CTS Spotlight for the week of February 25, 2011

Hello and welcome back to CRI's CTS Spotlight,

022511: Once again, those shorting the Swiss Franc have been stopped out, ugh! There is an old adage that these things come in threes so I will patiently wait for yet another breakdown to play my Swiss Franc puts. Flying bullets have a habit of injecting confusion into the market and that is exactly what I see now. It is interesting to note that the recent equity weakness has done little technical damage and one ought to still look for higher prices down the road. As an illustration of the potential to come, this weeks CTS spotlight will take a good look at Australian equities in the face of its rising currency. 

Australia has benefited greatly from the build-out of Asia in general and China in particular. Considering Australian short term interest rates are still quite comfortably above North American and even European short term interest rates, there is still great relative attractiveness for bankers to have their money working 'down-under'.

The chart below is of the Australian currency. The recent break to new 7 year highs (above 1.02US) suggests that money is still flowing into Australia and that one ought to look for substantially higher prices down the road. Indeed, even the past two year consolidation (and subsequent breakout) paints a target near 1.05. The violent bull flag formation since the '08 lows has continued to play itself out in near text book fashion.

The chart above is of the Australian equity market. This is the broadest index in Australia and basically reflects equity performance 'down-under' Here we see the infamous bull flag formation just starting to breakout and what has got me particularly interested in the trade. Should we get a move above the recent highs (at 5048) one can realistically look for a target in the 6150 area. This is just about 1100 points or 21.8% higher! Now have I got your attention? I will be looking at the call options will particular attention over the coming week and if I can find a trade where I can buy at least 6 months of time and can pay a premium that is half what I think the option's intrinsic value will be at our target, then I just may pull the proverbial trigger. OnlyDoubles NewTrades Subscribers, keep your eyes and ears peeled...

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 February 18, 2011

Hello and welcome back to CRI's CTS Spotlight,

02/18/11: In a week that saw little new develop with the currencies themselves, many long standing trends within the commodity space have re-exerted themselves. Considering we are 11 years into this 17.5 year commodity super-cycle, one ought to expect further commodity price appreciation for another 6.5 years. Supporting the notion of higher commodity prices to come, both the Australian and Canadian dollars in particular and world equity prices in general look like they all want to move higher. Of particular bullish note this week, Silver & Palladium impressed (both breaking to new highs) and the Meat complex moved higher across the board. This week's CTS will look at the meats a little closer to see what may be going on there. 

The meat complex

This week I thought we would take a good look at a couple representatives from the meat complex. What I like about this blog entry is that we get to see the bull flag formation in its completed form and the bull flag formation just as its breaking out.

While a little backwards, lets start with the bottom two charts, being the Live Cattle market. You will notice that CRI's CTS had the live cattle market breaking out and trending higher from $100.00, 27 weeks ago. The price pattern was fairly clear in that prices rallied dramatically from the fall '10 lows (from 80 to 100) then consolidated for several months (between 90 and 100). When prices broke through the 100 level last fall, one could be fairly confident that the upside objective of the price pattern was going to be hit (that being roughly 109). Since each point here is $4, 9 points represents $3600 US, not a bad sum!

So this brings us to today, and with what is going on in the Pig market. Lean Hogs (used to be called Live Hogs) are very much like Live Cattle in that farmers are constantly weighing the cost of sending their animals to market or holding off for higher prices. It would seem, the recent culling of animals around the world is taking its tole on the sheer supply of livestock which may make up the farmers' minds for them. Regardless of the fundamental reasons (one could make an equally bearish argument due to rising feed prices), the recent break above the '10 peak suggests prices want to move higher in earnest. Like the Cattle, this breakout may take weeks to develop but a move into the 110 area doesn't seem too out of the question. Like the Cattle too, this market may make traders some BIG money as that target is 17.5 points higher. Each point here is $4 so we are talking about $7,000 per contract!

So is there a trade here?

I personally don't like open futures contracts (I like to keep what little hair I have and be able to sleep a little at night). If one were to do a futures trade, one would have to risk down to 65 or more than 25 points (Ya, I know, totally unrealistic). With this in mind, I took a look at the options for Aug '11 (six months time). Unfortunately, they are very rich and only at $110 would we make any money so I am going to just put them on my screen and watch for a while. Should we get a correction to clean up the Daily over-bought condition, I may look to enter into the trade. Of course, if there is a possible double in the making, you can be sure subscribers of CRI's OnlyDoubles NewTrades will be kept well aware of the situation.

