Sunday, March 31, 2013

CRI's WCTS Spotlight Blog for March 28th, 2013

Hello and welcome back to CRI's WCTS Spotlight Blog,

03/22/13: The end of Q1\'13 is here and so too does it bring the Japanese fiscal year end. Amid the seasonal ill-liquidity, the US dollar index is once again pushing back above the 83 level suggesting the fight between 83 and 84 isn\'t quite over yet. We will be watching that chart\'s resolution closely over the coming weeks per our recent WCTS blog posts and weekly updates. Seemingly to confirm this broader market bearishness, Bonds look to be bottoming, Copper looks to be topping and Healthcare (a sector that usually does well during bear markets) was the best performer through the entire quarter as suggested by our 1st 2wks study back in January. Lastly, with the recent announcement of US farmer\'s crop planting intentions released on Friday (where corn intentions are for the biggest US corn crop in more than 80 years) I thought we ought to take a quick look at the grain markets and what the charts might be suggesting there going forward. Additionally, this week I have included a short tutorial on Bearish Engulfing patterns (Japanese Candlestick price pattern) and putting those patterns into context given higher time frame chart analysis - enjoy...


When I read through the news pertaining to the rather dramatic decline in prices on Friday (news link: News of record corn crop shakes market) I am reminded of a lesson I learned many years ago in the commodities market, the best cure for high prices - is high prices! Interestingly, shortly following that barrage of negative sentiment, news articles like this started to appear (news link: Crop outlook bullish for corn soybeans) suggesting institutional demand (Ethanol) and a diminished planting of other crops (especially evident in Oats for example) may set a 'floor' for further price appreciation. With the fear of a re-occurrence of last year's drought conditions and/or an always persistent fear of flood it is no surprise we have a very tightly wound market with potentially explosive fundamental movement either way. 

So here we are caught right between the proverbial 'rock' and a 'hard place'. At the moment it literally feels like there is an equal tug of war of news going on and that seems to be confirmed by the price action. Now here is the 'rub' - as traders, we must always be asking ourselves, is the potential reward I may realize on this one particular trade justify the very real risk I am going to have to take. And as of Friday's price action, I don't see justifiable shorts on any of these one day moves. One by one, I can go through each of these grain markets and make just as compelling an argument for the bulls as I can for the bears and that unfortunately doesn't help our risk:reward ratio at all...

Of the six markets shown above, lets take a look at Corn since the news was so Corn centered. I find it particularly interesting that while big, Corn's move did not break the significant lows from only a month ago. 687.25 was the key weekly low (682 daily low from the May contract 03/07/13) and that is the number I shall be watching closely for over the coming sessions. If indeed, that bottom holds, then corn is actually still working a perfectly normal double bottom 'bullish' price pattern and may even be setting the stage for a massive bullish AB= CD price pattern heading into the summer seasonal peak. At the same time, we may very well be carving out a bearish AB=CD price pattern too. A break of 678.50 would confirm this and would imply a downside target just under $6.00 which coincidentally happens to be where some juicy gaps are that really need to be filled. So as you can see, not the best odds....really about a 50/50 bet... anyone got a coin??? 

As you all know, I am by nature a very conservative investor and according to the 'Two Rules of Investing', rule number 1 says we can't consider a trade unless we are absolutely confident of at least 66% accuracy. 50/50 is not 66%. Additionally, options prices are currently skewed for a 50/50 scenario. According to our options model (OnlyDoubles Trades) we can only consider an option purchase if it's current price is half of what we expect it's intrinsic value will be should the market move to our anticipated target. That only happens with we catch a market with too much of a bias in one direction or the other. Here, the market really doesn't have a bias (remember our tug-of war), so there really isn't an unfair advantage for us to participate.

Which brings us to our Educational segment on Bearish Engulfing price patterns and their appropriate use given the larger time frame chart analysis. Here then is a very interesting daily (above) and weekly (below) chart summary on the DBA agg. commodity ETF with particular emphasis on two 'Bearish Engulfing Patterns' as highlighted in Stockchart.com's predefined bearish engulfing pattern scan from Friday.


