CTS Spotlight for the week of August 20th, 2010

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08/20/10: The dog says of August are heavily upon us as we head towards Labour Day. A cautionary note, the last weeks of August often see very low volumes as many professional traders are away. Please don't be fooled into thinking that low volume price action can't be reversed very quickly in early September (as is often the case). Having said that, little movement has been seen this week in the currencies other than the Swiss Franc. Stock markets continue their malaise as bond prices get pushed higher on a daily basis. While many commodity markets have moved higher of late, some are looking a little 'toppy'. This week we see OJ breaking down as little or no Hurricane news may take the fear premium out of this market. Please refer to this weeks CTS Blog Spotlight for more on this trade idea.

Frozen Concentrated Orange Juice

This market is all about one work....Hurricanes....if there are a lot of them, expect OJ prices to be high. If there are few, expect prices to fall. So far this summer has seen a very quiet hurricane season and the charts seem to be pricing in the event - or non event in this case. Regardless, our time tested 50% rule, coupled with the classic Dow double tops suggests that there is a short trade here and potentially a very profitable one at that.

The chart above left shows the weekly price action in OJ for the past 18 months. Notice the tighter and tighter move higher. The predominant trend line that followed the move higher has just recently been broken. Not only has that trend line been broken, but the market put in a nice double top right at the break. One can easily see that prices are going to have a hard time getting back above the uptrend line and I would argue that what once was support (on the way up) shall now become significant resistance going forward.

The chart above right shows the monthly price action in OJ for the past 7 years. Notice here the dramatic fall (from '07 to '09) and the almost text book 50% retracement of that fall (from '09 to '10). Now that the market is no longer overbought or oversold, one can't help but consider the longer term trendline implications here. First off, a further rally from here seems to be quite unlikely and more importantly, real support on a monthly basis for OJ current sits at or near .70! This is a very risky market to be long...

So if a top is in, where might this market pull back to?

Our good old 50% rule shall help us here. Again, referring to the chart on the left above, we see that a simple 50% retracement of the massive move higher shall bring prices back into the 110 area (where we add the high plus the low and divide the result by two). Additionally, the real weekly support for this market exists near the trend-line from the major lows of the spring and summer of 2009 (ie. 100 to 110).

Putting these two pieces of information together, we can see that a move back into the 100 area isn't unrealistic, the question now - is it profitable to consider the trade?

List below are the two heaviest open interest option contracts for the March, 2011 OJ futures contract.



Considering that both of these options will have an intrinsic value well over double their current price (should we get a move back to the 50% level) I would have no trouble buying either. I will go for the 120 Puts simply because at 3.3:
1. I'm only risking $500 per contract so if the trade fails I'm not going to take too big of a hit.
2. By spending $500 per contract, I can justify buying two (total of $1000 invested) and then if the trade succeeds, I can sell 1 very quickly at a double and ride the remaining one to the trade's ultimate fruition.

Just remember,
1. don't risk more than 5% of your stake on any one investment idea.
2. the bulls make money, the bears make money....the pigs get slaughtered (so don't be greedy! If the position doubles, take it and be happy)

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 July 30th, 2010

Hello and welcome back to CRI's CTS Spotlight



07/30/10: As calm has returned to the credit markets the Canadian dollar has joined the collective counter trend rally against the US dollar. Bond and equity markets believe growth has peaked suggesting that there is now room for further government sponsored stimulus measures should the correction in stocks get too out of hand. Significant to Asian growth prospects, The Japaneses Yen has finally broken a long standing resistance line (Please refer to this weeks CTS spotlight blog for more on that). If Japan has indeed awoken, that region of the world will have yet another growth engine coming online. In the face of this, commodity prices in general are reflating with noticeable moves higher this week in Palladium, Wheat and Coffee. Further to last week's CTS, OnlyDoubles subscribers ought to have taken a position in Feeder Cattle.

Jap Yen: On first blush I thought this chart would be clean and simple - a powerful bull market off a nice base. After some study my opinion of the Jap Yen is much more cloudy and uncertain....typical markets!

The problem....I don't think the latest move higher in the Japanese Yen is a new bull market. I think this market looks exhaustive, and dangerous. It also leads me to further believe that the latest US dollar sell off is a trap. Through the two charts shown above, I will try and explain why...

