CTS Spotlight Blog for November 2nd, 2012

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

11/02/12: The previously mentioned piercing of the 80.31 level in the US dollar index proved to be a significant event but wasn't truly confirmed until the later part of this week's trade. While its' previously registered bull ab=cd target may be a little aggressive, the index is moving higher and a test of the mid summer peaks isn't out of the question as we approach the 'fiscal cliff'. Will this coming Tuesday provide any real surprises? Considering intrade.com has Mr. Obama wining by a margin of 66% to 33%, a 74% likelihood of the Democrats keeping control of the Senate and a 94% chance of the Republicans winning the House - a surprise doesn't seem likely. Indeed, four more years of same old same old as we march toward the anticipated 17.5 year 'fear' cycle peak in Q3'17.

As we approach the all important US Presidential and US Congressional elections this November and the looming 'fiscal cliff' come January I thought it would be of some value to take a look at the US dollar index itself in earnest ahead of these events. 

Since we are all familiar with our 35 year generational cycles and its effect on money flows (if not then I highly encourage you to do a refresher on my Macro Economic Trends webinar) then we know that during the 17.5 'fear' cycle (of which we are current in year 12 of 17) the US dollar Index itself will represent a fear vote in the market place. In essence, when the market is fearful money will run into the Dollar, when it isn't it will explore alternative 'riskier' assets - hence the term 'risk-on' vs. 'risk-off' trade. Simply put, one can glean the general happiness of the broader market during 'fear' cycles by how poorly the dollar index is doing.

So with this backdrop in mind lets go take a look at what is actually happening. Clearly the US dollar index has been well contained within a bull trend since the significant weekly/monthly double bottom registered through 2011. Until a corresponding double top comes in my general hunch is to expect higher not lower prices from here. Indeed, if one where an advocate of higher highs and higher lows defining a bull market (of which I am) then we see that the Index has been successfully registering higher highs and higher lows for quite some time. Conversely, tops of late (like the one seen over this past summer) are 'V' shaped meaning price goes straight up and straight back down. This in itself isn't the hallmark of a bear market but one rather of a bull market (something to keep an eye on going forward). This past 'correction' is telling in itself too. The fact that the market came right back to the 1 year 50% retracement level, did not break the previously registered double bottom and has now itself put in a new double bottom (with the break above 80.31) all suggests this bull is rather healthy and normal in nature. A trade through those recent lows (78.6) & the 50% level (78.55) would cause me to reconsider but considering the potential upside objective (85.30...see below) and one ought to at least consider the long trade (80.31) from a risk/reward perspective (ie 1.80 risk vs 5.01 reward).

Technical outlook: So if we are pointed higher, where should investors expect this market to go? I personally have four bullish targets in mind should this little double bottom of late hold. Firstly, I shall expect the market to at least attempt a 50% retracement of the late summer selloff (currently 81.42 area). Once there, I shall look for the market to move into the OTE Short Sweet Spot (currently 82.58). Should price continue to point higher my next target shall be the summer peak (84.245). A break above this high would in itself represent yet another longer term bullish signal for the Dollar Index (and a very large 'fear'/sell signal for the broader market) and would suggest that the previously mentioned bullish AB=CD target is very much still in play (currently that target is near 85.30).

Fundamental drivers: So with all this US Dollar technical bullishness I have to ask myself what are the fundamental drivers for such a move going forward? I believe the US economy (and by default then the world economy) is heading towards a massive contraction very much like the contraction seen in the late 1930's (almost 10 years past the '29 crash) that literally laid the ground work for the 2nd world war. The looming US 'fiscal cliff' and the now completely failed 'austerity measures' of the PIGS nations of Europe are very much like Germany refusing to make WW1 reparations in the 1920's. While in the short term they are headline catchers and make for good political fodder, these kind of policies have far reaching consequences for national currencies, domestic economies and play right into the 'fear' cycle scenario. Indeed, very rarely do we see economists agree on an outcome; yet here it would seem they all agree that an economic contraction (dare we use the 'R' word) is coming, the question is how big (Reuters news link).

We know commodity prices will boom into 2017 which also means paper assets will bottom. That event is just under five year away and we will be guaranteed to see some very wild price swings over the interim. The combination of global competitive currency devaluation (QE programs) coupled with bad debt being piled upon more bad debt (historic budget deficits) has pretty much guaranteed our anticipated 'fear' cycle peak outcome - the only question now, how violent will violent get....and unfortunately, it can get pretty ugly around these 'fear' cycle turns...

