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

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

CTS Spotlight for the week of Sept. 23rd,, 2011

Hello and welcome back to CRI's CTS Spotlight,

092311: As the US dollar index continues to rally, one by one the commodity markets are being pulled back down to earth. From energy, to foods/fibers to metals, the US dollar denominated proxies are all correcting to reflect the currency change. This week's WCTS spotlight blog looks a Silver in particular. The only market that seems to be insulated from the correction are the meats and given the grain market's weakness - that may continue for some time to come.

 

Here then is the weekly continuous Silver futures price chart for the past few years. From the 2010 lows, this commodity tripled as the bull market 'went-parabolic'. The market eventually ran out of steam just under the historic $50/oz peak (from the last commodity cycle peaks in 1980). While there continues to be a 'fundamental' reason to own precious metals through this 17.5 year fear cycle (of which we currently are about 11 years in) one has to constantly put market moves (like we have seen over the past couple years) into perspective. Can a market keep doubling in price over and over again? Not likely. Unfortunately, the public (by definition always buy at the top and sell at the bottom) gets too enthusiastic and can't appreciate the simple fact that markets (even bull markets) can't always go up. Indeed, I might argue that the recent bullish sentiment within the metals space has gotten so overbought, a correction was long overdue. That correction is happening now. The markets are going down -  not up. A trend that may only reverse once the public starts to hate the sector again. How much pain does that take? only time will tell...

Technically speaking, the weekly/monthly bull run in Silver has ended. Friday's 15% intra-day drop was not only a headline catcher but also represented a significant breakdown on the price chart. Specifically, with the move through 33.488, we now have a classic 'M' or double-top price pattern working/in-place. This zone will represent resistance going forward as those that bought in the past will look to get out get-out at break even. Additionaly, the trading range is so large, short term headline catching rallies may represent nothing more than a move into resistance. Specifically, one should be short from 33.488 with stops just above 43.82. While very few have that kind of risk tolerance (at $5.00/point $.10 represents $50,000/contract) it is important to appreciate that this market is no longer trending higher and is in-fact, trending lower. 

So where do we go from here? one could argue the short term oversold condition suggests some kind of counter-trend rally is highly likely to occur.  Please refer to Cri's day-trading blog for more on this. The 50% level (31.70) ought to represent an oscillation level in the near term given it's magnetic effects. But because of extreme market volatility a 5-10% swing in either direction (from where we are right now) isn't out of the question either.

New investors are best advised just to leave this one (and really all the commodity markets in general) alone until the US Dollar Index tops out. A bullish US Dollar Index suggests that fear is once again dominating the investing landscape and one really shouldn't 'play' in the market during times like these. This condition may persist for weeks, months or even quarters, but being bullish in commodities right now is literally swimming against the current.

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 Sept. 2nd, 2011

Hello and welcome back to CRI's CTS Spotlight,

09/02/11:The US dollar index has held the important low of 73.51 but keep watching that level as dollar bulls aren't quite out of the woods just yet. The Labor Day weekend is finally upon us and with it hopefully too comes the end of the low volume, high volatility sessions we have experienced through the summer of 2011. While no new trends have been established in commodity land this week, several older trends (gold, Swiss franc, bonds) are re-exerting themselves. Is this their final push higher - too early to tell but I for one shall be watching for reversals in the coming weeks. This week's CTS Spotlight blog shall take a good look at the US 10 year Treasury Note to see if we can make some sense of the monster rally of late.

There is so much talk about the bond market of late (European sovereign debt, downgrade of US Treasuries by S&P etc) I thought it only prudent to take a good look at the US Treasury market to understand just what exactly is going on. 

Aside from the political rhetoric and its associated manipulation by the media, US Treasuries are in a resounding bull market. No ifs ands or butts. Politicians would have one believe bonds are in trouble - quite to the contrary, bonds are doing quite well and look to add to those gains in the coming weeks/months ahead. Interest rates are going down, not up. Deflation should be the primary concern - not inflation. And most importantly, the market wants more bonds not less. If President Obama understood this, his economic team would use that market strength to implement a massive public works project. The US Federal Reserve has given a huge endorsement of such a program when it recently suggested that monetary policy should take a back seat to fiscal policy when thinking of ways to get out of the current economic slowdown. Tragically, politicians are very rarely good economists...

