I just finished my Commodities and Currencies review and updated all of them in the Chartbook. Today’s notes include updates on:
- Crude Oil
- USD/JPY [Read more…]
In this week’s members-only letter we discuss the following topics:
There is a lot of noise surrounding the period between Christmas and the start of the new year. Santa Claus rally this, end of 2016 predictions that, what worked this year, what didn’t….. The truth is, most of that doesn’t matter and is just a lot of air-time filling, click baiting noise. Sure, if Santa Claus doesn’t show up and the U.S. Stock Market doesn’t rally during the last 5 trading days of the year and first 2 of January, bad things tend to happen. Fine. But end of year predictions are always wrong and they’re just a sell side marketing gimmick that the financial media eats up and loves to promote. It’s just noise. As far as what worked this year and what didn’t – it’s too late now anyway, so who cares. We want to look forward don’t we? Aren’t we here to make money?
What we really want to focus on during this period of the year is [Read more…]
Thank you to everyone who registered for the new All Star Charts membership. I’m super excited to have you guys as part of our team. Remember, we’re all in this together trying to navigate through this market day in and day out. It’s a puzzle that is constantly evolving and what we’re here to do is look for major trends around the world and then break those down to find more intermediate-term investing opportunities based on those structural setups. The new All Star Charts was an idea we’ve been working on for a long time, so we couldn’t be happier to finally be able to share the ideas and the homework that I already do with all of our new members. Welcome to our club!
For the past 2 months I’ve been very vocal about how there’s been no reason to own the major U.S. Stock Market Averages. If there’s been any trade to be made, it’s [Read more…]
We have a lot going on these days here at All Star Charts, but I wanted to put together a conference call to get us all in one room and discuss what I think are currently the Best 10 Charts in the World. Most of them come along with a few more charts or data points to either help tell the story better or help with tactical risk management procedures.
Going forward only Members of All Star Charts will have access to these monthly conference calls as well as the intra-month conference calls whenever market volatility dictates.
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Tags: $SPX $SPY $EEM $XLF $QQQ $COMPQ $AAPL $XBI $WMT $IBB $GLD $SLV $UNG $USO $TLT $TNX $NIB
November 18, 2015
We are just about 6 weeks away from finishing up 2015 and as usual there are a lot of questions left unanswered. Now is as good of a time as any to look back at how we got here so we can take a weight-of-the-evidence approach and put together a thesis of what we should expect going forward. At AllStarCharts, we prefer to incorporate a global top/down approach focusing our attention on various liquid asset classes with exposure both domestically and outside of the United States. With our long/short mentality, we look for opportunities to profit from both good and bad markets striving for absolute returns regardless of the economic environment.
Today we’ll start with the U.S. Stock Market which is relatively flat year-to-date. In large-caps, the S&P500 and Dow Jones Industrial Average have gone nowhere this year, while the leader has been the Nasdaq100 (up 10% YTD) and the laggard is obviously the Dow Jones Transportation Average (down over 10% YTD). With the tremendous amount of dislocation between Transports and the Tech-heavy Nasdaq, we’ll call that a wash and chalk this year up as flat, at least for now. The problem is, that the indexes don’t tell the whole story. Even before the August sell-off, the amount of stocks still making new highs was an embarrassment as only a small percentage of them were still rallying. The Consumer Discretionary space and the Dow Jones Internet Index were two standouts without much company. Looking at things today, and over the past few weeks, even fewer names are participating. The Nasdaq100 was the only index to make new highs this month as the rest rolled over putting in lower highs across the board.
The word “Distribution” really explains what is going on here in the U.S. Stock market. We can see a massive topping pattern forming in the S&P500 right at the 161.8% extension of the entire 2007-2009 decline. We don’t look at this as a coincidence. This distribution is also taking place at exactly the March 2000 highs for both the Nasdaq Composite and the Nasdaq100. Again, not something we consider to be a coincidence. The question we want to ask going forward is simple: with very few sectors and stocks in the market left participating to the upside, is this the tell before a much bigger sell-off, or will certain sectors take leadership and carry this market higher going forward? In the S&P500 alone, almost 70% of stocks have corrected over 10% and close to 40% of them have fallen over 20%. Will this “market of stocks” collectively stabilize, rotate leadership and head higher? I would argue that no, this is definitely the lower probability outcome and in all likelihood we are heading much lower. From a risk vs reward standpoint, this still very much favors the bears. My levels are 114.40 for $QQQ AND 2080 for the S&P500. We only want to be short these averages if prices are below them and neutral if we are above.