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 Blog for August 17th, 2012

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

08/17/12: In very light holiday volume we have seen some dramatic price action through the past week. Most notably, the much stronger US jobs data (and a waning fear of recession) have put a top in the long dated government bonds and have pushed major stock indices to within shouting distance of the spring highs. The top in the 10 year US bond is so pronounced I have made it the subject of this week's WCTS blog spotlight. Seeming to confirm this 're-flation' notion, commodity prices in general are moving higher across the board and most recent posts on being long the commodity heavy TSX 60 and in some of the Softs markets all seem to be working.

As we move our way through this 17.5 year 'fear' cycle (expected peak Q3, 2017) there ought to be a general preference towards income paying securities over growth [Please refer to CRI's Macro-economic analysis seminar for more detail]. The fear of recession (both locally within North American and globally) coupled with a credit crunch has had investors running to 'safe' assets, like US Government Bonds, for a few years now. This trend can be clearly seen in the chart above - where US Government Treasuries have enjoyed a rather dramatic bull run over the past few years.

While we know that this macro trend ought to continue for at least another five years, we also know that there ought to be pockets of 'correctionary' price action along the way. Short periods of time where the market cleans up any 'overbought' conditions before laying the groundwork for another leg higher. This is the point where I believe the market currently is. Not a new long term trend - a correction within a long term trend.

A rising bond market is in itself a deflationary situation - literally a lack of fear of inflation. The bursting of the US housing market bubble was the catalyst for the current 'dis-inflationary' spiral we are in now. Indeed, interest rates have move dramatically lower but may not clearly reflect the current situation. Economic data from North America is generally getting better as the FOMC has literally kept the gas pedal floored in an attempt to stimulate the economy. With the recent top in the bond market and an associated breakout to new highs in the stock market, one might come to be belief that the gas is finally reaching the engine.

So where might prices go over the near term if indeed there is a top in the bond market? The chart above clearly illustrates my three target zones should the recent top hold (please refer to chart above). These include a very healthy correction back into support around 130.6 (Point A.), a full correction back to the 50% level of this entire bull run around 126.80 (Point B.) and finally the 'all hell has broke loose' target back at the long term support around 123 (Point C.).

It is interesting to see that the US bond market set up an almost perfect 'OTE' short entry point around 135. It is interesting too that a move back to the refered to points above would represent interesting 'OTE' long entry areas.

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 Blog, TSX, for August 10th, 2012

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

They say, when it rains it pours. To that end, here is yet another CTS Spotlight Blog entry for you to consider in the coming trading sessions.

There appears to be a general consensus on what to do about the European debt situation, how bad it really is and who could be potentially affected. There have also been very stern comments from the ECB suggesting they will do 'whatever is necessary' to defend the Euro-FX. Couple this 'capitulatory' talk with surprisingly bullish jobs data out of the US, a Fed ready to add liquidity (not take it away) and very robust corporate earnings and it is my belief that the late spring/early summer 2012 correction is behind us. Consider too that we do have an upcoming US Presidential election in early November. I only mention this last part because we very rarely have a collapsing market into such events. 

From a contrarian perspecitive, it is Interesting to see that even though many of the world's indices are approaching their spring highs (and in my opinion starting to point higher in earnest) there remains a rather large bearish sentiment in the market - suggesting there are still plenty of investors either short or sitting on the sidelines. Should The Dow, Nasdaq or the S&P break to new highs, we could see a mass rush of buying on the 'don't miss the boat' trade.

So why am I mentioning all of this? Canadian stocks have been hit especially hard through this seasonal correction. Because of Canada's heavy reliance on the resource sector (a volatile sector by definition) Canadian investors have to face more and more volatility in their portfolios as we head into the 17.5 year 'fear' cycle peak. It's not much fun on the way down - but oh boy it can crazy on the way up. (which of course we all know exactly when it's gong to happen - right? If you answered NO to that question maybe you should go take CRI's macro-economics seminar to brush up on your fundamentals). Times ought to be very good for Canada in general over the next five years but any news/fear of recession in the US can/will lead to dramatic month-to-month price swings like we just saw over the past 4 months. Recent upbeat US jobs data, a very healthy yield curve and strong corporate profits are not the hallmarks of recessions and I do NOT believe the US is there at the moment. Once the US election is over and we are facing 'the fiscal cliff' I believe all bets are off and am probably going to suggest going to 'cash' at that point. But that is four months away and over the interim prices look to be heading higher - not lower.

