I just finished my Commodities and Currencies review for the week and wanted to share some of my notes. Here you go: [Read more…]
[Premium] What Intermarket Analysis Is Suggesting About The Current Market Environment
Intermarket Day is one of my favorite days. Yes I’m a huge nerd. Deal with it!
This is when I go through many markets relative to each other. These markets include individual U.S. Sectors compared with the overall U.S. Stock market. We also look at other assets against each other like Bonds, Commodities and Currencies. We price Gold in other currencies, and change around denominators for both trade idea generation and also for informational purposes.
Here are some of the things that stood out from this week’s homework:
[Premium] My Notes From Friday’s Charting Session
Next week I will be out of the office from Monday through Wednesday as I will be traveling for business in New York City and Baltimore. If you are in the New York City area on Tuesday afternoon, come join me at the Marriott Marquis for a discussion on how to use Technical Analysis to approach the Global Marketplace.
On Friday I updated all of the U.S. Sectors & Sub-sectors, Commodities and Currencies on both weekly and daily timeframes in the Chartbook. I took some notes along the way and wanted to share them with you guys. Here are a few things that stood out: [Read more…]
12 Charts You Need To Make Money In Gold
Precious metals are a sensitive subject in some circles. Discussions about gold or silver tend to bring out more anger and craziness than other assets. As someone who couldn’t care less about what we’re trading, Gold, Apple, Bonds, Australian Dollars or Go Pro, to me it’s just letters and math. I find it kind of funny when people get extra sensitive about a specific asset. Precious metals bring out some of the most hilarious commentary.
Today, I want to break down Gold and Precious Metals from many different angles in order to put it into context from both a structural perspective and a shorter-term tactical outlook. [Read more…]
Canadian Dollars Are About To Explode Higher
Canadian Dollars have been one of my favorite shorts around the world for a long long time. We are talking about one of the most beautiful bases I’ve ever seen in my career. The old sayings are, “The bigger the base, the higher in space” and, “The bigger the top, the bigger the drop”. I learned these from technical legend Louise Yamada who told me she picked these up from Alan Shaw, retired technician and legend in his own right. In the case of Canadian Dollars, the big top took place between 2009-2013, while the huge base could be seen in USD/CAD but both had the same implications (see base here). All targets have been achieved and now I believe it’s time for a change in direction.
First of all, let’s take a look at USD/CAD from the long-term to get structural perspective. This one is very clear: we’ve run right into the 61.8% Fibonacci retracement of the entire 2002-2007 decline. We kissed this level over the past week and it can be seen in this monthly bar chart:
Here is the weekly timeframe showing prices slightly exceeding the 2008-2009 highs in order to achieve this Fibonacci retracement target seen in the chart above. This one has “Failed Breakout” written all over it and we’re seeing confirmation of this with momentum putting in a bearish divergence at these recent highs. This could get ugly quickly and a break back below those 2008-2009 highs would be the catalyst to really get this going to the downside:
Finally, here is a short-term daily chart showing prices recently hitting that key 61.8% Fibonacci retracement of the 2002-2007 decline (red dashed line). This level also coincides with the 161.8% Fibonacci extension of the most recent correction which took place this Spring. Long-time readers know that it’s when these Fibonacci levels cluster together like this that I really start to pay attention. Momentum is also putting in bearish momentum divergences all year putting in lower highs with each new high in price:
I’m a weight-of-the-evidence guy. To me, the bearish implications here for USD/CAD (bullish for Canadian Dollar Futures) are very skewed in one direction. Price-wise this is a buy 100 times out of 100. The Commercial Hedgers, who we consider the smart money, are pretty much as long as they’ve ever been. Sentiment-wise, our data suggests that Canadian Dollars today are more hated then they have ever been (our data goes back 25 years). What more can you ask for?
Risk management-wise, which is the most important thing, I think the market has made it very clear for us. We only want to be long Canadian Dollars if we are above this week’s lows. That’s it. Below that and there is nothing to talk about. In the case of shorting USD/CAD, we only want to be short below this week’s highs. It’s that simple. Target-wise, sentiment unwinds like this can be very powerful and can take a long time to complete. I would be very patient here taking profits as I think this one has a long way to go.