DBA bearish engulfing pattern

Current DBA weekly chart: http://scharts.co/Y1WnL7
 
The two 'blown-up' charts (#1 & #2) are the two bearish engulfing patterns I would like to concentrate on here today. Notice they both meet the text book definition of a bearish engulfing pattern and may look roughly the same - but alas, they are very different. When one looks at the weekly chart (below) we see that #1 occurred at the top of the price channel and there was a very well defined downside target (the very large weekly gap at $26.50). #2 has however occurred at what I would consider a very tough location. 

First off, from a seasonal perspective we must keep in mind, spring is often a 'pivot' period for the broader market and especially so within the agricultural sector. Specifically for the grain markets, we are now shifting back to a supply driven market rather than the demand driven market typical during the North American winter. Prices shall be driven by fear of flood or drought and will ultimately culminate with the Fall harvest. In the face of poor international demand, it is not surprising to see that prices themselves have fallen for more than seven months and have left a lot of gaps to the upside that really ought to be filled in at some point down the road.  

So with this backdrop (one very different then in late January) we are currently right up against a key low and Friday's action was unable to penetrate that low. The grain markets themselves were ugly but they did not break. Should they break, the very important low ($25.70 on this ETF) shall be broken too. BUT that has not happened yet and I do believe it is dangerous to assume that it will happen.

Given too, we will be entering the 1st 2 weeks of Q2'13 (and all the implications that go with that event), I will personally be reluctant to take any bets in earnest until that window is closed. I fear prices will test and maybe even break those significant lows early this coming week but then rally hard through the first two weeks as trapped shorts have no choice but to cover. Indeed, if it is one thing I have learned while working with the good people at TsT, there are/will be quite a few traders that would consider buying against the 25.70 low as a relatively low risk:reward long scenario.

So what is the point of all this then? Take away from this that not every bearish engulfing pattern is the same. Some occur at really good shorting locations, others occur at typical 'trap' locations. As always, nothing is guaranteed in the market and getting sucked blindly into each and every bearish engulfing pattern can be both mentally exhausting and financially debilitating. Take every chart pattern you see and put it into context given your higher time frame chart analysis. If they agree, then you may have something to work with. If not, beware!

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




Brian Beamish FCSI  
The Canadian Rational Investor
the_rational_investor@yahoo.com 

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



p.s. fwiw, I personally prefer the concept of the 'outside downside key reversal' (using OHLC bars) in that the market opens HIGHER than the previous two period's highs and closes LOWER than the previous two period's lows. Notice that while both are text book candlestick 'engulfing patterns' definitions, #1 above meets the 'key reversal' criteria while #2 does not....

Sunday, March 24, 2013

CRI's WCTS Spotlight Blog for March 22nd, 2013

Hello and welcome back to CRI's WCTS Spotlight Blog.

03/22/13: The US dollar index this past week showed signs of fatigue any time it pointed its nose above 83.00. As previously mentioned, 83-84 represents a significant battle zone for the index and its ultimate resolution ought to give investors a guide as to 'fear' vs. 'greed' expectations for the coming weeks and months ahead. Given this is Japanese fiscal year end, we may see trend resumption once on the other side of that event. Interestingly too, that event will mark the beginning of Q2''13 and we shall be given yet another brief glimpse at what fund managers are doing with their new capital. Elsewhere, the professor of economics (HG Copper) had something to say this past week. While still contained within a larger channel, Copper prices registered a weekly double top breakdown suggesting lower, not higher prices ahead. With that in mind I thought we ought to take a look at what is going on there in this week's WCTS Blog.

High Grade Copper (HG) Weekly & Monthly


  
HG Copper review: Here again we find another commodity perched at or near 10-15 year highs and threatening to break down in earnest - quite a re-occurring theme of late. Unlike other markets, HG Copper's general trend itself has broader implications. Also known as the professor of economics, Copper is such a key componatant in manufacturing (from housing to airplanes to automobiles) that its direction is often a great proxy for global economic output. Rising copper prices equates to booming economies; falling prices equates to contraction. 