Within the U.S. stock market, since we have a negative bias, we want to focus our attention on the laggards. With the Dow Jones Transportation Average easily the worst of the bunch, I think Airlines are the ones we want to short. Looking specifically at the Amex Airlines Index, we are seeing the exact opposite of what we saw in March 2009. If you recall, while the market as a group was putting in lower lows in the first quarter of 2009, the Airlines held in showing the relative strength at the time to spark a 330% rally, which by far and away outperformed the S&P500 and other indexes. Today, it is the relative weakness that is standing out as this index has been making lower lows all year in an environment where the other indexes continued higher into the Summer. The uptrend line from the 2009 lows in the Amex Airlines Index has now been broken and over the past few weeks have successfully retested it and rolled over. Momentum is in a strong bearish range and prices are trending below a downward sloping 200 day moving average. Bad things tend to happen in this type of environment. We want to be aggressively short a basket of these airlines as long as prices remain below the broken uptrend line from the 2009 lows. I would be adding to shorts if we break the lows from this week. Also see the ETF $JETS.
Looking more globally, it is hard to ignore the underperformance out of the New York Stock Exchange Composite. Although considered a local exchange, half of the biggest 100 names in this cap-weighted composite are foreign companies. The relative weakness here is further evidence that the U.S. is still the leader compared with the majority of the international stocks markets. The emerging space is particularly weak as the S&P500 is sitting at or near 11-year highs relative to the MSCI Emerging Markets Index. In the more developed countries, the Japanese Nikkei has held in relatively well compared to the U.S., but is currently in no-man’s land at best. Whether looking at the Nikkei specifically, or the Hedged Japan ETF $DXJ, which we like to use, with prices trading near flat long-term smoothing mechanisms, this is a headache waiting to happen and we want to stay away from it. I would put Germany in a similar neutral category, but leaning on the bearish side on both as we are below broken support which is new overhead supply in the Nikkei and the DAX.
On the long side of the International markets, I think the potential for further mean reversion in Latin America is certainly there, but it’s the probability, or lack thereof, that annoys me. We are focused on the Latin America 40 Index ETF $ILF and specifically within that group, the MSCI Brazil Index ETF $EWZ. Coincidentally, it would take breakouts above $25 in each of these to get me bullish and long for that mean reversion towards 28. But that’s all I’m seeing there.
Crude Oil is likely to have an impact in this space. I’ve been in the camp that Oil has bottomed out, although tactically I see little reason to be long from current levels. I’d like to see more backing and filling to create a base large enough to get this one going. Looking at this from a more structural perspective, the high 30s-low 40s was where Crude Oil prices would peak throughout the 1980s and 90s. Once that range broke out to the upside after the turn of the century, we expect this to be an area where prices bottom out instead. So I think we’re close. We are watching Heating Oil and Unleaded Gasoline futures as the tell. If prices can get and hold above the lows from throughout 2015, which are awfully close, I think that Oil can bottom out. If we start to see new lows holding in these other energy commodities, I think we’re in a lot of trouble in Crude Oil and anything with a positive correlation to the commodity.
Where I would prefer to focus my attention instead within energy is Natural Gas. In September of 2009, Natural Gas bottomed out at $1.92 before rallying above $7 over the next few months. In April 2012 the bottom was $1.83 before rallying over the next 2 years above $7 again. Last month Natural Gas hit $1.94 before reversing higher. This is one we want to own for a 20% rally here back towards $3. This is a tactical trade where for risk management purposes, nimble traders can use 2.40 as the line in the sand. Contracts roll next week, so adjust accordingly ($2.55 in Jan Futures). According to the CFTC, Commercial Hedgers, who we consider “the smart money”, currently have one of their largest long positions of all time. Bigger picture, the Crude Oil:Natural Gas ratio continues to fall. This bubble peaked at over 50:1 in early 2012 and the mean reversion back to the single digits is running its course. Today the ratio sits around 18:1, from a high of over 50:1 with a long-term average near 10:1. Also remember that we are in a reversion beyond the mean business, and not just a reversion to the mean. So an overshoot into the single digits in the ratio is most likely.