Weekly chart (on left above): This market has been pointing higher for about 12 weeks since it put in a double bottom in the last spring from 1.0859. Over the past quarter we have seen higher highs and higher lows (most recently taking out the 1.138 resistance point) suggesting the late '09/early '10 correction had ended. Indeed, we are currently within shooting distance of the important high at 1.179. Should that be taken out, one must look for a move to the top of the weekly channel (at or near 1.25). We will cross that bridge when we come to it! For the time being, yes we are heading up and that is why CTS is positioned so. In fact, Regular CTS followers should be enjoying an almost 7 cent profit at this point. New positions should NOT be considered. Momentum players may consider adding to positions on a move through 1.179, but not until then.

Here is where the problem comes in for me...

Monthly chart (on right above): The first thing that jumps out at me is the massive monthly move higher since the '07 lows. Interesting here, we are currently within a cent of that long term trading range breakout target (1.165). Absolutely remarkable! As well, a 50% retracement of that massive move higher would bring prices back into the .99 area (or almost 15% lower!).

Yes this market is still pointing higher and if one is long from the weekly breakout (1.0859) then enjoy the rally. My hunch is we shall move higher through the rest of the summer. Should the lows of last spring be violated, there could be trouble - so watch the 1.05 level like a hawk.

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 July 23rd, 2010

Hello and welcome back to CRI's CTS Spotlight



07/23/10: Little new in currency land as the correction from the spring moves continues. The credit crisis has abated for the time being and prices here appear to be trying to find stable ground. One exception, the Australian dollar, has resumed its' upward march as Asian growth prospect appear to dwarf those of the other regions. Backing this notion up, both Copper and Crude Oil have registered new long entry points. Of note this week, Feeder Cattle prices have broke violently higher suggesting a 20 to 30% price increase may be in the not too distant future. Please refer to this weeks CTS blog entry for more on that and a possible OnlyDoubles trade idea.

Feeder Cattle: Should the above noted bullish flag pole formation play itself out, one ought to expect a test of the 1.30 area going forward.

Trading Strategies:
1. One could be long from the recent breakout (at or near 1.15, with a firm stop below the recent lows at or near 108). The risk would be $.07 (each point is $500US) or $3,500 US per contract. If prices did move to 130 (and you sold) it would represent a potential profit of $7,500 US per contract.

That is a little over 2:1 risk reward, not bad but I don't want to risk $2,800 (or more!) and I don't want to be subject to a margin call - so lets take a look at a different trade idea.

2. One could buy the January 2011 Feeder Cattle $118 Call option for about $750US (refer to options sheet below)


if I bought the January $118 call option at $1.50 and let it expire worthless then my total risk/loss is $750US (no margin call ever!). If prices do move to $1.30 then this option will have an intrinsic value of .12 or $6,000US. That is a whopping 700% return.....now that is my kind of investing!

Considering our time tested principle of risking no more than 5% of our stake on any one play, one has to have at least 15,000 US in your trading stake to consider to trade idea. If that is the case then I highly encourage everyone to take a serious look at the 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 July 16th, 2010

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07/16/10: The European currencies have rebounded from the steep losses seen just weeks ago. This has come on the heels of better fiscal numbers coming out of the 'PIGS' nations. This recovery however has come in the face of dramatically lowered global growth forecasts (out of the proverbial frying pan and into the fire). Confirming this notion; equities are moving lower while bond markets are moving higher. Adding validity, the industrial metals have rolled over. While Platinum has broken down, Copper, Palladium and Silver are looking a little toppy. As stated previously, governments around the world should be spending their way out of the slow down not pulling back. Unfortunately, they will only act appropriately when prices are crashing once again, won't we ever learn!

Platinum: The heavy industrial metals were the first to turn up way back in the fall of 2008. After a precipitous decline prices moved higher through 2009 and into the first half of 2010 in almost a perfect 50% retracement of the crash. Notice though, the internal strength of this market was starting to fail (RSI momentum divergance) as we moved into 2010. This was a warning that prices were not as strong as they would appear.

So if prices are indeed correcting, where is a logical target for us to consider going forward. Two numbers jump out to me:
1. A natural 50% retracement of the recent up move would bring prices back into the 1266 area.
2. A potential Head & Shoulders price patten also suggest prices want to come back down into the 1242 area.

