CTS Spotlight for the week of Nov. 25th, 2011: Swiss Franc

11/25/11: The credit crunch that began some sixteen weeks ago continues to play itself out. Short term US corporate interest rates (as measured by the Eurodollar futures contract) continue to climb while central banks keep government guaranteed yields at historic lows. Considering this is a European debt problem it should not surprise to see the Euro currency itself continue to flounder vs. the US dollar. Interestingly, since the Swiss pegged their currency to the Euro, it now has rolled over in earnest and is currently pointing much lower too. Elsewhere, select soft markets and the whole grain market have begun to collapse (as suggested here many times over the past few posts) indicating international demand is waning at these lofty levels. Weak demand, a strong local currency and out-right fear are dominating the commodities landscape - bulls be careful.

 

This week I thought we ought to take a look at one currency (vs. the US Dollar) that looks especially vulnerable, The Swiss Franc. Since the news of Switzerland's 'pegging' of its local currency to the Euro there has been a dramatic shift away from this once considered last bastion of security. Because of the peg (currently at 1.20 Sw. Franc/1 Euro) the Swiss believe they can control a run-away deflationary spiral that so often affect's countries with rapidly rising currencies. The irony of this belief is that they may indeed get a falling currency, and maybe even a bit more. The chart above is a classic example of what I like to call 'too far too fast'. The end result of these violent moves is often going right back to where the breakout started from. The recently confirmed massive bear flag pole formation (indicated on the chart above) seems to confirm this potential outcome. The rally that kicked this whole move higher off started at 85.73 and the bear flag pole formation target currently sits near .87. The fact that the market has consolidated at the 50% level and subsequently failed further supports this conclusion. So what may cause such a dramatic turn? Firstly, we are well aware of the fact that we are very firmly with another 'credit crunch'. Fear is dominating and when it does, people run into the only thing they can really trust - and for now that still remains the US dollar. Couple this macro backdrop (money moving away from Europe and towards safety) with local political meddling and one can easily see this scenario play itself out. Indeed, of late there have been more calls from Swiss politicians for an even greater devaluation of their currency peg with the Euro - with 1.3 and even 1.4 being tossed around (news link).

So couple local politics with an already weak Euro backdrop and we have the makings for the complete unwinding of a previously violent bull market. Additionally, the charts do confirm this fundamental outlook. The Swiss may indeed get exactly what they want (a weak currency) but the jury is still out on weather it will solve their domestic economic troubles.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
http://www.therationalinvestor.ca

CTS Spotlight for the week of Nov. 11th, 2011: Oats

11/11/11: Fear has taken over the currency markets as every uptrend vs. the US dollar has either failed or outright reversed. US short term corporate interest rates continue to climb as the 'Ted spread' widens. The fundamental seeds for further price deterioration are being sown, is anyone listening? In the commodities markets in particular, many of the previously strong uptrends have either broken or are starting to look vulnerable. This can be especially seen in the grain markets where Oats (as a good leading indicator) has just confirmed a very bearish price patten with this week\'s price action (and is the subject of our WCTS Blog). The only exception appears to be in the meats, where both Live and Feeder Cattle look especially strong. This too though makes sense given our outlook for grain prices.

In polar opposite to last week's blog write-up, the current Oats chart is a definition of bearishness. There are so many reasons to look for prices to correct over the medium term one really doesn't know where to begin. From the fact that the 50% rule suggests prices need to come back to the 307 area; to the well defined downward pointing channel that suggest real support currently sits in the 250 area; to the gap way down at 225, there are plenty of reasons to look for lower prices in this particular grain going forward. Today I am going to comment on what I consider to be the final 'nail' in Oat's 'coffin' - that being the confirmation of a short term bear flag pole formation (with the intra-week move through the October low of 321).

From a short term traders perspective, one really loves the see tight, well defined short term price patten. It give the trader an ability to get in and out in a short period of time with very well define price targets. The breaking of 321, in my opinion, represents such an event. The failure of 321 is often refereed to as a bearish flag pole pattern (as one can see on the chart above). The price objective (284.50) is 37 cents away (at $50/pt is $1850) while the risk (to just above 345) represents about 24 points (at $50/pt is $1200). I personally would like at least a 2:1 profit/loss ratio to consider a futures trade. To that end I might look for a rally into the 330s to put the short trade on where a move to above 345 would stop me out but at a much smaller loss. Having said that, I have seen markets collapse on the confirmation of a bear flag patterns so at the very least lets watch and see what happens. Another alternative might be to consider a Put option. March, 2012 Oats (chart link) has a similar price pattern where it's bear flag target is [bear flag; 354-(398-331.5)=287.5]. Currently, the March, 2012 $300 put is 4.75 points ($250). At the target, this option will have 12.5 points ($625) of intrisic value or more than twice the price we can pay for the option today. Considering that the option has a little more than 3 months to hit the target, buying this put option to me sounds like a reasonable risk. To that end, I shall be looking into this trade in earnest in the coming week.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight
http://www.therationalinvestor.ca

CTS Spotlight for the week of Nov. 04th, 2011: Cattle

11/04/11: The US dollar index rebounded after filling in a gap that remained on the downside. This rebound came on the heels of a massive intervention by the BOJ. Last week we commented on the relentless charge higher by the Yen. Monday saw the Yen break through key support on the intervention. That long position should be stopped out but once the dust settles, the Yen looks to be headed back up to the highs and my expectations, even further. Elsewhere, the cattle market has registered a massive breakout in both Live Cattle and Feeder and is the focus of this weeks CTS blog. One ought to expect much higher prices there going forward.

