CTS Spotlight for the week of January 28, 2011

Hello and welcome back to CRI's CTS Spotlight,

01/28/11: In a week that saw a stunned western world watch the middle east implode once again the markets are hinting at a possible end to our two year cyclical bull run. From bond markets threatening to bottom, to faltering stocks, to a break in energy, to a top in gold - there are mounting signs of consolidation rather than growth. While one event rarely stops a bull in its tracks and no new sell signals have been generated; one must appreciate where we have come in a very short period of time. This week's CTS spotlight will look at the Australian dollar and how it has performed as an excellent proxy for the past couple years of growth and how it may be effected by natural market forces going forward.

Australian dollar

Several interesting things jump out at me when I look at the currency 'down-under'. First off, it certainly has been a bumpy ride over the past few years (monthly chart below). Of course, regular readers of CRI's publications will remember well the monster bottom in the AD in '09 and our associated TTA. That trade has proved to be enormously profitable and I personally would like to congratuale anyone who was fortuante enough to be able to take advantage of it. Really, the text book definition of a Rational Investment. Once the technical bottom was in (April '09) the fundamental story powered this market for an almost immediate .20 cent gain!


The primary driver (from the fundamental perspective) was the dramatic spread between US and Australian short term Governement guaranteed interest rates (at that time you could borrow in the US at .25% and buy Aus. at 3% or more). When it comes to you and me it doesn't mean much, but when it comes to major corporations (keep in mind many US corporations are sitting on mountains of cash) and or governments themselves, 2 or 3% 'free' money (they didn't have to do a thing to make the return!) can equate to some serious cash.


This may be starting to change. While the US Fed has continued to signal that there will be no change in US short term interest rate policy soon, the impetuous for high Australian rates may be beginning to wain. On top of the fact that China and India (the areas super economies and primary consumers of Australian commodities) are in the midst of trying to slow their respective economies due to rising inflationary pressures (have you seen the price of cotton lately!) Australia has been hit with a natural disaster of 'biblical proportions'.  Should there be continued signs of economic retraction from the area's primary consumers and/or Australia itself needs to go through a period of consolidation/clean-up, Central bankers may feel lower rather than higher short term interest rates are warrented. Should this potential trend change gain traction we will need to refer to the charts for position guidance. 


Technically speaking, the weekly chart (chart above) is forming a coil that is getting tighter and tighter. It has NOT broken down but this looks to me like a classic rising wedge trap. This happens when the market makes higher highs and higher lows but the price pattern gets tighter and tighter (which has been the case for the Australian dollar since the broader market breakout last Oct-Nov). Should price 'top' (which would now be registered with a move below the weekly pivot line at .98) there are three significant price targets that weigh on this market going forward. Firstly, a 50% retracement of the rally since last June would bring prices back into the .9155 area. Second, there are two gaps that really ought to be filled at or near .92. Lastly, a correction back to the monthly trend line from the '08 peak to the late '09/early '10 peak would bring prices back into the .90 area. Put these three factors together and I think there is plenty of technical justification for this market to correct over the coming weeks/months.


The last consideration for a trader like myself (who hates the open ended risk of futures trading) is to shop the options market. Our time tested rule here suggests that we can make great money if we only consider buying an option if it has at least four months of time (really I like it to be at least 6 months) and its current price (or premium) is half what we expect the intrinsic value of the option will be when the underlying market hits our target. Since our target (I really like to use the weekly 50% rule here) is .9155, and the June .92 puts are currently about $.0060, there ins't any profit in doing the trade [our profit at our target would be: (.9200 - .9155) - 0.0061 (premium) = -.0016 (loss!)]. In essence, we would guess the market direction right and yet still lose money! This is the danger of the options market and drives home the point that just because you can guess market direction doesn't mean you can make money! Should this option get into the $.0020 area and the market has yet to break in earnest, we might get interested in the trade - but not now.


Having said all that, it is good to review and prepare.....you don't always have to trade


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 January 14, 2011

Hello and welcome back to CRI's CTS Spotlight

01/14/11: The end of the first two weeks of Q1'11 is here with some interesting results. Energy looks to continue its upward move while some of the other basic materials may take the quarter off. Most notably, unleaded gas looks to be setting itself up for a run this spring while gold looks a little toppy. As previously suggested, the one thing that could derail this global expansion really quickly would be a spike in energy and that may be exactly what we are about to get. On a side note, it is interesting to see that CRI's VCIM has been buying junior Cdn. oil & gas stocks in abundance of late - coincidence, I think not!  

