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