Moving over to the precious metals space, it’s hard to find a more beautiful downtrend out there in the world. With prices hitting new 5-year lows this week, sentiment is nowhere near as pessimistic as it has been at prior temporary lows in 2013 and 2014. I think this bullish (less bearish) outlook from the public will be the catalyst to take Gold under $1000 and Silver under $12. The risk/reward today is not as clean as it once was a few weeks back, but the trend here is lower and we want to continue to fade any strength in metals.
The U.S. Dollar should have an impact in this group as it has consolidated its gains from the past few years in one of the healthiest consolidations across the global marketplace. Back in March, we saw the most bullish sentiment towards the Dollar in history. The Commercial Hedgers were selling this thing like if it was going to zero. Anecdotally, the financial media who has never cared what I thought about the U.S. Dollar could not finish a phone call or email with me without asking my thoughts on the Dollar. Since then, however, the sentiment has dissipated and the hedgers have covered a lot of their bearish positions. It’s hard not to like the Dollar here. I think it continues to head higher after the recent breakout. This should have negative implications towards the Euro, which represents close to 60% of the U.S. Dollar Index. I would expect the Euro to continue to fall along with precious metals as we head into the first quarter of next year.
Next we turn to the Bond market. The collective waste of time of arguing about fed hikes or not continues to dominate the airwaves and interwebs. We try and ignore what the Fed has to say as much as we can and even more so Wall Street Economists. There is no group on planet earth that has been more wrong about anything as Wall Street Economists have been about the Fed. We prefer instead to focus on price, which at the end of the day is the only thing that will pay us. First of all, we are talking about a 35 year bear market for rates. Things don’t just turn on a dime. So to blindly short the bond market because “rates can’t go any lower” makes zero sense to us. Now, the short end of the curve and the long end are two different things. The 2-year US Treasury bond yield is highs this week not seen since 2010, but the 30-year yield hit fresh lows earlier this year and has not shown any signs of a major bottom. This dislocation has caused the yield curve to narrow. Note that an inversion of the yield curve (short-term rates exceeding long-term rates) is a heads up of a pending economic recession.
Since we don’t have time to sit around waiting for yield curve inversions, we prefer to focus on the here and now. Looking at the 10-year yield, widely considered the benchmark for U.S. Interest Rates, it’s the 2.4% level that stands out the most. This was the low in rates in 2010 and also twin highs in late 2011 and early 2012. We kissed that this month and quickly rolled over. Going forward, this is our line in the sand. As long as the 10-year is below 2.4%, we want to be buying U.S. Treasury Bonds very aggressively, particularly the 30-year Futures $ZB_F. Equity traders can turn to the iShares 20+ Year Treasury Bond ETF $TLT or $TLT options for non-futures exposure. We are not expecting any rate hikes in 2016 and regardless of any rumors, we want to be buying bonds here.
That’s it for now. Please feel free to write with any questions or comments that you may have.
Note: In next week’s letter we will spend time looking at Biotechnology, Palladium, Agricultural commodities and equities and some individual U.S. stocks like Apple, Amazon and Netflix on both the long and the short side.
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You want to talk about strong trends, it’s hard to find a cleaner downtrend than what we’ve had in precious metals since 2011. The Gold bugs have gotten really quiet and I’m actually starting to miss them. Remember how obnoxious the silver permabulls were 5-6 years ago? We’re near levels where metals are just a joke and from an anecdotal perspective, one might think that they couldn’t possibly go any lower as they are arguably the most hated asset class on earth. But the data suggests otherwise. In fact, sentiment, although just off bearish extremes, isn’t anywhere near the levels we’ve seen at prior pivot lows over the past few years.