This week I thought we would take a look at one of the few markets that is moving higher in earnest, regardless of the US dollar's trend. Meat prices have lagged the broader market's inflationary action over the past few yeas. Over the past few years we have seen Corn go from $3 to $6, gold from $750 to $1500 and crude from $50 to $150. Meat prices however haven't moved in such a manor. I believe that it is the meat's turn now. 

From a cost perspective, grain prices are current very weak and any further global economic uncertainty shall reduce demand for already dramatically inflated prices. This is music to a cattle farmer's ears. As the price of grain falls, the carrying cost of herds fall too. Couple this fundamental situation with an already tight supply of cattle and we have the makings of a bull market. Since farmers are not being pressed to sell their herds and they see rising prices, they have incentive to keep their herds in the hopes of seeing higher prices in the not too distant future. In essence, the spiral feeds on itself. Higher prices means less supply to market means higher prices etc.

Technically speaking, this chart is one of the most beautiful one's a technician can see. Simply put, prices are moving from the lower left to the upper right in a very consistent, steady fashion. Market's often 'go parabolic' near the end of moves, we see no parabolic action here which suggests we are a long way away from the end of this run. Specifically, traders were given a huge buy signal this past week when prices moved through Spring '11 highs (122.60). The formation itself suggests we will see at least another $.10 higher in the short term (where each point = $4 so $.10 = 1000 points = $4000 per contract).

Notice that this market actually gave you a chance to get in before the massive weekly breakout. CRI got a nice double bottom buy signal 13 weeks ago at 115.50. This position is up almost $4000 itself and yet I think we are just getting going here rather than nearing an end. Regardless of where you are long, enjoy the ride because it looks like this market is just now starting to heat up in earnest.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca

CTS Spotlight for the week of Oct. 28th, 2011: Canadian Dollar

10/28/11: As the US dollar continues its pullback from the recent panic-highs few new trends have been establish amongst it's major trading pairs. Of note this week, the Jap. Yen continues the relentless charge towards its bull flag target and both commodity currencies suggest more rather than less volatility ought to be expected in the coming weeks/months ahead. As the world pulls back from the proverbial brink, downward price pressure has eased momentarily across the board and especially so in equities. This new money has to be coming from somewhere and it looks like the longer end of the yield curve is where it is coming from. While the bottom continues to hold in the US Dollar index, one might consider this entire market move to be nothing more than relieving a short-term oversold condition.

Since the Canadian dollar is such a good proxy for the commodities markets in general, I thought we would take this week to look at what the 'Loonie' is doing and where one ought to expect this one particular currency to go over the coming weeks/months ahead. Just as important, one ought to appreciate the message the Canadian dollar is sending the market as a commodity proxy. 

The first thing that jumps out at me when I look at this chart is: wow, what a drop!. And now, what a rebound! If one had respected the 50% rule through last year's rally, one ought not to be too surprised that prices needed to cool down. Indeed, this currency appreciated more than 14.5% in a little more than 1 year. That kind of move certainly wasn't sustainable, and indeed, prices did begin to correct into the typical seasonal peak of late spring 2011. One can never know exactly where a bottom will come in on a correction and here is a case where the markets dramatically over shot the downside target. Indeed, we went all the way back to the original double bottom lows (92.40) to find buying support through the panic sell-off of late Sept./early Oct. In just as violent a move, we bounced of those panic lows and now sit just a bit above the original downside target - the 50% rule of 99.155.

If one had done the short trade coming out of the seasonal peak, one ought to have taken profits. The fact that the market overshot the correction target by more than 5 cents should be nothing more than extra gravy for your already handsome winnings. If one hasn't taken profits one really ought to ask themselves what the risks are going forward. Ironically enough, when looking at the chart from today's perspective, one gets the feeling that the risks are almost exactly 50/50. 

I find it interesting that the more I study charts, the more I see the market from a symmetrical perspective. There seems to be a poetry to price action and here again is another good example. Notice how the 50% level almost seems to be a pivot. We seem to have swung violently above and then below but ultimately end up back at the 50% rule. Notice too the sizable gaps left at the extremes (just under 1.05 and just above .96). This suggests to me we may take quite some time bouncing in between these two points. Considering how close we are to the 50% level, one might argue that there is almost an exactly equal amount of risk vs. reward with going long or short from where we are now.

So in summary then, as with many other commodity markets and commodity related currencies, there was a fabulous short trade that developed through the seasonal peak of 2011. That seasonal trade is behind us now and it appears that also like many other markets, the Canadian dollar is now quite comfortably into a 'clean-up' phase. Given the violent price action seen over the past few months and the fact that at both extremes gaps were left on the chart, one can realistically expect a 5% swing in either direction from current levels. This is historically a very high rate of volatility and should be respected. Fortunes can be made and lost in times like these so prudence is key in any market call. I don't see an easy trade here so what is the point in taking the risk....

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.therationalinvestor.ca

CTS Spotlight for the week of Oct. 7th, 2011

Hello and welcome back to CRI's CTS Spotlight,

10/07/11: As we approach the US Dollar's upside target many of its trading pairs are starting to look washed out. No new up trends have been established over the past few weeks suggesting the malaise that has blanked the broader commodities market shall continue for at least a little while longer. Of particular note this week, Corn and Oats have finally joined the rest of the grain markets in a general correction that looks to be long overdue.

