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 

CTS Spotlight for the week of December 17th, 2010

Hello and welcome back to CRI's CTS Spotlight

12/17/10: As has been the case for a few weeks now, money is once again flowing back into the US dollar. The stabilization comes on both better economic news from North America and worsening debt concerns in Europe. Stop gap measures won't fix structural problems, the only resolution is a meaningful fall in the Euro. (making investment in Ireland, Spain, Portugal, Greece, etc. relatively attractive again). What CRI finds so interesting here is that know one is commenting on how well Germany (and specifically German companies) is doing. Those members who are profitable at these levels have seen their markets boom higher. Speaking of booming, equities continue to zoom higher with every index followed trending up. The recent tax compromise out of Washington, coupled with QE2 has both relieved the market of potential selling pressure and once again put a bid in stocks. This weeks CTS Spotlight looks at the professor of economics (HG Copper) and what he is saying, should make for an interesting read.

HG Copper

This week we shall look at Copper from a rational perspective to see if the recent price action makes sense given the current fundamental and technical pictures. 

Economic indicator:

Copper itself is considered an excellent barometer for economic output and has thus been given the title of 'Professor of Economics' in the marketplace. If copper prices are trending higher, odds are it means someone, somewhere is buying. In most cases too, buying means building, which of course is another way of expressing economic activity. Yes there have been cases of market manipulation (Haminaka of Sumitomo Bank was the last to try back in the '90s) but by in large, a upwardly trending copper market is a hallmark of economic growth. According to CRI's most recent CTS, Copper has been trending higher now for 99 weeks (or a little under 2 years) with the most recent weekly 'buy' signal being issued at $4.08 just a week ago.

Fundamentals

While traveling through Transport Canada's offices here in Vancouver recently, I overheard a cute anecdote that I think summarized what is going on in commodity land of late. One bureaucrat scoffed at another, "last year it was airports, this year its rail". He was referring to China, of course, and the ferocious build-out of its economy. That got me thinking, what are some of the most basic necessities of building rail networks? Steel (for the rails), Copper (for the electrical wiring) and Concrete (for the buildings) were three thoughts that came to mind. So one would logically conclude that if this were indeed the case we would see huge draw-downs in the world's supply of these (along with many other) commodities. With this in mind, below is a chart of warehouse stock piles of Copper as reported through the London Metals Exchange (LME). Indeed, stocks have been dropping, confirming our thesis. Since we know Austerity programs have nearly halted development projects in Europe and North America is still treading water, the only region to be able to buy in this kind of size is Asia. One additional piece to the fundamental picture, there is word out of late that there is going to be a an ETF (Exchange Traded Fund) floated for Copper. In recent years Gold and Silver ETF's have been floated and the demand was very strong. Considering where we are in the 35 year 'fear-greed' cycle, I wouldn't be surprised to see a lot of demand for a Copper ETF. With this in mind, one could argue that the lack of demand from the industrial side here in North America could be replaced with investment demand from the ETF community.

Technical

Warehouse stock analysis

A closing note on the chart above, the drop in warehouse stocks over the past year has been so dramatic (by almost half!) that a 50% correction of this move does seem likely. While there is no 'bottom' in stocks yet, should a double bottom come in over the coming weeks, a rally into the 45,000 area shouldn't be unexpected.

Price chart analysis

Listed above are the short term and medium term monthly price charts for Copper traded on the COMX. Since we can all agree that prices are moving higher in the short term (daily & weekly pointing higher) I thought we would take a look at the market from a little longer term perspective to see where we may be going over the coming weeks and/or months. 