Lets take a look at the charts. Just above are the Weekly & Monthly Continuous Futures Charts for US 10 year Treasuries. As any market technician will tell you, 'a chart moving from the lower left to the upper right is a bullish chart' and that is exactly what we have here. Currently we are well contained within a massive monthly upwardly pointing channel where both long term support and resistance are far away from current prices. In fact, bonds bottomed more than five years ago and are just now entering their fourth year of trending higher. The recent breakout through 127.94 confirms this thesis and is yet another sign of strength. Indeed, this bull flag formation suggested price wanted to reach for 131 in the near term [(127.94-114.89)+117.94 = 130.99] and they have done exactly that. Traders & investors who bought the spring '11 bottom (122.47) are enjoying immense profits (up almost 9 points or $9,000 per contract) and would be well advised to let some of that position go upon hitting the bull flag target. Consider too that this huge rally has come in a very short period of time and one gets the feeling this market needs some time to either consolidate sideways or make an outright correction. A 50% retracement of the move higher would bring prices back into the 125 range [(117.94+131.29)/2 = 125.61] but the breakout to even newer highs over the past week suggests there is no top in place yet and prices may move even higher still in the coming weeks/months.

In Summary then, Interest rates have fallen considerably over the past few years as US economic growth has literally ground to a halt. Couple North America's demographic problems with China's need to curb its own inflation worries and Europe's complete lack of leadership amid the Euro's first real economic challenge and we have the makings for a deflationary spiral very similar to Japan's spiral of the 1990's. While politicians and their media counterparts spin a tale of inflation, deflation should be the primary concern going forward. Interestingly, history is giving the US government a window to expand its debt and grow its way out of the problem - will someone have the political courage to lead it through it? the 1990's was called 'the lost decade' in Japan - only time will tell if we shall have to 'lose' a decade too.

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 August 19th, 2011

Hello and welcome back to CRI's CTS Spotlight,

08/19/11:The tentative bottom in the US Dollar index is coming under pressure. The index matched its June support low of 73.51 only to briefly bounce off it. Economic news coming out of North America is poor at best so a general flight out of that region appears to be happening (as the Cdn. dollar has come under pressure too). The yield curve itself has narrowed dramatically suggesting the odds of a pending 'double dip' recession are growing by the day. As an ultimate leading indicator, equity price action also too points to a contraction in the economy rather than expansion. Lastly, and our focus for this weeks Commodity Trend Spotlight Blog, Copper prices have a well defined top working as well which suggests a weakening economic backdrop.

 

As the above commentary suggests, there are growing signs of a potential recession here in North America. From economic data (the New York and Philly Fed numbers for example) to chart analysis (breakdowns in equity prices) to a flattening yield curve, there is plenty to suggest the expansion from the 2009 lows has indeed come to an end. Couple this economic backdrop with the political rhetoric of late (all about austerity rather than stimulus) and we have the makings for a very serious situation. Governments must step up and take the place of the consumer in times like these, yet it appears the exact opposite is happening. This horrible economic combination was one of the hallmarks of the great depression, are we about to make the very same mistake again?

This weeks CTS Spotlight focus's on Copper. Historically, Copper prices follow the broader economy very closely (hence the nickname, 'Professor of Economics'). Since copper goes into everything from housing to automobiles, a higher trending copper market usually implies strong demand and therefor it implies a strong economy. Conversely, a lower trending copper market implies weak demand and therefore a weak economy. The price chart above is of Copper and you will notice that it had been trending higher through 2009 and 2010 but has rolled over through 2011. Copper prices are indeed correcting and as of last week have confirmed the lower trending market by making a 'lower low'. Having said that, we all know nothing moves in a straight line and there is plenty of evidence to suggest copper prices are going to be extremely volatile over the coming weeks/months.

