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

CTS Spotlight for the week of July 8th, 2011

Hello and welcome back to CRI's CTS Spotlight,

07/08/11: The US Dollar index continues to consolidate its recent bottoming action amid the turmoil of the European debt situation. Since this is the first two weeks of Q3'11, we shall watch for trends developing to give us an idea of where markets may want to go over the entire quarter. Of particular note this week, copper, lumber and the Nasdaq have confirmed bullish trends while the grains and energies looks weak.

 

During this horrible time in CRI's personal life, CTS Spotlight has suffered. Indeed, it has been a couple months since we last updated CTS Spotlight so to refresh things I thought we ought to take a good look at the US Dollar index to see if it is trying to tell us anything. 

The US dollar index is one of only a few markets that is negatively correlated with the broader market. My take on it (as of 2000) is that US dollar weakness is considered a market positive in that when the index is dropping it means that international money is looking for growth. It also means that US exports become cheaper (and more competitive) in the international market which helps US company profits. Conversely, when the US dollar index is rising, it means international money is fearful and running into the only 'safe haven' out there which in turn hurts US company profits. To confirm this notion we need only look at the two world commodity currencies to see that indeed, as the world inflates (commodity prices rise) both the worlds commodity currencies appreciate and when the world deflates (commodity prices fall) both the world's commodity currencies depreciate.This is the hallmark of the 17.5 'fear-cycle' we entered at the turn of the century and ought to persist for at least another 6 years.

As the chart above clearly demonstrates, the US dollar index has been in a steady decline for the past year.  As the world has reflated from the 2008 recession, international money has poured out of the US and into various international markets to take advantage of the growth. In essence it is a carry trade where money is borrowed in the US (at historically low interest rates) and invested in 'high growth' areas of the world. That has been primarily the emerging economies or what are known at the BRIC countries (Brazil, Russia, India & China). One will also recall how the US stock market as measured by the S&P 500 index (and really the whole world) has enjoyed a substantial bull run since last fall. That all may be changing. (Regular readers of CRI's SPY blog will be well aware of both the seasonal top that has been anticipated, but also the cycle top that is projected for late Q3'11.)

While the fundamentals are still a little unclear at the moment, two drivers seem to be emerging.

1. QE2 has come to an end in the US. This very controversial program (where the US Fed has literally pumped billions of dollars into the market) has met its economic/political objectives and further directed US dollar depreciation efforts by central bankers will not occur again unless we see another 'melt-down' in asset prices. As well, GOP political rhetoric has all but killed further US Federal government (fiscal) spending going forward.

2. The credit-crunch in Europe is back on. One by one, the marginal countries of the Euro-zone (Greece, Portugal, Ireland, Spain and now Italy) are coming under pressure to either raise taxes or cut government spending. Since many of these countries have horrible tax collection records - the only realistic alternative for them is to cut spending. This is never popular with the public and will meet a lot of resistance. Indeed, if taken too far these types of measures can lead to revolution - lets hope it doesn't come to that. The point of all this is that 'growth' is definitely on the back burner. Countries in the Euro-zone are shrinking not growing and this all plays back into the US dollar index.

So with all this being said, it shouldn't surprise us to see a technical bottom in the US dollar index of late. Since April, the greenback has been slowly appreciating and while not a stunning bull market, one has to respect the fact that the index is NOT trending lower. In fact, as of two weeks ago, it has confirmed a double bottom price pattern suggesting that the index actually wants to go up not down going forward. This represents a fundamental shift in the market and is very important. 

For an idea of where the index may want to go in the coming weeks/months we refer to the 50% rule. Since it's peak last year, the index has fallen from the high 80's to the low 70's. A 50% retracement of this move would bring the index back into the 81-82 area and that has to be at least our preliminary target going forward.

As an added feature of this commentary on the US dollar index, I thought we would include a very interesting chart done by the good people at FSC (website). These guys are cycle gurus and their recent work on the gold market is startling to say the least.

 

According to their work (red line) gold prices could see a precipitous decline in the near future. This is important because it confirms our notion that the US dollar index wants to rise - or that the 'fear' vote in the market is overwhelming the 'greed' vote. Historically, the US dollar and gold move in opposite directions (where gold is the ultimate inflationary proxy and the US dollar index is the ultimate deflationary proxy). Should their cycle analysis prove correct, we ought to see a dramatic fall in gold prices over the coming weeks/months as the world 'deflates'.

So in summary then, the technical double bottom in the US dollar index must be appreciated. The end of QE2 means that the 'easy' monetary policy days in North America are over for now. Additionally, the Euro-zone debt issues have, for the time being, brought growth from Europe into question. These deflationary fundamentals mean there isn't a guaranteed floor in the market and prices are vulnerable. Add these fundamental drivers with some simple cycle analysis (FSC chart above) and we have the makings for a dangerous market going forward.

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 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