Fundamental review: 
On balance, I find it incredible how only 10 years ago Copper prices traded in a nice $.50 to $1.50 range for the better part of thirty years. Only over the past decade has copper 'come to life' (as this chart illustrates: link). While I can understand a revision higher in price given the destruction of the base currencies' fundamental value (US$) unless there is continued strong demand, prices can easily fall from these lofty levels and fast! The 2000-2010 decade was dominated by the building out of China's economy. Will that trend continue? Has that trend already started to reverse? Chin's political structure has moved away from the growth-at-all-costs model and Chinese stocks are reflecting that. Europe itself is in self-destruct mode as we know austerity will cut GDP growth not help it. And here in North America we are facing a fiscal situation that like the Europeans lends support to contraction not economic expansion. Even from a short term perspective, whatever housing demand there is this summer has surly been bought by wholesalers by now, so when I put it all together I am not quite sure how this market can maintain such high levels let alone move to new highs from here. Once the seasonal window closes (sell in May and walk away) I personally would be especially leery of owning this commodity in particular.

Technical review:  
Monthly (chart on the right above): Given the 'V' nature of the bottom in price from 2008, it shouldn't surprise anyone to expect a test of that low at some point down the road. While that big fat juicy target may be a little aggressive there are two significant downside targets that seem very realistic given the world's current fundamental situation. Should price move through the lows from October 2011, we will be setting up a monthly bearish ab=cd price pattern. The target on that pattern is about $2.50 and at the same time, there exists a nice little gap on the Monthly charts at that level too. The two together make for a compelling argument for that level to be traded to at some point in the future.  
Weekly (chart on the left above): Here is a very interesting situation. Price just this past week broke down through the most recent low to register a new weekly double top price pattern (red channel). At the same time, price is also caught in another equally powerful bullish channel (blue channel). These two forces are at work at present and are making for a very interesting battle. Given the low liquidity of Japanese fiscal year end and the fact that we are coming up on the end of Q1'13 I am reluctant to get too bearish of this recent breakdown. I for one am willing to wait for the first two weeks of the coming quarter to get out of the way and let the market tell me if this price breakdown is for real or is just a head fake in an illiquid market. But make no mistake - things are brewing here...

Summery
The professor of economics is generally not happy and we should listen to what he is saying. Lower highs and lower lows define a bear market and this past week's price action gave us just that. Given the current global economic backdrop that expectation shouldn't come as too big of a surprise. Given too the current market's ill-liquidity in the face of Japan's fiscal year end (and what may lie just on the other side of that event) and the transition from Q1'13 to Q2'13, I for one shall be watching HG Copper over the coming weeks very closely to see if this breakdown is for real or just a head fake.

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



Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com 

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

Sunday, March 17, 2013

CTS Spotlight Blog for March 15th, 2013

Hello and welcome back to CRI's CTS Spotlight Blog.

03/15/13: The US Dollar index itself is at a very interesting cross roads here. As pointed out in this week's WCTS Blog, we are either at the end of a bearish Bat harmonic pattern (which would imply lower levels from here) or we push up through the 2012 summer peaks (suggesting much higher levels to come). Regardless, the area between 83 to 84 is a very important one and I for one will be keeping a close on how it resolves. While the bond market has yet to be convinced the North American economy has indeed turned, equities are enjoying what appears to be a flight back-into-risk. The fact that all world indices tracked are now pointing higher suggests we are closer to the end of this run then the beginning. Considering seasonality, I wouldn't be surprised if the spring/summer of 2013 marks an important peak. Interestingly, the rally itself is coming from unexpected sectors as our ABG trade (AAPL, Bonds & Gold) takes a break. Indeed, out-performance from sectors like pharmaceuticals shouldn't come as too big a surprise given CRI's 1st 2wks of Q1'13 study suggested that would be the case. Have the metals been beaten up a little too much? Recent WDB Options Model screen results would suggest so as several 'get paid to take a position' trades have emerged of late.