Only price pays, remember that. So we’re going to focus on what is actually happening within supply and demand in order to formulate a thesis. We prefer to take a weight-of-the-evidence approach and everything continues to suggest that lower lows are likely coming soon. Here is a weekly chart showing prices below the downtrend lines from the highs the last couple of years. Notice how we are also below all of that former support from 2013 and holding below the uptrend line from last year’s lows. All of this is evidence to us that there is currently way too much overhead supply to get bullish from a structural perspective:
Also notice how momentum is in a bearish range. We use a 14-period Relative Strength Index (RSI) and the fact that it can’t even reach overbought conditions on bounces and continuously gets oversold readings increases our bearish conviction as this is characteristic of downtrends. As far as targets go, I’ve been eyeing that $1000 level for a few years and I still think that’s where we’re headed. This was former resistance back in 2008-2009 before prices essentially doubled into 2011:
Now that we know there isn’t enough evidence for us to look for a longer-term bottom any time soon, we turn to the daily timeframe for execution and risk management purposes. This one looks pretty clear to me. Prices broke down in early summer below what had been support since last Fall and the uptrend line from those November lows. Immediately Gold reached the 161.8% Fibonacci extension of the last rally we saw, which was this Spring, and prices bounced nicely. We then ran up to all of that former support, which turned into overhead supply, as it should have, and prices have struggled with that area ever since:
At this point, all signs are pointing to a break of that uptrend line off the July lows. Upon that break, we should find support near that 1080 level which was support in the Summer as well as the 161.8% Fibonacci extension from the Spring rally. But I think that will only be temporary as the bears remain in control and all of this overhead supply has yet to be absorbed. It takes time. It looks like we’re heading down towards $1000. This is not only that former resistance from 2008-2009, as mentioned in the weekly timeframe above, but also the 261.8% Fibonacci extension of the Spring rally. That’s where I would be covering shorts.
From a risk management perspective, I see no reason to be short if prices are above the downtrend line from this January’s highs. As long as we remain below that, which also coincides with the broken uptrend line from last Fall’s lows, I think we can press shorts all day long. This level is very clear. We like that.
To add to our bearish conviction, I want to point to Platinum. We are watching Platinum continue to make lower lows and we have targets much lower than current levels. We want to look at precious metals as a group. The weight-of-the-evidence here suggests they’re going lower together. Gold should roll over to new lows soon as well. I really like this one.
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Tags: $GLD $GC_F $GDX $NUGT $JNUG $PPLT $PL_F $SLV $SI_F
We all know that precious metals are in a vicious bear market. The Gold bugs have been the butt of jokes for a good 4 years now. At the time, they were the loudest and most obnoxious group we’ve seen in a long time. Go back and see what was being said back in 2010-2011 from the perma-bulls in metals. That sentiment unwind has been extremely powerful as Gold prices are now down 40% and Silver is down 70% from their 2011 highs. The Miners ETF $GDX which represents a basket of the companies in that space are down 80% from those highs hitting all-time lows just last week. It’s okay to be wrong, but at some point if the data suggests changing your mind, you better. No reason to keep the same narrative all the way down for years. That doesn’t make any sense.
One of my favorite tells over the past few years for precious metals has been in the Silver market. This is the more volatile of these two and has been a great signal for a while now. A year ago when prices were around 18.60, we said that a breakdown was likely coming in Silver that would take us down another 20-25% under $15 and most likely under $14 (See: The Downside Target In Silver Is Below $15). These downside targets have all been hit over the past several months, but the lack of a significant bounce from down here is worrisome. Momentum is not putting in any bullish divergences and all signs are pointing to another leg lower. Think about this: even with Silver hitting new lows last month not seen since 2009, sentiment isn’t anywhere near the bearish extremes that we’ve seen at prior temporary lows the past 2 years.
This is the weekly chart that we were looking at a year ago showing prices hitting this support 4-5 times. The more times a level is tested, the higher the likelihood that it breaks. Sure enough, we broke down soon thereafter and prices came crashing down.
This is what that looks like today. You guys know I like my charts clean, and there’s a lot going on here, so bear with me. The black Fibonacci extensions with prices on the left represent our initial downside target that was hit in 2013. This was the 161.8% Fibonacci extension of the counter-trend bounce from 2011 to 2012. This combined with 4-5 tests of this level over the next year is why we felt this was such an important level and why a breakdown would be devastating. Shortly thereafter, we got the break we wanted and prices reached our next target between $14-15 that was based on a combination of former support from back in early 2010 and the 161.8% Fibonacci extension of the counter-trend rally in the summer of 2013. As you can tell, it’s when these levels cluster together that I really start to pay attention:
So if we’re going to use this exact same strategy that’s been working so well, we want to take the next level of support and combine that with the 161.8% Fibonacci extension target of the most recent counter-trend rally that took place in January of this year after hitting our initial downside targets mentioned above. This gives us a new target under $11.50 representing another 20% of downside from current levels.
