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 FCSIthe_rational_investor@yahoo.com
http://www.therationalinvestor.ca
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