One by one, the bull markets in the commodities are reversing. Here then is the latest commodity to break bearishly - Corn. Considering Corn was less than $1.50/bushel when I started to learn how to trade commodities back in the early 1990s, one could easily say that this market has come along way. What were once astronomical prices are now considered normal - can this kind of food/staple inflation continue? Or do we put in a top and spend the next twenty years working our way back down. Only time will tell, but one does have to respect the fact that this is historically a very expensive market. 

The fundamental argument for higher corn prices has always been about growing world demand. As our population grows, so too does the demand for raw food commodities like Corn. Couple this with the addition of government subsidized competition from the Ethanol industry and one can see how prices have tripled since the turn of the century. From the supply side, we have been fortunate for the fact that yields have also grown at a remarkable rate too. While 100 bushels per acre was normal before the turn of the century, today we produce well above 135. So given these underlying fundamentals can one justify prices more than doubling in the last year? And furthermore, can one justify prices continuing to grow from there? Unfortunately, I don't believe so. Yes, price pressure will remain strong as we work our way through this 17.5 year commodity cycle. But yearly gains like we have just seen certainly can't be sustainable. It all comes back to the old saying, 'nothing cures high prices - like high prices'.

Ironically enough, I don't think the run-up or this subsequent run-down in price has much to do with corn fundamentals at all. I believe that the market moved higher through QE2 (the reflation of the world economy through 2009-2010) and is now going through the hangover of the Fed. taking the proverbial punch bowl away from the party. Considering how broad based the fall in prices has been, it is hard to point to one specific piece of news that is deflating commodity prices. People are running out of all risk assets and into the US dollar. And if that we not enough, commodity prices we follow are traded in US Dollars which means that at the end of the day prices have to be lower (if the underlying currency is stronger) just to stay the same.

So corn, like so many other commodities, has entered its correction phase after a serious run up in price. With the break of the early July low 0f 616, the market has established a very well define double top price pattern. Additionally, this same break confirmed a head and shoulders top too. This is a massive topping patten where stops on short positions should sit just above resistance near 765. It is so much risk that I doubt many would actually do the trade. If we got a rally up into that resistance area and failed I might take a serious look at a Put option but for now I am flat and watching. For those that are short (or can get short) the gap at 563.5 and a one year 50% retracement of 561.75 shall represent short term targets. The 'support zone' highlighted on the chart should see some demand come in but If the global economic situation doesn't improve into the end of the year, one could see a realistic test of the head and shoulders target of 433 into the early 2012 export driven market.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of Sept. 23rd,, 2011

Hello and welcome back to CRI's CTS Spotlight,

092311: As the US dollar index continues to rally, one by one the commodity markets are being pulled back down to earth. From energy, to foods/fibers to metals, the US dollar denominated proxies are all correcting to reflect the currency change. This week's WCTS spotlight blog looks a Silver in particular. The only market that seems to be insulated from the correction are the meats and given the grain market's weakness - that may continue for some time to come.

 

Here then is the weekly continuous Silver futures price chart for the past few years. From the 2010 lows, this commodity tripled as the bull market 'went-parabolic'. The market eventually ran out of steam just under the historic $50/oz peak (from the last commodity cycle peaks in 1980). While there continues to be a 'fundamental' reason to own precious metals through this 17.5 year fear cycle (of which we currently are about 11 years in) one has to constantly put market moves (like we have seen over the past couple years) into perspective. Can a market keep doubling in price over and over again? Not likely. Unfortunately, the public (by definition always buy at the top and sell at the bottom) gets too enthusiastic and can't appreciate the simple fact that markets (even bull markets) can't always go up. Indeed, I might argue that the recent bullish sentiment within the metals space has gotten so overbought, a correction was long overdue. That correction is happening now. The markets are going down -  not up. A trend that may only reverse once the public starts to hate the sector again. How much pain does that take? only time will tell...

Technically speaking, the weekly/monthly bull run in Silver has ended. Friday's 15% intra-day drop was not only a headline catcher but also represented a significant breakdown on the price chart. Specifically, with the move through 33.488, we now have a classic 'M' or double-top price pattern working/in-place. This zone will represent resistance going forward as those that bought in the past will look to get out get-out at break even. Additionaly, the trading range is so large, short term headline catching rallies may represent nothing more than a move into resistance. Specifically, one should be short from 33.488 with stops just above 43.82. While very few have that kind of risk tolerance (at $5.00/point $.10 represents $50,000/contract) it is important to appreciate that this market is no longer trending higher and is in-fact, trending lower. 

So where do we go from here? one could argue the short term oversold condition suggests some kind of counter-trend rally is highly likely to occur.  Please refer to Cri's day-trading blog for more on this. The 50% level (31.70) ought to represent an oscillation level in the near term given it's magnetic effects. But because of extreme market volatility a 5-10% swing in either direction (from where we are right now) isn't out of the question either.