This then will be my target window for platinum prices going forward. Unfortunaly, there are no options available for this commodity contract and as a result OnlyDoubles subscribers and (I myself) won't be participating in this 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 July 02nd, 2010

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070210: On the heals of further bond market strength and a growing belief that deflation is back in the mix; all but one (Germany being the lone holdout) of the equity index's have broken their respective up-trends, have registered new bearish chart patterns and/or have broken down in earnest. Fundamentally, the recovery wasn't all that great to begin with and now politicians are calling for tighter fiscal policy, the imposition of various new corporate and consumption tax regimes and a growing belief that various industries need to be more strictly regulated. Look out all you capitalists, its going to be a bumpy ride for a little while. Else ware, commodity prices look vulnerable too. While they haven't broken the way stocks have we may need to go through a period of consolidation before any new moves higher can be seen.

Stocks: Listed above are the four most significant stock index's in North America. The Dow Industrials, The S&P 500, The Nasdaq and The TSX 60 (important for us Canadian's....irrelevant to the rest of the world....lol). Notice the almost straight line up move we experienced over the past year. It is hard to believe the Dow was trading in the 6000's just last year! The important thing here (I believe) is that it would be perfectly normal and healthy for all of these markets to take six months and clean themselves up. Give us a 50% retracement, let's hear some real bearish sentiment out there, and if we could too please.....could we get a nice bullish momentum divergence while you are at it......maybe that is asking a little much....

For those OnlyDoubles subscribers out there, after some careful analysis, it appears an option trade just isn't profitable enough (from a risk/reward perspective) to consider. Should we get a rally up to test the respective stops, options positions may become attractive at that point...


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 June 11th, 2010

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06/11/10: Some calm has returned to the currency markets this week. Additionally, equity and bond markets are settling down too. New signals registered this week include a nice breakout in Coffee (where it came very close to trading at a new yearly high) and Sugar (where a long over due bounce seems likely and a 50% retracement could be quite profitable). Please refer to this weeks CTS Blog spotlight for more on a potential Sugar options trade. Additionally this week, Soybeans and Soymeal held their recent lows and Oats popped on an oversold bounce. Interestingly, the meats look toppy again as Live Cattle has joined Feeders in consolidating.

Sugar: This market has fallen by more than 50% over the course of 2010. While we rode a good portion of the move higher, CRI was pushed to the sidelines when the market showed initial weakness last fall. Indeed, I even posted a blog about how one can miss the last part of a move higher but feel ok if the market subsequently breaks down. This market broke down and just kept on going!

Now that prices have fallen in half one might want to consider playing a long call option position. While I have little expectations for the old highs of $30 to be tested any time soon, a 50% bounce of the sell off is realistic. Buying the futures outright is one way to play this kind of market but I prefer an option. Currently I can buy the October 2010, $20 Call for 35 points (at $11.20/pt) that comes to about $390US. Should the market move back to the target ($21.70) by the middle of October this option would have an intrinsic value of 1.70 points or about $1900US.

Not a bad risk reward ratio indeed...

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 June 4th, 2010

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06/04/10: The US dollar reigns supreme as new European nations (some of the former Soviet Bloc now) bring to light their respective fiscal problems. The credit crunch is officially back on, as LIBOR rates shoot higher and our Euro-dollar trade enters its' 16th week of being short. One result, most stock index's have broken down. Similarly, many of the commodity market bull trends are coming into question too. While soft prices are indeed looking soft, this week's CTS Spotlight will look at the grains and how prices look to be pointing lower here too.

Grains: While Soybeans and Soymeal are still holding their recent bottoms, Wheat, Corn and Oats (the leading indicator of the group) have been pointing lower for a while. This past week Corn and Wheat broke down in earnest and are now pointing significantly lower. The weekly charts above (on left) are well defined bearish chart patterns and are of no surprise coming out of the normal seasonal peak in May. These formations may take a few days to a few weeks to play out but I would bet prices are heading to the indicated targets eventually. From a longer term perspective, the monthly charts (on right) show just how high they took these markets into the peak of '07-'08. As well, they show that real support of both of these markets is still a good deal lower. Wheat's bottom from '05-'06 is between $3 and $4 while Corn's is between $2 and $2.50. Should the trading targets indicated from the weekly charts (on left above) be breached, I would expect the above indicated Monthly support areas to prove as ultimate support.

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com