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Tags: $USDCAD $6C_F $DX_F $UUP $FXC
One-Third Of the Year Is Over. Now What?
Now that we’re officially a third of the way through 2015, I think it’s a good time to reflect on what we’ve seen so that we can get a better idea of where we might be headed. I’ve taken a little bit of time off from the blog as we held very high cash positions over the past few weeks, but I’m back and want to share some thoughts.
As far as the major U.S. Averages go, I think structurally they all look fine and are still in strong bull markets. I find it tough to argue against that. From a more tactical perspective, these consolidations over the past few months look constructive to me and I would expect breakouts to new highs at some point soon. I won’t be loading up on Index ETFs or futures through; I think there are better opportunities within individual sectors.
A year like this is very frustrating for the passive investor who owns the averages and doesn’t take advantage of the overwhelming dispersion we are seeing between stocks as sector rotation has ruled the land so far. Look at areas like Energy, base metals and emerging markets for example, that were left for dead, absolutely dominating recently (see here).
One of the reasons we’ve held large cash positions the past few weeks is because a lot of our upside targets that we had coming into April were hit a lot quicker that we expected. It’s not a bad thing, but when targets are hit I think it’s important to back off. I still like this emerging, energy, base metal theme going forward, but I think it’s important to pick and choose our spots. The entries today are not as favorable as they were, say a month ago.
I’m happy to see the U.S. Dollar get crushed the past 6 weeks. I’ve never seen such consensus bullish US Dollar sentiment. That was nuts (see here). The easy money has been made on the short side here, but I think this unwind continues. The US Dollar Index itself hit some very important upside targets in mid-March (see here), so I’d bet it’s going to take some time for this to unwind. I would not be buying US Dollars for anything other than just a very very short-term trade. I like the others, particularly Canadian Dollars, which I have liked since they broke out in Mid-April. But just like in the sectors mentioned before, the entry point today is no longer as favorable as it was last month.
In the bond market, I am happy to see rates mean revert while bonds get hit hard. I’ve liked the Long Crude Oil / Short Treasury Bond trade and still think this mean reversion has legs (see here). The ratio in the USO/TLT pair, which allows you to express this trade using ETFs, is near 0.16 up 30% from the lows in March, but still a ways away from our 0.21 target.
Bigger picture, I still think interest rates stay down. Economists continue to get this wrong and since they don’t actually put money to work, they keep making the same wrong call over and over again. Meanwhile, the fed fund futures market which has been dead on this whole time continues to point to low rates. They are currently pricing in just a 46% probability of a rate hike at the late October meeting. I’m still in the camp, like I have been, that they do nothing this year.
Coal is an area that looks interesting down here. As these beat up sectors like Energy, Base Metals and Emerging Markets mean revert to the upside, Coal has participated a little bit but not as much as the others. I think we can see significant upside from some of these coal stocks. We’re paying close attention to this space entering the middle third of the year.
The Agribusiness sector has really caught my eye. When you look at a sector ETF like $MOO which seeks to track to Market Vectors Global Agribusiness Index, it’s hard to find a nicer base out there. Look at this index on multiple timeframes and tell me that a breakout isn’t going to be extremely powerful. The only thing that has held me back is the flat 200 day and 200 week moving averages. If these smoothing mechanisms can start to slope up, we want to be all over this space, particularly from a structural perspective. This index is loaded up in agricultural stocks like John Deere, Agrium, Monstanto, Potash, etc. This sector has my attention.
Globally, I’d say that a big theme is countries hitting our upside targets. When you look at China, Japan, Hong Kong, Philippines, Malaysia, Australia and Vietnam, they have already reached our objectives. So at this point, it’s hard to find good entries globally. I think a lot of easy money has been made around the world, so it’s hard to put new money to work here. I’d say one area we are looking at closely that has yet to take off on us is Taiwan. We’ll be watching these guys closely this month as their long-term smoothing mechanisms begin to slope up.