New investors are best advised just to leave this one (and really all the commodity markets in general) alone until the US Dollar Index tops out. A bullish US Dollar Index suggests that fear is once again dominating the investing landscape and one really shouldn't 'play' in the market during times like these. This condition may persist for weeks, months or even quarters, but being bullish in commodities right now is literally swimming against the current.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of Sept. 2nd, 2011

Hello and welcome back to CRI's CTS Spotlight,

09/02/11:The US dollar index has held the important low of 73.51 but keep watching that level as dollar bulls aren't quite out of the woods just yet. The Labor Day weekend is finally upon us and with it hopefully too comes the end of the low volume, high volatility sessions we have experienced through the summer of 2011. While no new trends have been established in commodity land this week, several older trends (gold, Swiss franc, bonds) are re-exerting themselves. Is this their final push higher - too early to tell but I for one shall be watching for reversals in the coming weeks. This week's CTS Spotlight blog shall take a good look at the US 10 year Treasury Note to see if we can make some sense of the monster rally of late.

There is so much talk about the bond market of late (European sovereign debt, downgrade of US Treasuries by S&P etc) I thought it only prudent to take a good look at the US Treasury market to understand just what exactly is going on. 

Aside from the political rhetoric and its associated manipulation by the media, US Treasuries are in a resounding bull market. No ifs ands or butts. Politicians would have one believe bonds are in trouble - quite to the contrary, bonds are doing quite well and look to add to those gains in the coming weeks/months ahead. Interest rates are going down, not up. Deflation should be the primary concern - not inflation. And most importantly, the market wants more bonds not less. If President Obama understood this, his economic team would use that market strength to implement a massive public works project. The US Federal Reserve has given a huge endorsement of such a program when it recently suggested that monetary policy should take a back seat to fiscal policy when thinking of ways to get out of the current economic slowdown. Tragically, politicians are very rarely good economists...

Lets take a look at the charts. Just above are the Weekly & Monthly Continuous Futures Charts for US 10 year Treasuries. As any market technician will tell you, 'a chart moving from the lower left to the upper right is a bullish chart' and that is exactly what we have here. Currently we are well contained within a massive monthly upwardly pointing channel where both long term support and resistance are far away from current prices. In fact, bonds bottomed more than five years ago and are just now entering their fourth year of trending higher. The recent breakout through 127.94 confirms this thesis and is yet another sign of strength. Indeed, this bull flag formation suggested price wanted to reach for 131 in the near term [(127.94-114.89)+117.94 = 130.99] and they have done exactly that. Traders & investors who bought the spring '11 bottom (122.47) are enjoying immense profits (up almost 9 points or $9,000 per contract) and would be well advised to let some of that position go upon hitting the bull flag target. Consider too that this huge rally has come in a very short period of time and one gets the feeling this market needs some time to either consolidate sideways or make an outright correction. A 50% retracement of the move higher would bring prices back into the 125 range [(117.94+131.29)/2 = 125.61] but the breakout to even newer highs over the past week suggests there is no top in place yet and prices may move even higher still in the coming weeks/months.

In Summary then, Interest rates have fallen considerably over the past few years as US economic growth has literally ground to a halt. Couple North America's demographic problems with China's need to curb its own inflation worries and Europe's complete lack of leadership amid the Euro's first real economic challenge and we have the makings for a deflationary spiral very similar to Japan's spiral of the 1990's. While politicians and their media counterparts spin a tale of inflation, deflation should be the primary concern going forward. Interestingly, history is giving the US government a window to expand its debt and grow its way out of the problem - will someone have the political courage to lead it through it? the 1990's was called 'the lost decade' in Japan - only time will tell if we shall have to 'lose' a decade too.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of August 19th, 2011

Hello and welcome back to CRI's CTS Spotlight,

08/19/11:The tentative bottom in the US Dollar index is coming under pressure. The index matched its June support low of 73.51 only to briefly bounce off it. Economic news coming out of North America is poor at best so a general flight out of that region appears to be happening (as the Cdn. dollar has come under pressure too). The yield curve itself has narrowed dramatically suggesting the odds of a pending 'double dip' recession are growing by the day. As an ultimate leading indicator, equity price action also too points to a contraction in the economy rather than expansion. Lastly, and our focus for this weeks Commodity Trend Spotlight Blog, Copper prices have a well defined top working as well which suggests a weakening economic backdrop.

 

As the above commentary suggests, there are growing signs of a potential recession here in North America. From economic data (the New York and Philly Fed numbers for example) to chart analysis (breakdowns in equity prices) to a flattening yield curve, there is plenty to suggest the expansion from the 2009 lows has indeed come to an end. Couple this economic backdrop with the political rhetoric of late (all about austerity rather than stimulus) and we have the makings for a very serious situation. Governments must step up and take the place of the consumer in times like these, yet it appears the exact opposite is happening. This horrible economic combination was one of the hallmarks of the great depression, are we about to make the very same mistake again?

This weeks CTS Spotlight focus's on Copper. Historically, Copper prices follow the broader economy very closely (hence the nickname, 'Professor of Economics'). Since copper goes into everything from housing to automobiles, a higher trending copper market usually implies strong demand and therefor it implies a strong economy. Conversely, a lower trending copper market implies weak demand and therefore a weak economy. The price chart above is of Copper and you will notice that it had been trending higher through 2009 and 2010 but has rolled over through 2011. Copper prices are indeed correcting and as of last week have confirmed the lower trending market by making a 'lower low'. Having said that, we all know nothing moves in a straight line and there is plenty of evidence to suggest copper prices are going to be extremely volatile over the coming weeks/months.

So what's the trend? The break of the May, 2011 lows (two weeks ago) suggests we are now comfortably within a downward pointing price channel. The top of the channel currently sits near the $4.40 area and the bottom of the channel is near $3.80. One can make a case for prices to move about 10% higher or lower from where we currently are but until the market can put in a double bottom price pattern, this market is still trending lower.