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 February 11, 2011

Hello and welcome back to CRI's CTS Spotlight,

02/11/11: One doesn't quite know where to begin when trying to describe this past week's action. Yes the US dollar is trending lower but so too is the anti-dollar - Gold, the Swiss Franc and now the Jap. Yen. Stocks are moving dramatically higher yet so too is the cost of borrowing. Since so many commodity prices have doubled (if not more) over such a short period of time I must believe we are nearing the end of the counter trend rally that began almost exactly two years ago. Enjoy the ride up, but don't count on these high prices sticking around for too much longer. I am personally using the floating of the Copper ETF as my 'topping' target time frame window - which I believe is sometime this spring or early summer.

This week's CTS blog spotlight is on the Swiss Franc. Not only do I think that there is a trade worth mentioning here but I also think this is a great example to learn from. 

The trade arises from the double top breakdown recently registered when the market closed below 1.028. Stops on this trade ought to be just above recent resistance at 1.068. The lesson comes from the fact that this isn't the first sell signal the Swiss Franc has given over the past quarter. And while there is plenty of potential profits to be made, this is an excellent example of how trading systems are not 100% accurate and sometimes it is how you approach a trade that can be as important as why.

First off, lets start with the fact that CRI suggested this market had topped out last fall and that CRI's Weekly Commodity Trend Survey had this market trending down in the middle of November. Clearly this was not the case as the market promptly turned around and went right up through the 'M' top formation which triggers our 'stops'. If one had shorted a futures contract on the original breakdown and had been subsequently 'stopped out' on the violent move higher, the loss would have been of some significance (as every point here is $10.00 and the total loss was in excess of 350 points). 

This is where options can be very helpful. Unlike the above mentioned scenario, CRI bought July 2011, $1.00 put options on the original break. They cost $2.50 at the time (considering where the weekly gaps are and what the weekly 50% level is [.9645] there was profit to be made) and I was willing to risk that capital on the trade. 1 contract was $250, not much. So when the market moved through the original top (and those futures traders where stopped out with a huge loss) my option went down in value but not more than my original $250. Yes I was still in a losing trade, but my maximum exposure was only $250. This is where buying lots of time helps. Because the option's expiry is July, the premium didn't go down that much (low of $1.30). Now that the market has broken down again, my $1.00 July Put is back appreciating again and is almost back to where I bought it. I may even consider buying one more Monday morning. 

So here is an example of a market where I wanted to be short, was unwilling to take the risk of participating in the volatile futures market and had limited capital to work with. I was able to lock in a short position that may not have been timed exactly right, yet regardless of the extreme volatility, was able to hold onto the position until it became profitable.

There is an old adage that says, the market can remain illogical far longer than we can remain solvent. 

We may be right but that doesn't mean the market can act irrationally for short periods of time. Through the use of options, one can ride out those periods of irrationality while others are stopped out at huge losses. Something to consider the next time you consider a futures contract purchase.

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 February 04, 2011

Hello and welcome back to CRI's CTS Spotlight,

02/04/11: As the US economy flounders amid tepid growth data at best, bond markets around the world are breaking lower in earnest. QE2 has worked and inflation is alive and kicking. So much so that US treasuries are now also pointing substantially lower (Please refer to this week's CTS Blog for more on that). This all has 1987 written all over it. In that year, the bond market broke in March while equities rallied into October only to ultimately break too. The January Barometer lends support to that thesis as well. Be warned, prices are moving higher and ought to continue to do so for now - but that won't remain forever.

The charts above are the Weekly and Monthly 10 year US treasury note futures contract traded on the CBOT. There is no doubt about it, this market is heading lower and quickly. As the chart to the left shows (Weekly) we have taken the past three months to carve out a very bearish flag pole formation based primarily on the fundamental notion that the US Fed is pumping $600 billion dollars into the US economy through the purchase of two to five year paper. This of course left a proverbial vacuum for longer dated maturities and indeed prices have fallen. This past week's price action has confirmed a bearish flag pole formation and the specific numbers suggest we are going to test the 111 to 112 level in earnest. If we look at the chart to the right (Monthly) we can see why a move into that area makes sense. Since the recession peak in '09, US treasuries have traded in a range where the bottom is around 112 and the top is around 128. Considering the strength in equities, a general belief that the worst of the US housing market disaster is behind us, and a US Fed determined to bring inflation back no matter what cost - I think it only makes sense that longer term interest rates ought to be rising. Keep in mind too, the housing disaster was really a financial stock disaster that left the entire sector with massive liabilities and no earnings. TARP & QE2 have not only relieved the financial stocks of much of the debt burden but have also re-established bank earnings streams through an engineered yield curve. Well done Mr. Bernanke, well done...

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 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