The first thing that jumps out at me is that one should definitely be LONG this market from the monthly breakout at or near $3.68. This breakout corresponds with the broader market buy signal (Please refer to CRI's S&P 500 Blog for more on this) that was generated through the month of September as the market got news of both a change in the US Federal Political landscape and of a further US Federal Reserve Board Stimulus spending package. The breakout also confirms a massive bullish flagpole formation which suggests prices want to ultimately get up into the $5.00 area! While I think that target is still a ways down the road (maybe on the day of the IPO of the ETF), the fundamentals do suggest there is enough demand. In the near term, the top of the trend channels (for both the two year trend and the 5 year trend) seems to collide at or near the $4.50 area. As well, the current weekly price target for CRI's most recent CTS is also in the $4.50 area [Bull flag; (4.084-3.178)+3.606].

If you are in the trade from $3.68 then give yourself a big pat on the back. You played the breakout and it was spot on. There is no doubt about it, this market is 'going parabolic' so you may see that $4.50 target hit in the next week or two. CRI's CTS was given a new entry at $4.08 (on the move to new highs) but please keep in mind, this is a very speculative trade, not an investment quality signal at all. The low volume holiday atmosphere might just what the pros need to play with the charts.

Here is the tricky part - stops on this Monthly breakout trade should STILL be just under support at/near $2.72 (because it has been a straight line move up). This means one can realistically expect a $.43 correction at any given time. I wouldn't be surprised to see that exact thing happen after the first week of January with the market ultimately bottoming in mid February. My hunch is we will probably trade back down into the mid $3.00 area since that would be close to the monthly up-trend line (chart on left). As well, a 50% retracement of the recent rally would bring price back to $3.47 [($4.225 + $2.77)/2 = $3.4745]. Once we get a pullback (and then a subsequent move to new highs) we will have a new support level to move our stops to but that may be weeks if not a couple months down the road. If you missed the trade DO NOT go a buy this market now. Wait for a correction and then look to enter because heading into the spring, this looks extremely bullish. But, of course, CRI will be more than happy to let you know when we are pulling the proverbial buy trigger once again...

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 December 10th, 2010

Hello and welcome back to CRI's CTS Spotlight

12/10/10: The US dollar continues to consolidate its recent gains. Because of this, we appear to be stuck in a bit of a holding pattern within many commodity markets. Is the US dollar bottom for real? It's too early to tell but I'll have to admit, from Coffee to Aussie dollars to Swiss Francs, there are quite a few markets setting up for a trade - you can literally see it coming. Having said that, the market does have a lot of steam behind it so I won't be looking for a breakdown until at least the new year. In this week's CTS Spotlight we shall look at one of the few markets not to rally in 2010, Cocoa, and how that may be about to change.

Cocoa:

With all the news in commodity land of late, one is always hoping to grab the next big move. The recent bullish action in Cocoa prices, coupled with political turmoil in The Ivory Coast (where almost 80% of all cocoa supplies come from) had me thinking that a big move might be coming. Then we look at the charts and we come back down to earth.

While Cocoa prices have done virtually nothing for 2010 (which is one reason I thought we might have a long trade here), price have moved steadily higher over the past decade. Indeed, so much so that when one looks at the monthly price chart (on right above) one can clearly see that even the most aggressive price targets have all been hit. We can also see that 'real' support for Cocoa prices actually sits near the 20 area not the current 30 area. Supporting this argument, a very simple 50% retracment of the 2000's bull market would bring prices back into the 21 area [(8+35)/2 = 21.5].

From a shorter time frame (weekly on left above) we see that Cocoa prices are actually working a very clear bearish flag pole formation. The formation has taken almost a year and a half to play out. It was confirmed when prices broke through last January's lows (just under 28) in July. Because of this, one ought to be reluctant to get too bullish until this pattern has played itself out. The target here is near 24 which would coincidentally bring prices back to the 5 year Monthly trend line.

So, while I would love to report CRI had found another great market to get into, this just isn't the case. I will be watching Cocoa as it nears the 24 to 25 area as we may get a trade-able bottom at that point. But for now, a big nothing....

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

p.s. Swiss Franc has rallied into topping zone mentioned a few weeks ago in CTS Spotlight. CRI will be looking closely at the June puts and may issue a CRI OnlyDoubles NewTrade Alert...