So for an idea of where prices could/ought to move in the coming trading sessions lets take a look at the chart for guidance.

Upside objective: The fact that the market left a gap just above $4.40 suggests that there ought to be a rally of some sort to fill the gap in. Exactly when, no-one knows but the gap is there and we must respect it. 

Downside objective: The '50% rule' suggests prices want to move down into the $3.691 area. $3.58 & $3.70 represent significant trading highs and lows from 2010 and at this point ought to be tested. The speed/resistance line currently sits just under $3.80. 

So in summary then, as a general proxy for our North American economy, copper prices suggest we are contracting rather than expanding. The market has a well established bear price channel in place where resistance is about 10% higher than current market prices and support is about 10% lower. I personally don't think the risk reward ratio is attractive enough to take a position either way but one must respect what the market is telling us. The questions is - are you listening?

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of August 12th, 2011

Hello and welcome back to CRI's CTS Spotlight,

081211: While the US dollar is little changed through these tumultuous times, many markets are moving dramatically. From blow off tops in the Swiss Franc, Gold and US Treasuries to collapses in many equity markets one thing that can't be said is that there is no action out there. Most notable this week include fresh sell signals in Copper, Eurodollars (US corporate short term interest rates) and both the worlds' commodity currencies (Cdn. and Aussie dollars). Additionally, one market little mentioned by the media yet could see some extreme bearish action in the near future is the Soy complex.

 

This week's focus is on the gold market. As regular readers, you ought to have an idea of where I expect the US dollar index to go over the coming weeks/months so I thought we ought to take a real good look at Gold too.

Here then is the weekly continuous gold futures chart (link) going back well into 2009. Keep in mind the price of gold fell in tandem with equity prices through the 2007-2009 bear market (as it usually does) so seeing a steadily rising market over the past couple years should be of no surprise as equities have come back too. This - right off the bat then brings to mind an interesting conundrum (we know that historically gold prices track inflation fears and yet falling equity prices by definition are deflationary). Since the break in equities just a couple weeks ago, gold itself has gone 'parabolic'. At the same time the US dollar index hasn't moved more than 2% against any of its major pairs (Except the Swiss Franc) and both the world's commodity currencies have well defined weekly double top (bearish) price patterns working. And if all that were not enough, futures commissions themselves have raised the margin requirements for buying gold futures. So needless to say, there are many warnings signs. But unfortunately, one must respect the old John Maynard Keynes quote, 'Markets may remain illogical far longer than any of us can remain solvent' (link). So lets take a look at what is happening and then ponder what might happen down the road. CRI-WCTS has had the gold market tending higher now for 24 weeks and its long standing upside technical target (bull flag formation) has been hit ($1717.80). Additionally, two speed/resistance lines suggest there ought to be a significant barrier at or near the same area (represented by Point 'A' on the chart above). While no 'top' currently exists one always has to ask themselves - are further gains really that realistic. At least one should have taken partial profits on long positions when the target was hit - at most you are completely out. From just a pure trading experience perspective, I myself have noticed that upon the completion of most bull flag pole formations there is a high probability of a period of consolidation for those gains. The consolidation may lead to another bull flag pole formation should it resolve higher - but it is in the consolidation and subsequent resolution one gets validation. Lets play devils advocate for just a moment and assume that we have indeed entered a 'topping' zone and ask ourselves, 'If we are indeed near a top then what might a correction look like?'.  A pullback into the $1400 to $1500 range (Point 'B' on the chart above) seems the most realistic scenario should prices start acting 'normally'. This correction would bring prices back to the 50% rule (and by now I sure hope you have come to appreciate this simple yet powerful tool). More importantly, it would bring prices back into the prevailing trend channel. I will finish off this commentary with the fact that I have included Point 'C' so that if the cycle analysis forecast (refereed to in last month's post) does indeed come true we have a good idea of where serious market support currently exists on a by-yearly basis.

That's all for this issue of the CTS Spotlight,

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of July 8th, 2011

Hello and welcome back to CRI's CTS Spotlight,

07/08/11: The US Dollar index continues to consolidate its recent bottoming action amid the turmoil of the European debt situation. Since this is the first two weeks of Q3'11, we shall watch for trends developing to give us an idea of where markets may want to go over the entire quarter. Of particular note this week, copper, lumber and the Nasdaq have confirmed bullish trends while the grains and energies looks weak.

 

During this horrible time in CRI's personal life, CTS Spotlight has suffered. Indeed, it has been a couple months since we last updated CTS Spotlight so to refresh things I thought we ought to take a good look at the US Dollar index to see if it is trying to tell us anything. 

The US dollar index is one of only a few markets that is negatively correlated with the broader market. My take on it (as of 2000) is that US dollar weakness is considered a market positive in that when the index is dropping it means that international money is looking for growth. It also means that US exports become cheaper (and more competitive) in the international market which helps US company profits. Conversely, when the US dollar index is rising, it means international money is fearful and running into the only 'safe haven' out there which in turn hurts US company profits. To confirm this notion we need only look at the two world commodity currencies to see that indeed, as the world inflates (commodity prices rise) both the worlds commodity currencies appreciate and when the world deflates (commodity prices fall) both the world's commodity currencies depreciate.This is the hallmark of the 17.5 'fear-cycle' we entered at the turn of the century and ought to persist for at least another 6 years.