From a risk management perspective, the strategy is the same as it’s been over the past 2 years. We only want to be short if prices are below the lows from this counter-trend consolidation, and more neutral if we are above it. The line in the sand is clear. Notice how when prices broke down in early 2013, that former support turned into resistance later in the year on that counter-trend move. The same thing happened earlier this year as the bounce was halted right at former support since 2013. I would expect the same to occur here in the future, if prices break down, hit our target and then bounce. But we’ll worry about that when the time comes.
I’m a weight-of-the-evidence guy. Everything I’m seeing points to a breakdown coming soon. If and when we get it, I think there’s another 20% of downside. Best of all, the market has given us a very well-defined line in the sand, which to us is the most important thing. Sure we can see another temporary bounce from here, but I think that will be met with more supply and eventually we break. We want to aggressively short that break.
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Tags: $SI_F $SLV $GLD $GDX $GC_F
Over the last few weeks we asked readers and stocktwits & twitter followers to submit chart requests. In this video we go over each of these ticker symbols on both weekly and daily timeframes. I think this video does a good job of showing my process. I cleared out all of the previous annotations that were on there and started from scratch.
I hope this adds value and if you have any questions, please feel free to reach out at email@example.com
Here is the video in full:
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As a technician that looks at multiple asset classes and stock markets all over the world, I treat them all the same. For us it’s just math. Whether we are looking at shares of MSFT, US Dollar Index, Malaysian Stock Market, Treasury Bonds, etc to us they are all the same. For most market participants this is not the case and people tend to be more interested in certain stocks or markets.That’s understandable. AAPL is a good example, precious metals, Oil lately for obvious reasons, etc etc. These days, I’ve been getting a lot of questions about the price of Gold since the yellow metal has gotten the year off started on such a strong note.
So if you want to know where Gold prices are headed, I think your best bet is to watch Silver. They generally move together, although Silver tends to me the more volatile of the two. Nevertheless, I think if you want to know where precious metals are going as a group, Silver is the cleanest one and that’s our tell.
First of all, you guys know I don’t like to assume correlations like we see some other do so often. I want to responsibly make sure that the math adds up. So after running the numbers, the correlation coefficient between Gold & Silver over the past month is +0.9, over the past quarter it is +0.9 and it is also +0.9 over the past year. They move together.
Now, here is a weekly candlestick chart of Silver going back a few years where we can see that key support near 18.50 throughout the second half of 2013 and into 2014 until it broke last September. Our polarity principles tell us that former support should turn into resistance. This is precisely what occurred over the last couple of weeks. This resistance, or “overhead supply”, is what we want to watch going forward.
As you can see on this chart, not only does this former support now represent resistance, but this is also where we run into a downtrend line from the highs in late 2012. In addition, the 18.35 level is exactly the 38.2% Fibonacci retracement from the entire August 2013 – November 2014 Decline. There is a big cluster of resistance levels here that we simply cannot ignore.
Until prices are above all of that resistance, I don’t see any reason to be long precious metals, particularly from a structural perspective. Sure, there will be some volatility and plenty of ups and downs for short-term traders to take advantage of. Therefore, I think it is more important than ever to define your time horizon. To simply ask, “Where is gold going?”, is a bad question. You mean, in the next 10 minutes? Tomorrow? Next month? Next year? Time horizons have to be defined.
As far as I’m concerned, I generally use weekly and daily charts to first get a structural bigger picture perspective, and then break it down to a shorter timeframe for executions. Right now, I do not see any reason to be long precious metals, for my time horizon. I think if Silver can break out and stay above the cluster of resistance levels mentioned above, then we can look to put money on the long side. Until then, I don’t see anything to do here.
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Tags: $GLD $SLV $SI_F $GC_F $DJP
Sometimes I just like to babble about what’s on my mind. It helps me organize my thoughts and you guys keep asking me to do more of this. So here’s what I’m thinking….
The year is off to a great start for us. I’ve never gone into a new year this prepared. Sunday night January 4th I couldn’t even sleep I was so excited. It was like I was a little kid on Christmas Eve. I keep a spreadsheet with a list of if/then statements where if certain things happen I would enter long or short positions in asset classes of all kinds. So far this year I’ve been in soft commodities, energy stocks, foreign stock markets and base metal stocks. Some of these were longs and some were shorts. If you follow my stocktwits and twitter streams, you pretty much know what I’ve been looking at.
