Sunday, November 23, 2014

Market Analysis for Week of 11/24/14

It looks like Draghi squashed any notion of a deeper pullback in the Dollar and Euro.  Anyone playing the breakout of the Euro downtrend line on Wed got their face ripped off on Friday.  With the shortened, lower volume holiday week upon us, there's a good chance the Euro stays contained and moves sideways toward the end of this triangle before breaking down.  With some luck it will grind back up to the trend line and give a low risk entry.

When it closes below the long-term uptrend line from 2003, a fairly quick move down to horizontal support at 1.2054 and then 1.1884 should be in order.  From there, we may see a backtest of the breakdown before going lower, but that's too far ahead to worry about.   

The dollar on the monthly chart is looking like a rocket ready to launch.  The Dec Fed meeting will likely add fuel to the fire.  I'm thinking the Fed learned from last December that the time to break bad news is right before the holiday break, so the risk is high for December to be the month they remove "considerable time" from their language.  Either way, the dollar looks ready to go boom.  

USD/JPY will likely make it to 124, but it's so extended, so the risk is high of a pullback at anytime.  The Yen is doomed for a long time.  

Gold continues to creep higher toward its daily downtrend line on the back of significant short covering and new Spec longs who will soon be getting their face ripped off.  

Note the significant increase in Commercial short contracts of 30,315 is well above the increase in Spec longs of 10,687 contracts.  They also absorbed the 14,692 shorts the Spec covered, and initiated new Commercial shorts as well.  This by itself isn't necessarily a smoking gun type sure-thing piece of evidence because the Commercials will fade the Specs as high as they want to push it.  And it's not a timing indicator.  However, they didn't HAVE to short any additional contracts than the Specs went long and covered, so the fact that their short increase was MORE is just a piece of noteworthy evidence that they are urgent to lock in prices.  Does this mean a sharp turn down is imminent?  Not necessarily.  But in context of what is happening with the dollar and the risk of the upcoming Fed meeting, I'm thinking yes, the time is near to short.  

Here's the weekly chart of gold.  I'm looking for it to rollover at or near that downtrend line with the little white bubble around $1225 and head toward the big white bubble at $1040.  I will scale into half my position and then once it rolls over I'll will be building an inappropriately large position, but I'm gonna do it in SLV put options out in April (delta 25 strike 14).  The reason for half  at a time is just in case I'm early, or wrong.  I'd prefer to scale up a winner.

I'm hoping silver can make it to $17.40-ish first.  I'm not trying to be perfect here.  I'd like to get past the Swiss Gold Referendum next Sunday, but if it makes it to my number by Friday, I'll go half in before.  I'm looking for silver to make it to $13 by the Super Bowl and eventually to $8.50/$9 area.  I can hardly stop thinking about this. 

Normally, this price action in the NQ is what scares me.  Big gap ups that reverse all day are usually signs of impending pullbacks and sometimes tops.  However, it happened on options expiration, so you can't treat it the same.  Also, we are heading into a shortened holiday week, so there's usually not the volume for big selling.  Plus, none of the indices closed negative.  If it were a sign of a serious top, they would have closed negative.  There's no choice but to take some profits on big gap ups like that, and while I would love to see a pullback to either of the white bubbles, I'm not holding my breath.  We might see a slow sideways to upward grind thru the holiday.  This is not even remotely my concern right now.  The silver trade has my highest attention.  I don't care about anything else. 

Same thing for the ES.  If we do indeed grind sideways to higher along the upper channel line, there's a chance we see some selling after this week.  I don't know how you stay real long under the upper channel on a move that went straight up.  When we do have the next serious selling episode, force yourself to not see it as the beginning of the end, but the best buying opportunity for the following couple months.  

Here's the weekly chart of the ES.  Note the yellow weekly uptrend line that was supposed to mean something when it broke.  I'm thinking all serious pullbacks will be contained by it for the foreseeable future.  