So what's the trend? The break of the May, 2011 lows (two weeks ago) suggests we are now comfortably within a downward pointing price channel. The top of the channel currently sits near the $4.40 area and the bottom of the channel is near $3.80. One can make a case for prices to move about 10% higher or lower from where we currently are but until the market can put in a double bottom price pattern, this market is still trending lower.

So for an idea of where prices could/ought to move in the coming trading sessions lets take a look at the chart for guidance.

Upside objective: The fact that the market left a gap just above $4.40 suggests that there ought to be a rally of some sort to fill the gap in. Exactly when, no-one knows but the gap is there and we must respect it. 

Downside objective: The '50% rule' suggests prices want to move down into the $3.691 area. $3.58 & $3.70 represent significant trading highs and lows from 2010 and at this point ought to be tested. The speed/resistance line currently sits just under $3.80. 

So in summary then, as a general proxy for our North American economy, copper prices suggest we are contracting rather than expanding. The market has a well established bear price channel in place where resistance is about 10% higher than current market prices and support is about 10% lower. I personally don't think the risk reward ratio is attractive enough to take a position either way but one must respect what the market is telling us. The questions is - are you listening?

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 August 12th, 2011

Hello and welcome back to CRI's CTS Spotlight,

081211: While the US dollar is little changed through these tumultuous times, many markets are moving dramatically. From blow off tops in the Swiss Franc, Gold and US Treasuries to collapses in many equity markets one thing that can't be said is that there is no action out there. Most notable this week include fresh sell signals in Copper, Eurodollars (US corporate short term interest rates) and both the worlds' commodity currencies (Cdn. and Aussie dollars). Additionally, one market little mentioned by the media yet could see some extreme bearish action in the near future is the Soy complex.

 

This week's focus is on the gold market. As regular readers, you ought to have an idea of where I expect the US dollar index to go over the coming weeks/months so I thought we ought to take a real good look at Gold too.

Here then is the weekly continuous gold futures chart (link) going back well into 2009. Keep in mind the price of gold fell in tandem with equity prices through the 2007-2009 bear market (as it usually does) so seeing a steadily rising market over the past couple years should be of no surprise as equities have come back too. This - right off the bat then brings to mind an interesting conundrum (we know that historically gold prices track inflation fears and yet falling equity prices by definition are deflationary). Since the break in equities just a couple weeks ago, gold itself has gone 'parabolic'. At the same time the US dollar index hasn't moved more than 2% against any of its major pairs (Except the Swiss Franc) and both the world's commodity currencies have well defined weekly double top (bearish) price patterns working. And if all that were not enough, futures commissions themselves have raised the margin requirements for buying gold futures. So needless to say, there are many warnings signs. But unfortunately, one must respect the old John Maynard Keynes quote, 'Markets may remain illogical far longer than any of us can remain solvent' (link). So lets take a look at what is happening and then ponder what might happen down the road. CRI-WCTS has had the gold market tending higher now for 24 weeks and its long standing upside technical target (bull flag formation) has been hit ($1717.80). Additionally, two speed/resistance lines suggest there ought to be a significant barrier at or near the same area (represented by Point 'A' on the chart above). While no 'top' currently exists one always has to ask themselves - are further gains really that realistic. At least one should have taken partial profits on long positions when the target was hit - at most you are completely out. From just a pure trading experience perspective, I myself have noticed that upon the completion of most bull flag pole formations there is a high probability of a period of consolidation for those gains. The consolidation may lead to another bull flag pole formation should it resolve higher - but it is in the consolidation and subsequent resolution one gets validation. Lets play devils advocate for just a moment and assume that we have indeed entered a 'topping' zone and ask ourselves, 'If we are indeed near a top then what might a correction look like?'.  A pullback into the $1400 to $1500 range (Point 'B' on the chart above) seems the most realistic scenario should prices start acting 'normally'. This correction would bring prices back to the 50% rule (and by now I sure hope you have come to appreciate this simple yet powerful tool). More importantly, it would bring prices back into the prevailing trend channel. I will finish off this commentary with the fact that I have included Point 'C' so that if the cycle analysis forecast (refereed to in last month's post) does indeed come true we have a good idea of where serious market support currently exists on a by-yearly basis.

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

Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com