This whole interest rate thing is hilarious to me. I never knew the bond market could be so funny. Wall Street Economists keep telling us that rates are going higher and I have no idea what they’re looking at. Why on earth would they think that? Fed Fund Futures keep pricing in lower and lower probabilities of the first hike at the October meeting. Last I checked we were now down to just a 56% chance, down from over 80% last week. It’s hysterical to me.
I get asked every day when Crude Oil is going to bottom. I really have no idea. Bearish sentiment is stretched to levels rarely ever seen before. But that alone is not a reason to buy it. I’m looking for a momentum divergence to even think about putting on a position and so far we have not gotten it. We can put Unleaded Gas and Heating Oil in that same camp, with respect to both sentiment and a lack of momentum divergence. I don’t know when they will bottom. So we’re focused elsewhere. Euro is in that category too. Maybe they bottom simultaneously. We’ll see…
Natural Gas has exploded this week. To me, this one came out of no where. Earlier in my career I would have gotten upset with myself for missing this move. But now I realize that there is no reason to get mad. Looking back at the setup last week, there wasn’t any reason why I would have bought it. I have to stay true to my process and wait for only the perfect setups. If something makes a big move and it wasn’t my trade, there’s no reason to be mad. It wasn’t for me. And still isn’t, for that matter.
As far as US Equities go, I still don’t see any reason to put money to work up here in the major averages. One of my favorite positions so far this here has actually been a short SPY with a long REITs as a hedge. This has worked well and don’t see any reason why this still won’t work. I’m looking at 0.42 target on that spread (IYR/SPY). As long-term interest rates keep getting killed, there will continue to be a relative demand for higher yielding stocks. Fixed income guys aren’t getting their yield in the bond market. So they have to go to stocks. This is the reason I believe REITs and Utes doubled the returns of the S&P500 last year and will continue to do so in the first quarter.
I went to see Louis CK at Madison Square Garden last night. He was hilarious as always. So much fun. But I have a problem with the cavemen that run the arena. I get to the front of the line and show my tickets on my iPhone and these idiots make me go across the street to the Pennsylvania Hotel to print out the tickets. I couldn’t believe it. I thought this was 2015? I haven’t printed out tickets to a game or show in god knows how long. Anyway, I get to the hotel business center and there are 20 other angry people there printing out tickets wondering why we’re all doing this. And then if things couldn’t get any dumber, the guy’s gun to scan the bar code on the freshly printed tickets couldn’t even scan the bar code. He had to enter the numbers manually!!!! I couldn’t believe it. Still can’t. MSG get your act together. This is 2015 and we use phones not printers. And you wonder why the New York Knicks have the worst record in the National Basketball Association.
Some of the soft commodities are interesting. Coffee got off to a great start. We’re long Sugar futures currently and as long as we’re above the September lows, I love this one. OJ doesn’t look too bad either. My buddy Jonathan Krinsky at MKM Partners calls this the Breakfast Trade. Love that. I like Sugar the best of the 3.
Around the world I think we can see some nice mean reversions in countries that have been beat up. I like Malaysia down here. The risk/reward is definitely in favor of the bulls. I only like it above this week’s lows. Below that and things get messy.
Shorting Base Metals has worked out well for us so far this year. I was upset because we’ve had a small position. I didn’t want to chase it. This brings up an interesting point that has become the theme around the office this year. I think I’ve caught myself saying, “well that’s the downside of risk management” at least once or twice every day. It’s turned into a joke. But funny or not, it’s true. If you miss it you miss it. This isn’t venture capital where missing a good one could be a disaster. For us liquid market guys, there will be other opportunities.
Business wise things are going well. We’ve received great feedback from our subscribers about our weekly research reports. I love putting them together. This is really just my homework that I have to do anyway. I think of it as a professional athlete having to go to practice or to the gym. Even when it’s a Saturday morning or Tuesday late at night and I kind of don’t feel like putting in the work, I have to do it. No choice. I owe it to our paid members, I owe it to investors in our hedge fund and I owe it to myself. Hard work pays off. If I didn’t take the time to look at all of these charts, there is no way that I would find as many opportunities to profit around the world. I really want to have a great year, especially if the US Stock Market doesn’t do well. It will be nice to point to the success of an uncorrelated portfolio looking for absolute returns. I’m trying my best.
