CTS Spotlight for the week of May 6th, 2011

Hello and welcome back to CRI's CTS Spotlight,

05/06/11: The US Dollar Index has hit its downside objectives and then reversed violently off its lows. This move (and many commodity bearish reversals) has come right into the normal seasonal peak of May and yet again lends credence to the old adage, 'Sell in May and walk away'. Regular readers of CRI's WCTS will recall our overt cautious behavior over the past few weeks in anticipation of such an event. Indeed, the price action has been quite abnormal with Silver, for example, loosing more than $16/oz in just one week. This week's CTS spotlight is on Copper and how its price action is often called the professor of economics. Can you tell which way the Prof is expecting the broader economy to move over the coming weeks/months? You should!

This week I thought we ought to take a look at our old friend High Grade Copper. Because copper itself is used in so many manufactured products throughout our economy (from autos to homes to consumer electronics) this commodity, unlike many others, is often used as a barometer for the broader economy. In fact, it has been given the nickname of Professor of Economics 101. Simply put, whichever way copper prices are trending gives economists a good idea of where the broader economy is expected to move in the near future.

With that said, I think it speaks volumes that copper prices HAD been trending higher for (a rather remarkably) 117 weeks or a little over two years straight. Since the credit crunch of '07-'08 and the subsequent bottom in '09 copper has done nothing but go up. That now appears to be changing. Seasonally, we can understand a natural top ought to come in at this time of year (given that those who plan to build new homes over the summer months have bought all of their needed supplies by now) but added to that is a general sense that the economic expansion that started a little over two years ago seems to be running out of steam.

Specifically, Copper has now put in a very well defined double top price pattern and has subsequently confirmed that top with this past week's breakdown through important support at $4.076/lb. While I am not looking for the proverbial sky to fall, one ought to expect a healthy correction back into the $3.68/lb area as this would represent a 50% correction of the past year's price action. Keep in mind too, this formation is very large (with suggested stops more than $.50 higher than the short entry). Because of this, I doubt there are many traders with deep enough pockets to be able to stomach this kind of risk ($.50 on one contract represents $12,500!). Heck, most of us should be able to remember when copper wouldn't move $.50 in a whole year!

So while it is important to see and understand what is going on in the market, I doubt many will actually do the trade. What is important here is that the run-away bull market is starting to fail. Consider too the fact that the first two weeks study of Q2'11 suggested we were going to have some tough slogging through the quarter.

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 April 22nd, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/22/11: In a week that saw the US Dollar almost hit its downside target (73.516) there appears to be a lot of cross currents effecting the broader commodity market. For example - Gold & Silver continue to move higher even though Platinum, Palladium and Copper are not. The tech. heavy Nasdaq is breaking out yet the broader market proxy, the S&P 500, isn't. And lastly, Cotton prices have topped in earnest (the focus of this week's CTS Spotlight) yet most other grains have not. Considering gold's lagging indicator status and the proximity of the US dollar to its well established downside target - aggressive long commodity traders ought to temper their enthusiasm heading into the seasonal topping zone in May.

This week, I thought we would take a look at the Cotton market from a weekly and monthly perspective. Here we can clearly see the dramatic bull market that has dominated for the past 2 years. Would anyone in 2009 have expected a 5 fold increase in price - NO! In fact, I would argue that Cotton represents an excellent example of the old cliche, Markets can remain illogical far longer than any of us can remain solvent'. The question I pose to those 'investor' out there is - does being long (given the recent price breakdown on a weekly basis) seem rational? 

Of course not - In fact, this is a great example of how dramatically commodity prices can swing and can literally destroy a small investor. Keep in mind that within the heart of the financial crisis, one could have bought all the cotton one wanted in the $.45/pound range. Now, for some unknown reason, that same pound of cotton will cost you well over four times that price - go figure. Having said that, there are those that are suggesting one ought to consider any pull backs as buying opportunity. I, as a rational investor, would disagree. For those considering a purchase, I have specifically included cotton this week as an example of coming to a market too late. Yes I would have endorsed a buy from the significant breakout (in 2010) at or near $.90 but now that the market has broken on a weekly basis, I might argue that long positions should be tempered until we see a nice weekly bottom come back in. This consolidation may take months to develop and may come in at substantially lower levels - one just never knows. For now - the bull run is over, so cool your jets bulls and new prospective investors - keep that powder dry! 