So now on to the chart. The first thing that jumps at me is the fact that the 50% level is almost 40 points higher than where we are now. Yet the recent lows are only 20 points lower. That would represent a 2:1 risk reward model. Addtionally, this market is current within both the 2 year and 1 year 'OTE' zones suggesting again that the risk/reward model is tilted towards the reward side.  

I would advise taking some time over the coming week to look seriously at 6-12 month call options (on your most favored ETF proxy....for me probably the XIU March, 2013 $17 call currently $1.05 offered TMX link or about twice what I want). If I can find one where the price paid today is half (or less) what the intrinsic value of the option will be should prices move to the 50% level, I might just pull the trigger - seems like an interesting OnlyDoubles trade, no????

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 Blog, Softs, for August 3rd, 2012

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

Since I had the time this week, and I see some startling opportunities out there in the market, I thought I would post my thoughts on the 'softs' market in general and point out two intersting opportunities developing within the sector.

So here is my CTS summary for the week of August 3rd, 2012:

 08/03/12: After a week's hiatus, we are back in the saddle! In what appears to be a rather normal bounce (coming out of the seasonal trough of late spring/early summer) commodity prices in general are moving higher. ECB help from Europe, better employment data from North America and stabilization from Asia all seem to be supporting the idea of higher, not lower prices going forward. Some rather aggressively (grains), others mid stream (energies) while others seem to be just getting started (softs). Indeed, Softs got hit very hard through the correction and look to be offering some very interesting risk/reward potentials here. For more on that please refer to this weeks WTCS blog post.

Specifically, I am refering to Orange Juice and Cotton as outlined in the chart and associated tables below:

Both of these markets have yet to respond to the broader market bottom of late. While I am not an outright bull on either market yet, it is interesting to see the 'OTE' trade idea at work (In short, taking a position at or near a 70.5% retracement of the consolidation range and risking a break of the significant range pivot). You can see how OTE suggested getting long cocoa several trading sessions ago and now we seem to have a working uptrend there. Can either OJ or Cotton do the same? At these risk levels (Cotton: .65 risk for 45.00 potential reward!!!!!! & OJ: $8.50 risk for $32.00 potential reward) is it not at least prudent to consider the trade. From a fundamental perspective, either one good 'hurricane fear' or a little of the grain misery passed on to cotton growers and either one of these markets could spike back to their respective 50% levels and most probably back to filling in their rather weekly price gaps.

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 Blog, Indian Rupee, for July 27, 2012

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

 

Since trading Crude Oil in earnest for the past six months (please refer to CRI's DayTradingBlog) I must admit I have been letting this blog slide a little of late. 

So for something a little different, I thought I might use this platform to take a look a specific markets as they come to my attention.To that end, this week a friend of mine asked for my thoughts on the Indian Rupee. Frankly, I have always been a little suspect of this currency trading unit and wouldn't be inclined to 'invest' my hard earned dollars into it directly. But considering the myriad of North American based ETF's and other such products, it seems only prudent to at least be cognizant of what is going on. 

On first blush my knee jerk reaction was to be looking for a top. Yet one fatal mistake many novice traders do is to assume a change when there really isn't one. So, while my hunch is we need to come back to the daily and weekly 50% levels and clean up what appears to be an overbought market, there is NO top in place on either the US or Canadian crosses. One must still be looking for the recent highs to be tested and then if broken, the respective uptrend channel lines next.

On a side note, it is interesting to see such strength in the face what appears to be world wide weakness. This, in itself, is quite bullish and does suggest one ought to be looking for substantially higher prices to come. Is India becoming a reserve currency in itself? While that may be stretching things a bit, the internal Indian economy seems to be offsetting overseas weakness. While 'reserve currency' status may be years down the road, we at least know that for the next 5 years (give or take a quarter or two) this country will have the wind at its back and not in it's face...

Trading perspective. While this market is clearly trending higher, one must be weary of buying into risky markets. I could easily see the daily and weekly 50% levels tested in earnest and still feel like this market is trending higher. To that end, new purchases of either unit ought to be put on hold until some sort of 'clean up process' happens. Those that are long should be looking to take at least partial profits on existing positions (if you haven't already done so) and enjoying a free ride on the remaining (and what should be relatively 'risk free') positions.

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 Blog, Canadian Dollar, for April 27, 2012

04/27/12: The first signs of a crack in the US Dollar Index showed this past trading week. While a collapse is a little premature to predict, the break does suggest the much anticipated change in US Fed policy may still be quite some time to come. Indeed, confirming this notion, US Long dated Treasuries have reversed their recent breakdown and have pushed to new highs. Interestingly, the Canadian dollar has bottomed vs. the Greenback as Canadian bonds have not broken their recent top and on word from BOC Governor Carney warning the Canadian public to expect higher rates there soon. Additionally, Crude Oil looks to have found support just above $100/barrel which is interestingly often led/supported by the Canadian and Australian dollars (the commodity currencies). 