Solars are another interesting one. The trend here has been to the downside for almost a year. With downward sloping smoothing mechanisms on both daily and weekly timeframes, I think we break to the downside soon. Will that have anything to do with crude oil breaking to new lows? Possibly. But I want to be shorting these guys on a break of the lows from the 4th quarter. Solar stocks look terrible as a group.
Why are so many people lazy when it comes to math? I read things and am told things constantly that contradict 3rd grade math. I don’t understand. Interest Rates and US Dollars are positively correlated? What idiot told you that? When one is making new highs and the other is hitting new lows…..guess what? They’re not positively correlated buddy. The furthest thing from it in fact. I don’t get it.
I went to an art class the other day. It was so much fun. I’m not exactly the most artistic person. I’m not very good at drawing or painting. Although Howard Lindzon calls what I do “Chart Art”. But I had a blast at this class. It was at bar down in the Bowery. As it turns out my college buddy is dating this girl who is a lawyer during the day. But her heart and passion is really in art. So she decided to start this company called Art By Friends NYC. She teaches the class. So a few of us went to go support her. It was about 2 hours on Tuesday night. We drank wine, ate pretzels with a delicious mustard dip and my painting came out terrible. All good though. Some of the people in the class were incredibly talented. It was amazing how good some of these came out. But there was no judging. Everyone in the class was very supportive and friendly. Great time.
I don’t know when Copper is going to bottom out. It looks horrible. Structurally this is and has been a broken market that will take plenty of time to bottom out. We will get rallies, but I believe they will just be counter-trend in nature and the bottom will be a process. A long process. This tells me I need to keep looking at shorting base metals and base metal companies.
The metal I do like is Palladium. Relative to the others this is by far and away the best one. I want to buy this, but only on a breakout above 825. Below that and I don’t think there’s any reason to be involved long or short. The precious metals, gold, silver and platinum have done well so far this year and I think they have a little more upside maybe. But this isn’t something I want to fool around with. I think there are better setups elsewhere. But we’ll keep a close eye on them. Platinum to me has been the cleanest. I think we see at least 1350 on that one. Gold and Silver should benefit as well.
So that’s what’s on my mind.
What are you guys thinking these days?
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Last week I sat down with the CEO Technician over at CEO.CA to talk about my methodology in the market, how I utilize sentiment, what I currently see in Energy, Metals and Interest Rates and to talk a little bit about our business, both the hedge fund and research products.
Here is the Interview in full:
In the financial blogosphere, the cream rises to the top. JC Parets, Founder and President of Eagle Bay Capital, LLC, is one of the clearest voices on Wall Street today. As author of the popular technical analysis blog, All Star Charts, Parets, 32, has established a significant following (You may know him from CNBC and other frequent media appearances). We respect JC as a disciplined trader and market analyst; he is especially strong at risk management and often finds unique insights utilizing inter-market analysis. We had the opportunity to catch up with J.C. the other day and so without futher ado, here is our interview with J.C. Parets talking global markets…It’s great to have you here J.C., what can you tell us about your methodology for the markets? What do you look at on a daily basis?
Sure, the only reason why we are in the market is to make money. We aren’t journalists, we aren’t economists, the only reason we are in the market is to make money. So we are being very selfish in that respect, to make money for our investors. In order to achieve this goal I am constantly going out there looking for risk/reward opportunities that are very much skewed in my favor. We are looking for opportunities where for each $1 of risk we are able to make between $8-$12 in profit, so we are looking at 1:8 risk-to-reward opportunities. We are very picky.
We are able to do this because we look at such a broad array of markets and asset classes. We run a lot of spreads as well, where we can be long one market and short another etc. So for example if we want to be neutral precious metals as a group we can be long palladium and short silver, a trade which has worked very well for the past couple of years.
A few of the tools we are able to use to find the best risk/reward opportunities, obviously we are analyzing price because it is the only thing that pays. When we are looking at momentum I use a 14-period relative strength index, I do a lot of relative strength analysis, so not only on a particular stock relative to the overall market but also for example we will look at emerging markets as a group and compare countries within the emerging markets. So for example India has been showing relative strength compared to emerging markets as a group, Russia has been showing a lot of relative weakness compared to emerging markets as a group.
