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