It's interesting to watch investors and traders get psychologically steamrolled by this bull market at different times and different degrees as price gets further and further disconnected from reality.  It's not easy to trade against what you believe, but clinging to the shoreline of value and fundamentals as the river continues flowing upward is even less healthy.  Know your risk and become Buddha-like in acceptance.  You can't control it.  You can't stop it.  And there's no prizes handed out for understanding the consequences before they happen.  It is what it is.  Desperate, ignorant, usually unethical people in power trying to prevent systemic collapse from their predecessors' flawed and corrupt ideas.  I don't believe this is an evil, nefarious plan by central banks to steal wealth from the people. It's the end result of a monetary system unhinged from the restraint to gold to limit the issuance of debt.  It's too late to stop it now.

If the central banks step aside, the system will implode, which is going to happen anyway when they lose control, so what difference does it make if it happens now or they fight it until it overcomes them?  The fact that they don't seem to understand the root cause of the problem is more disturbing to me than their feeble attempts to hold off the tsunami of debt deflation that's coming.  And for that I applaud and encourage the folks who are fighting the good fight and trying to express the Truth to put those Keynesians back in the bottle from whence they came.  The only way to prevent a deflationary debt destruction is to not allow the inflationary boom to happen in the first place, and for that you need sound money.  I still think this bull market will end when there is a real threat to the financial system like a Japan default, or a Eurozone banking crisis.   Something that causes sustained fear over time from an evolving crisis that can not be contained.  Anything less leads to a controlled short squeeze.

The Tech Bubble ended with the realization that two guys in a room with a computer and an internet connection doesn't lead to actual earnings.  The Subprime Bubble ended with the realization that people working at McDonald's can't afford mansions in the burbs.  So it makes sense that the Sovereign Debt Bubble will burst with the realization that governments can't issue debt in excess of the underlying growth to repay it in perpetuity.  Until the rubber meets the road via the threat of a bond market or currency implosion, the bubble doesn't have to end due to overvaluation, especially since I agree with the notion that central banks are in the market, but not to the extent some people think.  They only need to show up at critical times to contain selling and pressure shorts into covering.  Why anyone would vehemently deny that as a very real probability?  The stated goal of the Fed was to create a wealth effect through inflating asset prices.  Why wouldn't they defend it?  

I haven't commented on bonds in awhile because I think the bond market is confused, or maybe I'm confused about the bond market.  Bonds want to keep going higher to respond to the slowing global growth, but the Fed keeps talking about a path of normalizing interest rates, which makes no sense whatsoever.  So the bond market seems to be thinking: how crazy IS the Fed?  Can they actually raise rates?  I would think the answer is no they can't, and bonds will eventually head higher, but playing chicken with the Fed may or may not be a good idea.  I'm interested elsewhere.   

Parting thoughts?  Apple to $150.  Nasdaq to internet bubble highs.  Silver to $9.  And I'd like to remind you, at least for entertainment purposes, about those two silver dreams I had, which were the same quality as the one I had that showed silver trading in the $18 handle when it was at $32.  

The first dream (Nov 2013) showed silver trading in the $9 handle and then bouncing hard to $13.  The 2nd dream (March-ish 2014) showed silver getting aggressively sold thru $14 and $13 with a football game on in the background.  I've tried my best to figure out the timing.  In hindsight, I was an idiot to take until silver made it from $22 back down to $20 to let go of the idea that it was going higher first.  But the real trade is still ahead.  I'm telling you this because if it plays out again, I want to force you to question the nature of reality. lol.  And hopefully, you make some money.  It appears all the pieces are falling into place.  I don't know how high this retracement will go for sure, so the most conservative way to play it is to wait for it to clearly rollover first.  But I'm gonna fade it, hopefully in the $17s, and hopefully my timing is right.  

Sunday, November 16, 2014

Market Analysis for Week of 11/17/14

The current equity markets are a great example of why using technicals in trading is so important.  Market extremes get too far disconnected from fundamentals to rely on them as a guide for your decision making.  As much as it seems like the market should go down, it's just not worth playing the short side, and one of the big clues that we're going higher, and likely way higher, is that NO ONE IS SELLING at the top of a 12% move in three weeks this deep into a mature bull market.  That kinda shouldn't be ignored.  And once we shake off the short-term overbought condition I see no reason for anyone to sell in the forseeable future.  Clearly, there will be pullbacks, but I'm thinking right now that another 10% by May is totally do-able.  Does it make any sense to me?  No it does not.  Will I change my mind if the market tells me I should?  Yes I will.  But the evidence at the current moment is bullish.  And the fact that equities are correlated to the sinking Yen is only more reason to believe the bull market could be long from over.  The USD/JPY might make it all the way to 120 before having a significant pullback.  A strengthening dollar will eventually have a negative impact on equities due to international earnings, but that could be six months or more away.  Until then the carry trade overrides those concerns.  I've said this a million times but strong trends do not end in inverted V tops.  Could it happen?  Anything can happen.  But that would be an extreme outlier event.  Until we get a strong pullback that fails to make a new high on the retest, or makes one of those poke to new high reversals, there's no reason to short the equity indices because price will be in your face before you can blink.   Am I concerned about the Russell being a drag on the rest of the market?  Of course.  But if the shorts in the Russell get squeezed out and we breakout to new highs, watch out above for the rest of the market.