We also do a lot of seasonal studies. We have some proprietary models that we incorporate because during different times of the year certain markets behave in different ways. Not just the stock market, but commodities, fixed income, and currencies as well. And we also implement traditional pattern recognition, something that we kind of take for granted, looking at behaviors of the market in different patterns. As a technician that’s what i’m really focused on, price and pattern recognition. I also do a lot of Fibonacci analysis to come up with price targets and to manage risk.
How do you utilize sentiment in your market analysis?
More often than not there isn’t any valuable information we can take from sentiment. I only really start to pay attention to sentiment when we’re at extremes. For the most part sentiment is a bunch of noise. For example in the US stock market right now I believe that sentiment is just a bunch of noise – sentiment has been relatively bullish and we have continued to make new highs, but we have not seen extremes in bullish sentiment. Another example are metals, sentiment has been extremely depressed yet prices have continued to make lower lows. This sort of action is classic bear market stuff. Could we see a counter trend rally in metals? Sure. But is there enough evidence to say that this multi-year bear market in metals is over and we’re going higher? It’s way too early to say that, but short term we could definitely get another counter trend rally.
What are you seeing in crude oil after the big sell-off the past few weeks?
I really like to wait for the perfect storm in terms of sentiment, price, and momentum before I get involved in a market. In crude we are really only at extremes in terms of sentiment, there is really nothing else to suggest that now is the time to be buying. Are we close to a bottom? Yeah, I’ve got to believe that we’re close and the mean reversion process is likely to get going soon. I could see oil getting back to the low-to-mid $80s on a rally but we must remember that this will be a counter trend rally. Oil has been in a bear market since it topped at $147/barrel in 2008.
One of the best trades you’ve had during 2014 has been your long US Treasury Bond position which you’ve had on since January. What do you see from here and when will we know that we’ve put in a bottom in yields?
It’s a process and that’s what I think the academics and the economists don’t understand. It’s something that takes time and it’s not going to be a single event that’s going to be like “BOOM!! that’s the bottom in rates” and then we’re going to have a multi-decade bear market in bonds. I like to look at history, we can learn a lot from the past behavior of the market, especially a market like the US Treasury Bond market, a market that’s been trading for over 200 years. Historically speaking a bottom in interest rates takes 10-15 years to happen. I see zero evidence that interest rates are heading higher, in fact everything we were seeing back in January that made us bullish bonds we are still seeing now.
So to be clear, you are seeing no signs that we are near a bottom in long bond yields?
To the contrary, everything i’m seeing is telling me that interest rates are going to stay down. Look what’s happening in the stock market, what are the best performing sectors year-to-date? Utilities and REITs. This is yet another indication that rates are staying lower. The only people saying rates are going higher are the economists and the journalists, people who don’t put any money to work.
What are your favorite sectors and asset classes out there right now and what are your favorite charts?
We want to be in utilities (XLU) and REITs (IYR), these sectors are breaking out to multi-year highs. Tactically from a risk/reward standpoint it doesn’t get much juicier than this; we have a target on IYR of 85 and we only want to be long above 76, if it breaks back below 76 we will be out.
We also really like being short the Canadian dollar via being long USD/CAD. This pair put in a huge bottom and as they say “the bigger the base, the higher into space” – we have a 1.17 target for USD/CAD.
Relative to the broader market regional banks have been strong recently, this is a sector that I have previously been vocally bearish on, but recently I have been seeing some interesting things:
We are targeting $47.50 on KRE and with two weekly closes above $40.50 I will get long.
We also want to continue to be long S&P 500 (SPY) vs. short emerging markets (EEM). This has been a huge bottoming process and when we see huge bottoms like this one we need to respect it:
Thanks, J.C. Now what should our subscribers know about your fund and research services?
My #1 job is to manage money for my fund investors and if you would like more information on that please email us at firstname.lastname@example.org. We also offer weekly chart research packages. For years I had been getting emails from people to launch some sort of subscription platform. Fortunately we were recently able to partner with some people on our back end so I could focus on what I do and we were able to launch these chart research products which are all detailed at www.eaglebaysolutions.com – every market we cover includes analysis on both weekly and daily time frames including momentum analysis, relative strength, pattern recognition, fibonacci levels, price target, and support/resistance. We currently offer 5 chart packages:
I would like to thank J.C. for sharing his insights with us and I invite readers to check out his blog at www.allstarcharts.com and we can attest that his chart research packages are well worth the price of admission. You can also follow J.C. on Twitter @allstarcharts
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