US Dollar Index (Weekly)



British Pound vs. The US Dollar (Weekly & Monthly)

 
As highlighted in recent weekly commodity trend summary posts, there are some interesting wranglings going on with the currency space of late and I thought we ought to take some time this weekend to look at the US Dollar Index in general and one of its trading pairs (The British Pound) in particular.

The US Dollar index
The greenback itself has been under relentless cyclical pressure since the day George Bush Jr. took office some 12 years ago. The coupling of the generational cycle turn ('greed' cycle peak into 2000) and absolutely horrible domestic policy culminated in the United States of America being pushed to the literal brink of bankruptcy by 2009. Once it was revealed how bad the situation really was and the US Fed established itself as a dependable 'lender of last resort' (and at considerable risk I might add) both a floor in the US Dollar was established and 'fear' proxies (like gold) calmed appreciably. 

So the question at this point seems to be, ok, what's next? The underlying fundamentals within the US economy have been supportive of both a stronger US dollar itself (interest rate spreads are attractive relative to the rest of the world) and a stronger US domestic economy (US corporate earnings are good and the yield curve remains expansionary). Until either the Fed signals an end to its current 'low interest rate' policy or international demand for US paper wains I see no change in that backdrop. Which brings us to the charts. The first chart above is the US Dollar index and it is in my opinion that the index is at a very significant cross roads. Should this be a 'Bearish Bat' harmonic pattern (where point d. would represent the end of our counter trend rally) we should see prices fall appreciably from current levels. Should this be a bullish AB=CD harmonic pattern (where point B would represent the beginning of a whole new longer term leg higher) we should see prices rally appreciably from current levels. While the jury is still out on the broader world economy, I myself will be looking to see how the index acts in and around this 83 to 84 level over the coming weeks. This is what I would consider the battle zone. If the bulls win we blast through 84, if the bears win we fail at 83. 

So are there any ques for investors that might help guide expectations going forward? In the short term we do still have seasonality on the 'commodity bulls' side. Once that window closes (Sell in May and walk away) my bullish enthusiasm for commodity ownership (and respective US Dollar bearishness) shall be tempered. It has been my general belief that the public is 'too long' commodities in general. Given my recent comments on the risks of owning such assets (WCTS Blog posts on Gold and F. Cattle of late for example) my general feeling is for lower commodity prices and a stronger US dollar over the medium term. Consider too, Democrat US Presidents are historically US Dollar bullish (as their constituents are typically urban rather than rural) a strong US Dollar policy in general shouldn't be a surprise through Mr. Obama's second term. While these two arguments are fundamentally US Dollar bullish, I myself am going to wait for the break of 84.245 to confirm it technically and I wouldn't be surprised if it takes us getting through the seasonal 'peak' to do it.

So lets take a look at what is going on internationally to see if there might be any hints there. The second chart included in this week's blog is on the British Pound vs. The US Dollar and I think it has some interesting 'tells' to it.  There is no doubt about it - this is a bear market! The question for me is, how bearish is it? In exact opposite fashion to the US Dollar index (as expected) the British Pound is literally on the brink of a significant collapse. Indeed, I remember reading stories of traders getting their 'big break' on the devaluation of the British Pound back in the late 1970's and early 1980's - is history repeating itself here? Believe it or not, the Monthly B. Pound chart is painting a target below parity with the US Dollar - or about $.50 lower from current levels! If this chart isn't a wake up call for US Dollar bears, I honestly don't know what could be. While the monthly chart does look ominous, the weekly chart does look a little washed out. Selling below 1.50 seems a little late to the trade but any counter trend rallies back into the 1.60 area would be considered an attractive shorting area (looking to buy Jan, 2014 or beyond Put options) and I shall be keeping an especially 'peeled eye' on this potential trade going forward.

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


Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com 

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