Finally Natural Gas is an interesting area we want to watch. We are coming off bearish extremes in sentiment that we haven’t seen since 2002. Meanwhile, the Commercial Hedgers, who we consider to be “the smart money”, has the most net long exposure that we’ve ever seen. These factors accompanied by bullish momentum divergences on multiple timeframes point to a mean reversion here to around $3.40. With prices currently under $2.80, this risk/reward favors the bulls. We’re not in but will be looking for entry points in the coming weeks.
That’s what’s going on in my head.
What are you guys thinking here?
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Tags: $SPY $DJIA $NG_F $UNG $USO $CL_F $ZB_F $TLT $TNX $MOO $MON $MOS $DE $AGU $POT $KOL $UUP $DX_F $6C_F $USDCAD $FXC $XLE $EEM $VNM $FXI $DXJ $EWM $EPHE $EWH $KOL $BTU
A Non-Random Walk Through Canadian Dollars
After the initial breakout earlier this year and successful retest of former resistance, I have consistently said that the USD/CAD chart is one of my favorites in the entire world. And you guys know how many I look at. More specifically I’ve liked this chart from a structural perspective because of the 4-5 years of basing. I don’t like it when people take victory laps after a good call because I constantly preach that it’s not about being right, but about making money and managing risk properly. So bragging about a great call contradicts that type of mentality. So I don’t like to do that myself. But today I am going to make an exception because for educational purposes I think that not pointing out how beautiful this base has been and the consequences of its breakout would be doing a disservice to all of us, particularly newer market participants. I have highlighted each point in the chart with a blue number.
When looking through charts, I like mine clean. I don’t like messy charts that are all over the place. I have to say, that this one really has behaved so well and remained so clean that it has almost been impossible for me not to love it. The first thing that stood out to me earlier this year (Point 1) was the initial breakout above several years of resistance. Here is the weekly chart showing this breakout above 106 to start the year that gave us an initial target just below 113 based on the 161.8% Fibonacci extension of the most recent decline, which took place from October 2011 to September 2012:
Once this initial target was achieved in March of this year (Point 2), prices pulled back and retested the initial breakout level. Notice how not only did former resistance turn into support (we call this “polarity”), but there was also an uptrend line from the 2012 lows at that exact same price (Point 3). After a successful retest, prices then rallied through former resistance in March and is currently hitting our target of 1.166 based on the 61.8% Fibonacci retracement of the entire 2009-2011 collapse from 1.30 to 0.94 (Point 4).
Here is a closer look at the most recent breakout and consolidation. In July prices got down to this 106 area that we can see on the weekly timeframe was former resistance since 2010 (Point 1). After rallying back to the March resistance this Fall (Point 2), prices began to consolidate and digest the gains while also acknowledging this overhead supply. That downtrend channel throughout November (Point 3) was the consolidation that it needed before heading up to the next target, which was the 161.8% Fibonacci extension of the 2014 correction and retest of that former resistance (Point 4). This also happened to be the 61.8% Fibonacci retracement of the entire 2009-2011 decline which we can see on the weekly timeframe:
For me it’s best when there are multiple reasons for levels to be relevant, whether it represents former support/resistance or if it’s a Fibonacci extension/retracement level from a previous trend. I prefer both and I think this is a great example of these support/resistance clusters turning into powerful levels. At this point I think some acknowledgement of this level would be both normal and healthy. But if we can manage to breakout at some point above this 1.166 target of ours, there is little in the way of prices heading back towards the 2009 highs. It’s a bit premature to call for that now because we like to be disciplined and take profits when targets are achieved. But after some time passes, it might make a lot of sense to reevaluate and perhaps turn bullish once again. But we’ll worry about that down the road.
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Tags: $USDCAD $FXC
A Breakdown of the US Dollar Index
The US Dollar is one of the more fascinating markets today. There are so many things going on currently that I think it’s hard to just group them all together. Remember there are several components that make up the overall index, so today I wanted to breakdown the different pieces and see how they fit together to make up the entire basket. We’ll focus on the biggest 4 names and see what we can learn from what is currently going on.