This week is options expiration week and since we never got the snap back pullback this cycle to scare people into puts, it's still lingering as a possibility for the next three or four trading sessions. Maybe it doesn't have to happen due to the difference in underlying positioning from the 10% Oct selloff as opposed to every other month this year, but it's just something to be aware of.  I'm sure there's a ton of stops resting under the day lows of the previous two weeks.  A 30 point sell off in the ES would run all those stops and work off the overbought condition.  But I would expect a massive amount of buyers to step in and buy any dip that occurs.  Think about how many trend following systems got knocked out of the market in early Oct.  Most of them have rules that should have triggered them back in, or are about to.  They will be buying the dips.

The bottom line is there's still more buyers eager to get in than sellers dying to get out.  And there's nothing in the immediate outlook to alter that, imo, so the path of least resistance remains up.  I've tried to express this on many occasions but the only thing that matters to me is the current position size of the large players and their immediate market outlook.  I play the other players.  I have no fixed beliefs.  I don't care about fundamentals.  I don't care about price.  I only care about what the others players are doing, how overextended they are, and what is coming up that could change or amplify that.  I am a trader.  I hate gambling.  Those two things are not even in the same universe.  One takes more skill than luck, the other takes more luck than skill.  I don't know if we'll get the snap back early in the week or not, but if it happens I'm a buyer, and I'm a holder.  I'm actually already holding but small enough to not worry about a pullback.  Day trading has been nice to me lately.

The short squeeze in the metals is playing out how I expected.  The chance of this being a short-lived rally that rolls over and goes way lower is VERY high.  Here's a great example of how I think about trading.  I track the COT reports, so I knew that the short spec position in silver and gold, and therefore the not-quite-but-getting-closer to a net long position of the Commercials, was at levels typically seen before a squeeze.  I knew the upcoming Swiss Gold referendum is on Nov 30th.  And I figured we've gotten quite oversold since July when silver peaked out with a net long position in the Large Specs that has been seen at previous tops.  So it makes sense that the short side is going to have a hard time staying short if pressed into that referendum.

The fact is we are in a monetary policy environment that is dollar positive and gold negative.  I do not believe the Fed can change its current line of thinking about raising rates next year (even though I don't believe it will happen) for at least a few more meetings.  Therefore, what you have in the metals is an overall downtrend that should continue once the short-term unwinds.  Think about the position of the Commercials.  They are hedgers for the physical world.  They are currently a lot less short than they would want to be to hedge against lower prices.  Therefore it follows that they are going to be very quick and aggressive about locking in prices so they can reduce their physical risk.  Which means as price rises from a short squeeze, the Commercials are at the ready to absorb as many contracts as the Specs will throw at them, which means in order for the Specs to move price very much it will require an enormous amount of long contracts and I don't believe in the current environment that is likely to happen.  They will run out of steam.  And while the Swiss Gold referendum, even if it passes, might ignite some speculative buying and more short covering, there's a lot of Specs who would normally play the long side who are thinking more like me, so that takes away potential longs and moves them to the short side, meaning they are looking to short the rallies, which is kinda the definition of a downtrend.

