Morning Call: October 17, 2012

The markets are digesting the huge gains of last two days and it is normal for the markets to give back a little gain before it start with the journey again.

Overnight, Dow futures are down 20+ points, Nasdaq futures are down about 6 points while S&P is up about 3 points. The four hourly chart of /ES (SPX futures) are overbought and will most likely turn down. While that is the logical course of action, market does not always behave logically. Therefore, if I am a day trader (which I am not), I would not jump to short the market just because RSI has reached overbought. Rather I would see how low the correction goes and buy in new long positions.

Reasons being, the up momentum for the last two days is very strong and cycles are up.

Commodities: Natural Gas has started its downward journey which I wrote in the weekly report. Hopefully it will reach around $3.25 or lower to allow a good entry. Crude is modestly up along with Euro but the cycle is down and those who control the speculators will ensure that crude does not go up till election. Gold and silver consolidating at yesterday’s level.

Earnings & Economic data: The earning season is upon us. Today's economic calendar features the MBA mortgage index, new housing starts and building permits, as well as the weekly update on crude inventories. Meanwhile, earnings are due out from American Express (AXP), Abbott Laboratories (ABT), Align Technology (ALGN), Bank of America (BAC), Bank of New York Mellon (BK), BlackRock (BLK), Check Point Software Technologies (CHKP), Comerica (CMA), eBay (EBAY), Halliburton (HAL), Kinder Morgan Energy Partners (KMP), Knight Capital Group (KCG), PepsiCo (PEP), Quest Diagnostics (DGX), St. Jude Medical (STJ), SLM Corp (SLM), Stanley Black & Decker (SWK), Steel Dynamics (STLD), U.S. Bancorp (USB), and Xilinx (XLNX).(H/T Schaeffersresearch).

I expect most of these companies will beat the forecast.

Yesterday’s price action indicates that QE3 or QEI (whatever you call it) has started its action. And that was exactly what they had in mind. Maximum impact just before election. Once we know which direction they are leaning, we can play accordingly.

Conclusion: Look for the market to seek lower levels today but no reason to be a bear.