Here is the performance for the S&P 500 sector groups for the first two weeks of the quarter. Indeed, energy is again amongst the top performing sectors this quarter again. Interestingly, basic materials was not. So for this weeks Spotlight we shall look first at the energy sector and then at one 'problem' in the basic materials.

Energy review

Energy prices in general have been trending higher for some time now. Indeed, since the 2008 meltdown, prices have moved higher with only brief periods of consolidation. As long as the market continues to make higher highs and higher lows, one can't help but to look for further price appreciation down the road. Seeming to confirm this, the price channels for Crude, Heating Oil and Unleaded Gas all suggest the upward move has further to go. The interesting market here is natural gas. For some time now prices have been going up but at such a slow rate that really one could argue they have been going sideways. With the recent announcement that a firm can produce deasel fuel from natural gas cheaper than from crude oil, one can understand why prices may see a bit of a run here. Should the market embrace natural gas once again, prices could see a 50% 'pop' just to play catchup with its brethren.

        
One problem - gold

As previously suggested, one very quick way to derail the current global economic expansion is to see a dramatic rise in energy costs. energy prices have been relatively well behaved over the past couple of years and as a result, economic expansion has driven demand for many commodities to lofty levels. Indeed, if one were to see the world economy cool a bit in 2011, we could see gold, for example, correct quite substantially. And by judging how bullish the public is of gold, a substantial correction wouldn't be too unexpected. A 50% retracement of the '09-'10 run would bring prices back into the $1170 area and there are some funny gaps to be cleaned up on the monthly charts in and around this area as well. While I am not saying 'sell all your gold', this market does look a little tired and considering where it has been, a period of consolidation seems realistic.

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 January 07, 2011

Hello and welcome back to CRI's CTS Spotlight

01/07/11: Could 2011 see much of the late 2010 commodity rally taken back? So far, it appears that way. The first two weeks of every quarter are often a good indication of what to expect for the remainder. News of no new bank bailouts from the ECB means status quo which means more European debt worries which means 'the crisis' is still very much on. Considering the dramatic moves higher seen of late (Copper alone up more than 65% since June's lows), a period of consolidation while the Germans squeeze their fiscally incompetent ECB partners seems not only realistic but maybe even a little necessary too.

US Dollar / Euro / Jap Yen Analysis

Recently, CRI wrote a CTS Spotlight on the Japaneses Yen, the Nikkei and the US dollar Index. (Nov. 14th) in-which it was concluded that the Yen had indeed moved up quite a bit vs. the dollar and one ought to consider a correction in the not too distant future. Since Japaneses stocks have again broken out higher (suggesting the Yen may indeed come down more versus the US dollar) I thought this week we would take another look at the major currencies to see if opinions ought to be changed.

So lets start off with the greenback.  The US dollar index has put in a bottom formation with the recent close back above the 81 area. A trade above the early Dec. highs would confirm a tight bull flag formation [roughly (82-75)+79 =86]. This is supported by the monthly chart which suggests the recent price channel resistance is currently in the 87 to 88 area.

Moving on to the Euro. Here is where I think most of the US dollar will get its strength from. Recent comments reiterating the 'no bailout' theme in Euro land suggest that the credit crisis will continue for some time to come. This shall be detrimental to most markets but interestingly, the German stock market is dramatically overextended and could really use a period of consolidation. Maybe German bankers/politicians see this and are creating this short term crisis to effect the cleanup. The market just flashed a sell signal (moving through the significant lows near 1.30) and looking at the monthly chart it would appear there is very little supporting this market until we get back below 1.20!

Lastly the Yen. As previously noted, there is a lot of room for the Yen to come down. Indeed, one could argue for at least a 10% correction here just to get back into monthly support. Unlike the Euro though, the Yen has NOT broken down yet. While I would be interested in shorting the Yen to capture some of this over extension, I must wait for the signal so here we shall hurry up and wait...
 
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com