I'm thinking the metals market has a strong chance of peaking on, or shortly after Nov 30th, maybe by a week or so.  The next big event would be the Fed meeting on Dec 17th.  With the equity market strong and the dollar not really all that extreme yet, I don't see any reason they will say anything bullish for the metals.  In fact, the risk is more along the lines of removing "considerable time" and laying out a more detailed framework for the supposed first rate hike.  After the dollar is done pulling back I expect it will continue its rally, which will be yet another headwind for the metals above and beyond the desire of the Commercials to get really short again.  I'm thinking the dollar has a realistic chance of making it all the way to $100 by May.  If that happens, now you have a situation where the Fed might be forced to return to QE to battle the deflation of commodities that would result.  THAT would be a potential turning point back up for the metals.  But until something like that happens, there is too much need for hedging and too little need for speculating in this space.  The question, as always, is how high will the retracement go and what is the timing.

At the moment I think gold will make it to the $1220s.  It depends on how fast it gets there in relation to Nov 30th for whether I think that will be the top.  Silver looks like $17.40 is a possible area.  That's where I'm looking to get short at the moment, but I will adjust as I see it play out.  I'm also eyeing dollar support and Euro resistance.  Both have two sets of trend lines to use as guides for when the pullback could be over.  As usual, I'm always willing to drop everything I currently believe if the evidence suggests I should.  I'm currently long gold as of Fri on the pullback to $1170, but the real trade will be to the short side in a couple weeks, imo.

Gold's first resistance is the $1220-ish downtrend line.  Next is the $1240 horizontal area.  And last is the downtrend line thru $1300, which is unlikely.  The timing I'm thinking for it to potentially peak is between Nov 30th - Dec 7th.

Silver has a downtrend line it's been respecting from July that goes through $16.50.  If that clears I would think $17.40-ish could be the ceiling.  

The dollar has two uptrend lines that currently run thru $86.50 and $85.20 and they're rising everyday.  

The Euro has a downtrend line that goes thru 1.26.  If it clears, I would expect the 50-day EMA at 1.2724 to be the next significant resistance.

When the Euro loses the uptrend line from 2003, it can drop a LONG way, which also aligns with current monetary policy and the fact that the Eurozone seems doomed to break up one day.

If the ES pulls back at all, which is a big IF, it should happen early in the week and be met with a frenzy of buying that takes us higher thru December.

Trade Your Personality

The most important thing I've learned in trading is you have to trade in a style that aligns with your personality.  There's as many ways to trade as there are traders.  If you're a math orientated person and you tend to have trouble with direction and timing, and you tend to take profits quickly, then selling option premium is the perfect strategy for you.  If you tend to be good at direction and timing and can fight the tendency to take quick profits so you can let your winners run, then you need to be trading with the trend.  If you are very deliberate in your decision making, you need to trade a longer time frame than someone who is more nimble and quick, or simply prefers to be active.

If you have a high tolerance for taking heat on a trade but usually end up getting the direction right then you should be using smaller size on entry and scaling in slowly.  If your life is ruined when you have overnight market exposure then you should be looking for trades with a very small risk, meaning, one that's coming into a clear support line that should hold if your idea is right, and be more of a day trader.  If you tend to be good at psychology and reading the price action, then technical trading is the path for you.  If you're a data head and love to do research and develop a strong fundamental conviction about a trade, then you should be a position trader for longer holds, more like an investor than a trader.  In all cases, a thorough understanding and awareness of the technicals will always be helpful.  Ignoring technicals is like ignoring gravity.  

If your winners are smaller than your losers than you need to have a higher win percentage.  If your winners are bigger than your losers, you can get away with winning less often.   Meaning, if you have seven losses that are $1 and three wins that are $3 out of every ten trades, then you are a profitable trader with a 30% win rate.  Conversely, if you have two losses that are $3 and eight wins that are $1 out of every ten trades, then you're still profitable but you need to have an 80% win rate to remain that way. Win percentage and the size of winners vs losers is a major factor in figuring out what style of a trader you are.  The one thing you can't do is trade in a way that is not in alignment with your personality.  Unfortunately, the only way to figure out what style is best for you is to start trading and figure it out.  If you stay small until you find a way of trading that fits, you will be able to withstand the draw downs that blow up beginner accounts.