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 April 8th, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/08/11: As the US dollar continues its slow grind down to the well established target zone (74.441 to 73.516) there is a general feeling in the market that the US economy itself is far from healthy. Of note this week, Eurodollars (our short term interest rate proxy) have established a bottom and reversed what looked like a well defined top. The implications suggest short term interest rates in North America are not going up any time soon. Indeed, the US Fed has suggested that its QE2 program will be extended into June '11. Looking elsewhere, many commodity prices have reversed their recent tops suggesting that the latest market correction was little more than an attempt to shake out the 'weak-hands'. CRI's S&P 500 blog has been attesting to this notion over the past weeks as very little 'technical damage' has been done even though the news headlines would lead one to believe otherwise.

 

The Eurodollar market is the corporate equivalent to the T-bill market. Where T-bills are guaranteed by a government body, Eurodollars are guaranteed by corporations. To understand how this market works think of a Eurodollar contract's price as the inverse of its interest rate. So if Eurodollars are trading at 99.60, then the interest rates paid is .40% (100 minus the price). The fact that the Eurodollars have bottomed in price suggests that short term interest rates paid by corporations to the holders of their paper are now NOT going up but indeed, may fall even further. This is very interesting because if one believes the North American economy is improving then Eurodollar rates should be rising. The fact that this very well established bottom has come in, suggests that the North American economy isn't as good as the media would lead us to believe and that indeed, one should expect the malaise of the past couple of years to continue. The question then becomes, when does this 'malaise-ness' get reflected in the rest of the market. CRI's feeling is that the stock market (and many of the commodity markets) have a natural tendency to rally into the seasonal peak in and around May. So CRI's words of caution this week are: 

Don't get sucked into the seasonal euphoria, this may be a very big trap...

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 April 1st, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/01/11: After a month absence due to a family emergency, CRI is once again at the helm to help in understanding what is going on in this crazy world. First and foremost, the US dollar continues to point towards the mid 74 area so that means we still have a little farther to go on the downside. Having said that, I did notice this week quite a few markets have triggered stops and those that haven't are looking rather toppy. Considering the seasonal top that ought to materialize in the coming weeks (sell in May and walk away), one shouldn't be too surprised with the idea that trends begun after the US mid term congressional elections (last November) are starting to exhaust themselves. Trade accordingly - now is not the time to be taking big risks!

This week I thought we would take a good look at the Canadian bond market. As a proxy for commodities in general and a good barometer for demand for commodities from North America, Canada has been enjoying the benefits of growth at a very low inflation rate. That may be coming to an end - and the one market that will herald that end will be the bond market.

Two things jump out at me when I look at this chart:

1. There is a very well established double top breakdown in price (that occurred right after the massive equity buy signal following the US mid term congressional elections last fall). This will not only act as massive resistance going forward but also represents a major pivot in the perception of inflationary pressures within Canada itself. In other words, inflation is back and it isn't going away until a well defined bottom in price comes in.

2. This previous week's price action has confirmed a nasty looking bear flag pole formation (with help on understanding this technical price pattern please refer to CRI's FREE Chart Patterns & Formations seminar). This price action is bearish (confirming point 1. above) and implies prices want to move down into the 114 area. If such an event happens, it will also confirm a massive monthly top in price (with a break of the major support area in and around 117). While this is a trade-able price pattern, the risk (suggested stop point just above 123) means for every dollar you potential could make on the trade (going short at 119) you have to take twice the risk - not worth the trade in my opinion. Having said that, it is important to understand what the market is trying to tell us - Canadian interest rates are going up!

So to summarize, Canada and Canadian bonds are looking very risky at the moment. Interest rates are not going lower in Canada, they are going higher. Ironically - the Bank of Canada has been pounding the proverbial table for months warning Canadians of their very high relative debt levels and the potential disaster looming for Canada. Did anyone listen - I doubt it!

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 25, 2011

Hello and welcome back to CRI's CTS Spotlight,

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

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

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

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

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

CTS Spotlight for the week of February 18, 2011

Hello and welcome back to CRI's CTS Spotlight,

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

The meat complex

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

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

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

So is there a trade here?

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

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

CTS Spotlight for the week of February 11, 2011

Hello and welcome back to CRI's CTS Spotlight,

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

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

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

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

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

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

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

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

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