As the chart above clearly demonstrates, the US dollar index has been in a steady decline for the past year.  As the world has reflated from the 2008 recession, international money has poured out of the US and into various international markets to take advantage of the growth. In essence it is a carry trade where money is borrowed in the US (at historically low interest rates) and invested in 'high growth' areas of the world. That has been primarily the emerging economies or what are known at the BRIC countries (Brazil, Russia, India & China). One will also recall how the US stock market as measured by the S&P 500 index (and really the whole world) has enjoyed a substantial bull run since last fall. That all may be changing. (Regular readers of CRI's SPY blog will be well aware of both the seasonal top that has been anticipated, but also the cycle top that is projected for late Q3'11.)

While the fundamentals are still a little unclear at the moment, two drivers seem to be emerging.

1. QE2 has come to an end in the US. This very controversial program (where the US Fed has literally pumped billions of dollars into the market) has met its economic/political objectives and further directed US dollar depreciation efforts by central bankers will not occur again unless we see another 'melt-down' in asset prices. As well, GOP political rhetoric has all but killed further US Federal government (fiscal) spending going forward.

2. The credit-crunch in Europe is back on. One by one, the marginal countries of the Euro-zone (Greece, Portugal, Ireland, Spain and now Italy) are coming under pressure to either raise taxes or cut government spending. Since many of these countries have horrible tax collection records - the only realistic alternative for them is to cut spending. This is never popular with the public and will meet a lot of resistance. Indeed, if taken too far these types of measures can lead to revolution - lets hope it doesn't come to that. The point of all this is that 'growth' is definitely on the back burner. Countries in the Euro-zone are shrinking not growing and this all plays back into the US dollar index.

So with all this being said, it shouldn't surprise us to see a technical bottom in the US dollar index of late. Since April, the greenback has been slowly appreciating and while not a stunning bull market, one has to respect the fact that the index is NOT trending lower. In fact, as of two weeks ago, it has confirmed a double bottom price pattern suggesting that the index actually wants to go up not down going forward. This represents a fundamental shift in the market and is very important. 

For an idea of where the index may want to go in the coming weeks/months we refer to the 50% rule. Since it's peak last year, the index has fallen from the high 80's to the low 70's. A 50% retracement of this move would bring the index back into the 81-82 area and that has to be at least our preliminary target going forward.

As an added feature of this commentary on the US dollar index, I thought we would include a very interesting chart done by the good people at FSC (website). These guys are cycle gurus and their recent work on the gold market is startling to say the least.

 

According to their work (red line) gold prices could see a precipitous decline in the near future. This is important because it confirms our notion that the US dollar index wants to rise - or that the 'fear' vote in the market is overwhelming the 'greed' vote. Historically, the US dollar and gold move in opposite directions (where gold is the ultimate inflationary proxy and the US dollar index is the ultimate deflationary proxy). Should their cycle analysis prove correct, we ought to see a dramatic fall in gold prices over the coming weeks/months as the world 'deflates'.

So in summary then, the technical double bottom in the US dollar index must be appreciated. The end of QE2 means that the 'easy' monetary policy days in North America are over for now. Additionally, the Euro-zone debt issues have, for the time being, brought growth from Europe into question. These deflationary fundamentals mean there isn't a guaranteed floor in the market and prices are vulnerable. Add these fundamental drivers with some simple cycle analysis (FSC chart above) and we have the makings for a dangerous market going forward.

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

 

CTS Spotlight for the week of May 6th, 2011

Hello and welcome back to CRI's CTS Spotlight,

05/06/11: The US Dollar Index has hit its downside objectives and then reversed violently off its lows. This move (and many commodity bearish reversals) has come right into the normal seasonal peak of May and yet again lends credence to the old adage, 'Sell in May and walk away'. Regular readers of CRI's WCTS will recall our overt cautious behavior over the past few weeks in anticipation of such an event. Indeed, the price action has been quite abnormal with Silver, for example, loosing more than $16/oz in just one week. This week's CTS spotlight is on Copper and how its price action is often called the professor of economics. Can you tell which way the Prof is expecting the broader economy to move over the coming weeks/months? You should!

This week I thought we ought to take a look at our old friend High Grade Copper. Because copper itself is used in so many manufactured products throughout our economy (from autos to homes to consumer electronics) this commodity, unlike many others, is often used as a barometer for the broader economy. In fact, it has been given the nickname of Professor of Economics 101. Simply put, whichever way copper prices are trending gives economists a good idea of where the broader economy is expected to move in the near future.

With that said, I think it speaks volumes that copper prices HAD been trending higher for (a rather remarkably) 117 weeks or a little over two years straight. Since the credit crunch of '07-'08 and the subsequent bottom in '09 copper has done nothing but go up. That now appears to be changing. Seasonally, we can understand a natural top ought to come in at this time of year (given that those who plan to build new homes over the summer months have bought all of their needed supplies by now) but added to that is a general sense that the economic expansion that started a little over two years ago seems to be running out of steam.

Specifically, Copper has now put in a very well defined double top price pattern and has subsequently confirmed that top with this past week's breakdown through important support at $4.076/lb. While I am not looking for the proverbial sky to fall, one ought to expect a healthy correction back into the $3.68/lb area as this would represent a 50% correction of the past year's price action. Keep in mind too, this formation is very large (with suggested stops more than $.50 higher than the short entry). Because of this, I doubt there are many traders with deep enough pockets to be able to stomach this kind of risk ($.50 on one contract represents $12,500!). Heck, most of us should be able to remember when copper wouldn't move $.50 in a whole year!