First here is the US Dollar Index itself consolidating nicely above the upper of these two converging trendlines since the 2005 highs. I have to say that as long as we’re above this downtrend line, there is no reason to be bearish this currency basket. In addition, the longer it remains above the downtrend line, the more likely that this breakout is for real. Momentum in a bullish range since 2011 and now confirming that as it enters overbought conditions is another positive for the US Dollar Index as a whole (see here for more on US Dollar):
The Euro is something very interesting here. We do a lot of sentiment analysis and they really loved this thing in May; at the worst possible time. Now that the Euro has gotten crushed, the sentiment is at levels not seen since Summer 2012, right before the Euro exploded higher into year end. So we try and look at this market to see where we might find the beginning of a mean reversion trade. We’ll look at the Daily chart since it is the most actionable based on current sentiment. Here we can see EURUSD rolling over to new lows and approaching the breakout level from 2012. If Euro can manage to find some support here as momentum continues to positively diverge, this would be a nice entry point on a long. Good risk/reward. But if this breaks, which there’s no way to tell at this point, we could potentially see the 2012 lows. What would worry me about that scenario is that the potential bullish divergence we’re watching may not play out, making this a lower probability long. So this is what I see. We’ll wait for a setup to come, if it ever does. If not, no big deal (see here for more on Euro):
The next interesting component I see is the British Pound. I’ve been watching this big downtrend line from the highs in 2009. It looked like after a nice breakout last year, we could potentially see a nice recognition of that former support and allow for demand to take over at that trendline. Well that certainly did not happen as prices continue to fall through that and approach former support from last year (shaded gray) and 61.8% Fibonacci retracement from the 2013-2014 rally. This is something we would only consider being long if we were above that blue downtrend line. Momentum hitting oversold conditions in the recent sell-off is another feather in the hat for the bears. With a flat 200-week moving average, a lack of trend at best is likely here for now. I’m only interested above the blue downtrend line (See here for more on British Pounds):
One of the most incredible moves in recent years has clearly come from the Yen. The Japanese are absolutely destroying their currency over there. After the initial breakout from this symmetric triangle a year ago, prices stalled at the 61.8% Fibonacci retracement from the 2007-2011 decline. But notice how the acknowledgement of that supply came through a sideways consolidation and not through a downside correction. This is the stronger of two ways for prices to correct, in this case through time rather than through price. After breaking out again in August, prices retested that level last month successfully and we’ve been off to the races ever since. We are now above the 161.8% Fibonacci extension from that symmetrical triangle last year, which also represents the highs in August of 2008. Our next target is up near 120 based on the 2.618 extension of that triangle. I think that’s where we’re headed next. With momentum in a solid bullish range, there is no reason not to be bullish USDJPY unless we break back below the August 2008 highs, where a more neutral approach would be best. 120 here we come (See here for more on Yen):
And finally, this one has to be one of my favorite charts in the world. I love big bases. Is there a nicer base than USDCAD over the past several years? From a structural perspective, this is one that I talk about and write about constantly, for obvious reasons. We have big rounding bottom since 2010, a nice breakout at the end of last year, a successful retest of former resistance, momentum in a bullish range and now we’re ripping to new highs above the 161.8% Fibonacci extension from the 2011-2012 decline that was acknowledged by the sellers this March. The next target is above 116 which represents the 61.8% Fibonacci retracement from the 2009-2011 decline (See here for more on Canadian Dollars):
So all in all, the Dollar is still the stronger side of all of these fractions. I see no reason to be short the Dollar Index here, particularly with this much strength vs the CAD and YEN. I think the Euro can set up a mean reversion soon, but we’re just not there yet. I’m looking at that specific market tactically and the rest more structurally for the purposes of this discussion. But Members of Eagle Bay Solutions receive all of these charts, but with additional timeframes and variables every week with annotated charts and commentary based on recent action as well as from a structural perspective. Make sure you are registered to receive these Currency and Commodities Reports.
Tags: $EURUSD $USDJPY $USDCAD $GBPUSD $DX_F $UUP $FXE $FXB $FXC $FXY