This blog is not going to be about learning how to trade.  But I want to be clear about the reasons that led to my style of trading:
  • I'm drawn to the psychology of trading.  I like figuring out what the other players are doing and where they are looking to be buyers or sellers.  I ask questions like: who is in control of this market?  What do they respond to?  What could alter their sentiment?  What is coming up that could impact their outlook?  Meaning, I don't care about my own outlook as much as I care about the outlook of the other players.      
  • I am a macro, big picture thinker, so I'm drawn to gold, silver, currencies (mostly the dollar, the Yen, and the Euro), the broad equity market indices, oil (sometimes), and bonds (sometimes).  I do play individual stocks but only special circumstances.  
  • I hate the overnight risk of options and equities, so while I trade options a lot, I much prefer futures because you can put a stop loss in and know with confidence that it doesn't matter what happens overnight, you will be taken out if your stop is hit.  This sometimes leads to opportunities when you can get way bigger in futures than you can in options or equities because that stop loss is secure so you don't have overnight risk (with the exception of the 45 min market close).  However, sometimes being in options is an advantage because a futures stop might get hit overnight but then the price rebounds, which makes being locked out of the market a good thing because it keeps you in your options trade.  So there are advantages to both.  
  • I tend to day trade and swing trade.  Anything that lasts more than a couple weeks is an accident and I'm just trailing a stop until I get taken out.  
What you won't find on this blog will be anything related to data or research or the mathematics of option probability.  I have nothing against those ways of trading.  If that works for you, then have at it.  Occasionally, I write about monetary or economic issues, but mostly I plan to share my outlook based on chart technicals and positioning.  I find that even when you disagree with someone, hearing another point of view often help solidify yours.  So I like hearing what other traders have to say, especially when they include their reasoning behind the idea.  I find the reasoning often exposes why I do or don't agree with their outlook, which means I don't care if someone else is wrong, I only care about what their thinking was because if it's based on an economic outlook I don't agree with, or a personal bias they might not be aware of, then it gives me more confidence in my own idea.  In that spirit, whether you agree or disagree with my analysis, I hope it helps to solidify yours, or at least gives you another angle to consider.

Call 1-800-Don't-Sell

I had an epiphany today.  Very similar to the one I had over the summer when I compared my realization that the stock market doesn't go down anymore to being saved by Jesus.  For you see, I have sinned and lost my way.  When the markets had what now appears to be a tiny blip of selling in October, I believed it was possible for it to keep going down after we bounced and believing that was even a possibility has caused a great deal of exile and punishment.  So I would like to publicly say to the Fed that I am sorry.

It was the first time I awoke to the reality that stocks don't go down anymore and I fell off the wagon.  I have since joined Equities Anonymous and I'm currently working the program.  I have confessed.  I have done my penance.  Please forgive me.  I promise to never think stocks can go down again.   Please let my transgression serve as a warning to any of the non-believers among us.  If you want to make money in the stock market you hit the buy button.  You do not use a stop loss.  In fact, you no longer need the sell button at all.  If the market goes toward the bottom half of the screen, you buy it again.  Anyone who tells you there is even a remote possibility of the market going down should be publicly shamed.  Repent of your ways or be forsaken!  The new Ice Bucket Challenge is dumping ice water on anyone who claims such nonsense.  Forget your historical reference points.  Forget value, and fundamentals.  Close your charts and just buy.   From now on there are several words that need to be banished from your vocabulary: Down.  Sell.  Reversion.  Dip. Short. Pullback. Volatility.  Retracement.  

If you have trouble adjusting to the reality that the machines have taken over, there is help for you.  Call 1-800-DON'T-SELL, or our sister station at 1-800-JUST-BUY for more information.  We are here for you.  You can do this.  We heart you.

A Guide to Reading This Blog

There are two different versions of me that will be posting to this blog, so it's a good idea to distinguish between them.

Trader me is a humble, got-his-butt-kicked-by-the-markets-enough-times-to-develop-a-twitch kind of guy who will make straight-forward market analysis based on sentiment, positioning, and technicals.  He thinks in terms of risk/reward, outcomes being likely or unlikely, and he changes his mind based on new evidence that comes along because the market is always right.  Being wrong is inevitable; staying wrong is a choice.

Artist me is an irreverent, sarcastic kind of guy who will post reflections-of-society ramblings that are usually satirical in nature.  Both guys are dedicated to the Truth.  Trader me wants to be helpful.  Artist me wants to entertain and express.  Sometimes they merge.  Both guys will inevitably piss you off.  Don't take it personally.

I have no idea how often I will post, so you're better off signing up for email notifications on the upper right side of the home page as opposed to randomly checking.