Sunday, December 14, 2014

Market Analysis for Week of 12/15/14

For me, everything revolves around the reaction of the dollar to the Fed.  Will they change their language or not?  Does the dollar need to pullback further or not?  It had a great run but even strong bull markets don't go straight up.  I still believe the dollar is going much higher, but if we need to pullback to $85 first, I'd like to avoid that.  It's probably all about the language.

Here's the dollar monthly.  I'm open to the idea of a deeper pullback if they don't change their language now, but if I was the Fed and I knew I had to remove "considerable time" from one of the next few meetings, I'd do it right before the holiday break to give the equity markets a couple weeks to digest the news in low-volume-senior-traders-away-from-the-office trading,

Here's the dollar daily.  Notice how the green 20-day EMA has supported price for six weeks now.  That's typical of strong trends.  This chart looks great.  It's just about the Fed. 

Check out the monthly Yen futures chart.  I usually look at the USD/JPY.  But on the futures you can clearly see the horizontal support that gave it pause.  If the dollar pulls back we could see this triangle fill up a bit.  

Yen futures weekly.  I don't know how people stay short when it gets this oversold.  

The Euro had a pretty strong week.  Knowing the LTRO was Thurs, I should have trailed my stop tighter.  I gave back more than I should have.  I'm looking for reentry short, but I will wait till after the Fed. It would be a gift to do it from higher prices.  The long-term future of the Euro is doomed. 

I was feeling pretty good about being so patient before I bought my gold and silver puts, but it was clearly not patient enough.  This is how I do damage control: if I still like the overall trade but I think I'm early, the first thing I do is cut the position in half and look for opportunities for short-term trades in futures to make up for it.  Clearly, this too will depend on the Fed.  It's entirely possible gold grinds up to the larger downtrend line just under $1300.  If it does, I will add back the other half of my puts at really cheap prices and look for it to rollover again.  Only a strong close above that trend line turns me bullish.  I don't currently believe that will happen and am open to the idea of a dollar pop, gold drop out of the Fed.  

Gold weekly.   We've seen this before.  The net Spec positioning in gold gets too close to net short, there's a short squeeze with new long buying that runs out of steam and topples over to continue the downtrend lower.  This is why I chose puts instead of futures.  Even if the premium is jacked, the risk is contained without worrying about a stop.  If I'm right I'll be able to cheaply re-add to the position because I gave myself until spring.  If I'm wrong, I expect to lose money, and with puts not only is the risk contained but it frees up futures to trade against it. 

Silver daily.  Notice how it's clinging to the underside of the downtrend line.  That's typically bullish.  If it breaks through there it may backtest the $18.17 breakdown area, but $17.50 is a spot to watch too.   

The RSI on the crude weekly is 12.  Would you believe the Spec longs added again?  As a group they've been long since $105.  And while there are a lot of individuals within that group, and I assume there's a good deal of hedging in other ways, the fact is they are averaging down their long position.  Which means when the inevitable bounce comes, the Spec longs will be selling into it. This could stay ugly for a long time, especially in the face of a strong dollar.  The risk/reward of the short side is diminishing as we approach the lower $50s.   

Sidestepping the pullback in the ES was one of my better decisions lately.  I didn't anticipate the selloff as much as I thought the risk/reward wasn't good.  It was a a day trader's market last week.  The old weekly uptrend line is at 1975-ish, but since it's already been violated in Oct, it's not as strong, so we could see the 200-day EMA get tested at 1938.  If you take a look at my VIX post, I'm thinking we bottom this week and see a VIX crushing over the holidays, so I'm looking to buy the ES but I will wait till after the Fed. 

 While I do think the oil collapse could be a game-changer for equities it may take some time before the impact is undeniable.  Every selloff feels like the end and there's always a good reason, but they keep popping back up.  Clearly, the bull market is weakening internally, but there's no reason why the inevitable bounce here won't pressure out the shorts and continue the same pattern we've seen for the last two years.