So while it is important to see and understand what is going on in the market, I doubt many will actually do the trade. What is important here is that the run-away bull market is starting to fail. Consider too the fact that the first two weeks study of Q2'11 suggested we were going to have some tough slogging through the quarter.

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com 

CTS Spotlight for the week of April 22nd, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/22/11: In a week that saw the US Dollar almost hit its downside target (73.516) there appears to be a lot of cross currents effecting the broader commodity market. For example - Gold & Silver continue to move higher even though Platinum, Palladium and Copper are not. The tech. heavy Nasdaq is breaking out yet the broader market proxy, the S&P 500, isn't. And lastly, Cotton prices have topped in earnest (the focus of this week's CTS Spotlight) yet most other grains have not. Considering gold's lagging indicator status and the proximity of the US dollar to its well established downside target - aggressive long commodity traders ought to temper their enthusiasm heading into the seasonal topping zone in May.

This week, I thought we would take a look at the Cotton market from a weekly and monthly perspective. Here we can clearly see the dramatic bull market that has dominated for the past 2 years. Would anyone in 2009 have expected a 5 fold increase in price - NO! In fact, I would argue that Cotton represents an excellent example of the old cliche, Markets can remain illogical far longer than any of us can remain solvent'. The question I pose to those 'investor' out there is - does being long (given the recent price breakdown on a weekly basis) seem rational? 

Of course not - In fact, this is a great example of how dramatically commodity prices can swing and can literally destroy a small investor. Keep in mind that within the heart of the financial crisis, one could have bought all the cotton one wanted in the $.45/pound range. Now, for some unknown reason, that same pound of cotton will cost you well over four times that price - go figure. Having said that, there are those that are suggesting one ought to consider any pull backs as buying opportunity. I, as a rational investor, would disagree. For those considering a purchase, I have specifically included cotton this week as an example of coming to a market too late. Yes I would have endorsed a buy from the significant breakout (in 2010) at or near $.90 but now that the market has broken on a weekly basis, I might argue that long positions should be tempered until we see a nice weekly bottom come back in. This consolidation may take months to develop and may come in at substantially lower levels - one just never knows. For now - the bull run is over, so cool your jets bulls and new prospective investors - keep that powder dry! 

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com 

CTS Spotlight for the week of April 8th, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/08/11: As the US dollar continues its slow grind down to the well established target zone (74.441 to 73.516) there is a general feeling in the market that the US economy itself is far from healthy. Of note this week, Eurodollars (our short term interest rate proxy) have established a bottom and reversed what looked like a well defined top. The implications suggest short term interest rates in North America are not going up any time soon. Indeed, the US Fed has suggested that its QE2 program will be extended into June '11. Looking elsewhere, many commodity prices have reversed their recent tops suggesting that the latest market correction was little more than an attempt to shake out the 'weak-hands'. CRI's S&P 500 blog has been attesting to this notion over the past weeks as very little 'technical damage' has been done even though the news headlines would lead one to believe otherwise.

 

The Eurodollar market is the corporate equivalent to the T-bill market. Where T-bills are guaranteed by a government body, Eurodollars are guaranteed by corporations. To understand how this market works think of a Eurodollar contract's price as the inverse of its interest rate. So if Eurodollars are trading at 99.60, then the interest rates paid is .40% (100 minus the price). The fact that the Eurodollars have bottomed in price suggests that short term interest rates paid by corporations to the holders of their paper are now NOT going up but indeed, may fall even further. This is very interesting because if one believes the North American economy is improving then Eurodollar rates should be rising. The fact that this very well established bottom has come in, suggests that the North American economy isn't as good as the media would lead us to believe and that indeed, one should expect the malaise of the past couple of years to continue. The question then becomes, when does this 'malaise-ness' get reflected in the rest of the market. CRI's feeling is that the stock market (and many of the commodity markets) have a natural tendency to rally into the seasonal peak in and around May. So CRI's words of caution this week are: 

Don't get sucked into the seasonal euphoria, this may be a very big trap...

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com  

CTS Spotlight for the week of April 1st, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/01/11: After a month absence due to a family emergency, CRI is once again at the helm to help in understanding what is going on in this crazy world. First and foremost, the US dollar continues to point towards the mid 74 area so that means we still have a little farther to go on the downside. Having said that, I did notice this week quite a few markets have triggered stops and those that haven't are looking rather toppy. Considering the seasonal top that ought to materialize in the coming weeks (sell in May and walk away), one shouldn't be too surprised with the idea that trends begun after the US mid term congressional elections (last November) are starting to exhaust themselves. Trade accordingly - now is not the time to be taking big risks!

This week I thought we would take a good look at the Canadian bond market. As a proxy for commodities in general and a good barometer for demand for commodities from North America, Canada has been enjoying the benefits of growth at a very low inflation rate. That may be coming to an end - and the one market that will herald that end will be the bond market.

Two things jump out at me when I look at this chart:

1. There is a very well established double top breakdown in price (that occurred right after the massive equity buy signal following the US mid term congressional elections last fall). This will not only act as massive resistance going forward but also represents a major pivot in the perception of inflationary pressures within Canada itself. In other words, inflation is back and it isn't going away until a well defined bottom in price comes in.