This week I thought I would take a good look at the Canadian dollar since I made reference to it so much in the weekly CTS. 

After putting in a well defined double top pattern through the spring and summer of 2011, the Loonie promptly gave back the entire bull run of the previous year in a matter of a couple months. Importantly, the Loonie did not break the previous significant monthly low (92.13) suggesting the longer term bull market was still in place. As it appeared that Europe's debt issues had for the time being been contained within Europe, the Loonie quickly took back a good portion of the sell off and has spent the better part of the past year oscillating between the lows and the 50% level. As energy prices have improved so too has the broader Canadian economy as well as the prospects for significant infrastructure spending going forward. The anticipation of such spending has created a whirl wind of activity within the western portion of the country. So much so that BOC chairman Carney recently warned Canadian's of higher short term interest rates to come. Additionally, Canadian long dated government bonds have not broken out as have their US counterparts suggesting any slowdown south of the boarder shouldn't be too constrictive on Canadian GDP.

As a direct result of this relatively rosy outlook for the Canadian economy, the Loonie has started to appreciate vs. the Greenback. On a short term basis, we have broken through recent peaks suggesting prices do want to move higher. While the short term bull flag I have outlined does suggest a move north of 104, on further inspection it does seem a little conservative of a target. I wouldn't be surprised if we shot a little farther than 104 then consolidate around the 104 area. Should be move through 104 cleanly (or on a subsequent breakout after a consolidation), a serious test of last year's peak (just above 106) seems likely.

A couple of side notes I would make here:

As a student of the market for more than 15 years, I have noticed that the commodity currencies in general lead basic commodity prices. Those currencies in particular are the Canadian and Australian dollars. Both are pointing higher at the moment which does support the notion of higher raw commodity prices in general going forward. This should be a helpful tool for all those that follow CRI's day trading blog on Crude Oil and does confirm our basic thesis that Crude prices are pointing higher too in the short term.

2. Interestingly, Asia had been the significant driver for world economic growth over the past decade and the Australian dollar was a direct beneficiary (almost doubling in value vs. the US dollar over the time period). As Europe flounders in its sea of debt and China appears headed for a harder landing than was expected, It appears in the short term North America (and particularly North America ex. USA) is currently the best place for economic growth going forward. Does that mean we could see the Canadian dollar rise materially vs. the Australasian dollar? Is this a spread trade in the making? Further research does seem warranted...

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 February 17th, 2012: Japanese Yen

02/17/12: While the US dollar index is little changed this week, the Japanese Yen has broken down materially. The long standing bull market has reversed and suggests it may need to go through a natural correction process of the recent multi-year run. Coincidentally, a bottom has formed in the Eurodollar market. While rather wide, it does suggest that the credit crunch begun last year has abated for the time being. If this is indeed the case (the reflation of the world economy) the notion does support a Yen bearish stance and further appreciation of both equities in particular and commodity prices in general.

This week I thought we ought to take a good look at the Japanese Yen. If one is to believe that a top has formed in the Yen (double top breakdown currently working from 12783) then there may be far sweeping fundamental implications going forward. The Yen itself has been quite a rise over the past few years. Since the US Federal Reserve lowered its key borrowing rate into the same range as the Japanese, there has been a definite preference for the Yen over the Dollar. The new 'safe-haven' flow pushed the Yen to rise to historic levels, but that may be changing. As mentioned above, the fact that the Eurodollar market (which is the US corporate short term interest rate market) has bottomed and equity prices are pressing historic highs suggests fear is leaving the market and that the world is reflating once again. In short, the 'safe-haven' trade seems to be over for now.

So if indeed the 'safe-haven' trade is over for now, where ought one to expect to see the Yen move to over the coming weeks/months ahead. My primary target here is a 50% retracement of the past 2 year move. Currently that 50% level is in and around the 11900 area. Considering the short signal came in on a move through 12783, there is a potential 800 plus point gainer here. One ought to risk up to recent resistance (the highs from 3 weeks ago at 1.3134) or about 350 points. This trade represents a greater than 2:1 reward to risk ratio so is definitely worth considering. Should we get a daily bounce into resistance and then some sort of failure I will look at a June 121 put option (currently 0.00970). At 11900 this option will have an intrinsic value of .02000 or more than double today's price - but I think we can get it a little cheaper

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