2. This previous week's price action has confirmed a nasty looking bear flag pole formation (with help on understanding this technical price pattern please refer to CRI's FREE Chart Patterns & Formations seminar). This price action is bearish (confirming point 1. above) and implies prices want to move down into the 114 area. If such an event happens, it will also confirm a massive monthly top in price (with a break of the major support area in and around 117). While this is a trade-able price pattern, the risk (suggested stop point just above 123) means for every dollar you potential could make on the trade (going short at 119) you have to take twice the risk - not worth the trade in my opinion. Having said that, it is important to understand what the market is trying to tell us - Canadian interest rates are going up!

So to summarize, Canada and Canadian bonds are looking very risky at the moment. Interest rates are not going lower in Canada, they are going higher. Ironically - the Bank of Canada has been pounding the proverbial table for months warning Canadians of their very high relative debt levels and the potential disaster looming for Canada. Did anyone listen - I doubt it!

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com

CTS Spotlight for the week of February 25, 2011

Hello and welcome back to CRI's CTS Spotlight,

022511: Once again, those shorting the Swiss Franc have been stopped out, ugh! There is an old adage that these things come in threes so I will patiently wait for yet another breakdown to play my Swiss Franc puts. Flying bullets have a habit of injecting confusion into the market and that is exactly what I see now. It is interesting to note that the recent equity weakness has done little technical damage and one ought to still look for higher prices down the road. As an illustration of the potential to come, this weeks CTS spotlight will take a good look at Australian equities in the face of its rising currency. 

Australia has benefited greatly from the build-out of Asia in general and China in particular. Considering Australian short term interest rates are still quite comfortably above North American and even European short term interest rates, there is still great relative attractiveness for bankers to have their money working 'down-under'.

The chart below is of the Australian currency. The recent break to new 7 year highs (above 1.02US) suggests that money is still flowing into Australia and that one ought to look for substantially higher prices down the road. Indeed, even the past two year consolidation (and subsequent breakout) paints a target near 1.05. The violent bull flag formation since the '08 lows has continued to play itself out in near text book fashion.

The chart above is of the Australian equity market. This is the broadest index in Australia and basically reflects equity performance 'down-under' Here we see the infamous bull flag formation just starting to breakout and what has got me particularly interested in the trade. Should we get a move above the recent highs (at 5048) one can realistically look for a target in the 6150 area. This is just about 1100 points or 21.8% higher! Now have I got your attention? I will be looking at the call options will particular attention over the coming week and if I can find a trade where I can buy at least 6 months of time and can pay a premium that is half what I think the option's intrinsic value will be at our target, then I just may pull the proverbial trigger. OnlyDoubles NewTrades Subscribers, keep your eyes and ears peeled...

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com  

CTS Spotlight for the week of February 18, 2011

Hello and welcome back to CRI's CTS Spotlight,

02/18/11: In a week that saw little new develop with the currencies themselves, many long standing trends within the commodity space have re-exerted themselves. Considering we are 11 years into this 17.5 year commodity super-cycle, one ought to expect further commodity price appreciation for another 6.5 years. Supporting the notion of higher commodity prices to come, both the Australian and Canadian dollars in particular and world equity prices in general look like they all want to move higher. Of particular bullish note this week, Silver & Palladium impressed (both breaking to new highs) and the Meat complex moved higher across the board. This week's CTS will look at the meats a little closer to see what may be going on there. 

The meat complex

This week I thought we would take a good look at a couple representatives from the meat complex. What I like about this blog entry is that we get to see the bull flag formation in its completed form and the bull flag formation just as its breaking out.

While a little backwards, lets start with the bottom two charts, being the Live Cattle market. You will notice that CRI's CTS had the live cattle market breaking out and trending higher from $100.00, 27 weeks ago. The price pattern was fairly clear in that prices rallied dramatically from the fall '10 lows (from 80 to 100) then consolidated for several months (between 90 and 100). When prices broke through the 100 level last fall, one could be fairly confident that the upside objective of the price pattern was going to be hit (that being roughly 109). Since each point here is $4, 9 points represents $3600 US, not a bad sum!

So this brings us to today, and with what is going on in the Pig market. Lean Hogs (used to be called Live Hogs) are very much like Live Cattle in that farmers are constantly weighing the cost of sending their animals to market or holding off for higher prices. It would seem, the recent culling of animals around the world is taking its tole on the sheer supply of livestock which may make up the farmers' minds for them. Regardless of the fundamental reasons (one could make an equally bearish argument due to rising feed prices), the recent break above the '10 peak suggests prices want to move higher in earnest. Like the Cattle, this breakout may take weeks to develop but a move into the 110 area doesn't seem too out of the question. Like the Cattle too, this market may make traders some BIG money as that target is 17.5 points higher. Each point here is $4 so we are talking about $7,000 per contract!

So is there a trade here?

I personally don't like open futures contracts (I like to keep what little hair I have and be able to sleep a little at night). If one were to do a futures trade, one would have to risk down to 65 or more than 25 points (Ya, I know, totally unrealistic). With this in mind, I took a look at the options for Aug '11 (six months time). Unfortunately, they are very rich and only at $110 would we make any money so I am going to just put them on my screen and watch for a while. Should we get a correction to clean up the Daily over-bought condition, I may look to enter into the trade. Of course, if there is a possible double in the making, you can be sure subscribers of CRI's OnlyDoubles NewTrades will be kept well aware of the situation.

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com