Sunday, May 17, 2015

Market Analysis for Week of 5/17/15

My blog ambition is suffering from a lack of incentive,  so I'm not sure how much longer I'll be doing this.  I considered creating a more thorough analysis as a weekly product and charging a small subscription fee, but there's just not going to be enough paying subscribers to justify creating an obligation for myself, and I don't currently have the time to build a business like that, so that means if you enjoy engaging the thoughts on this blog you're just going to have to deal with free, and therefore random and infrequent postings, until I get sick of it altogether, or I attempt to create an incentive for myself through subscriptions.  Just thought I'd explain the big gaps between postings.

The dollar trade is unwinding like I thought it would, but it happened a lot faster than I anticipated, so I'm removing the $92.50 area as a possible bottoming point to give it more room.  Rather than looking for a certain price level, I'm more interested in time.  I'd like to get beyond the June Fed meeting, which likely has zero chance of a rate hike and should continue to pressure the dollar.

I spent months pounding the table about the Fed never raising rates until I had an epiphany, which made me soften my view.  Just because the Fed can't raise rates doesn't mean they won't.  Meaning, the best way to express my view is that it is impossible for the Fed to sustain a full rate hike cycle without coming right back down to zero, but I can't know for sure that they won't raise rates for reasons that aren't economic in nature.  Maybe they finally realized that it's insane to be at zero for 7 years and so as long as the economy isn't imploding they will justify a reason to get off the zero bound.

The other scenario is the one I was originally pounding the table about, which is not only will they not raise rates, but we will be back in QE as their next significant policy move.  I know the economic bears favor this view and some make rather compelling cases that the economy will not see a bounce back this summer like last year and will in fact worsen, which will give the Fed no choice really.  And while I agree that it's inevitable, to say the data will worsen over this summer for sure is not really my wheelhouse, so I would rather get beyond the June meeting and start looking for signs of a bottom in the dollar, which could go as low as $87-$89.  I'll put it like this.  If we get to August and everything is pretty much like it is now, I think Yellen is going to set the tone for hiking rates at Jackson Hole, which is kinda their birth place for horrible ideas.  But if the data worsens significantly over the summer, or the stock market turns down in a meaningful way, then the likelihood of rate hikes happening ever diminishes substantially.  It's just too early to tell, imo.

Therefore, the big question on everyone's mind of whether this is a pullback in the dollar, or a trend reversal, can't be answered with any kind of conviction unless you already have a biased view to begin with.

Here's the dollar monthly.  There may in fact be support at the prior peak of $92.50, but it could easily go further and use one of the other peaks as a support level, so for me it's more about getting beyond the Fed June meeting, which should be dollar negative.  Also note back in the late 90s during the bull run from $80 to $120 there was a pullback from $102 to $88, so consider the emotions and changing sentiment during that pullback.  While no two markets are the same, the point is a pullback of that magnitude doesn't end the trend.  The future of this space is more about what will happen in August and September, not to mention the Eurozone, which is a project I think is destined to fail.

Dollar weekly with Fib retracement points.  The safest way to play it is to forget the bottom and wait for the triangle to fill in and finally break through the trendline off the highs.  Personally, I'm hoping to get better trade location than that.

Check out the weekly EUR/USD chart. If it simply backtests the multi-year breakdown it would retrace all the way back to 1.21 without damaging the overall downtrend.  The next Draghi Day is Wed, June 3rd.  Clearly, the Greece situation could alter things, but this has been a textbook example of what happens when positions and sentiment get extreme.  Everything has to go perfect.  If there's the slightest change, it causes an unwind that perpetuates itself until all the short and medium term players are washed out.  Another area of interest is the downtrend line off the 1.39 highs that runs through 1.17-ish.

It's not a coincidence that oil and gold bottomed roughly the same time as the dollar topped, which is clearly why commodities in general have come off their lows.  The deflation trade was on from last summer till about March.  Now it's getting some relief.  Therefore, I believe oil and gold have potential for some upside since I'm not convinced the dollar has bottomed.  These correlations aren't 1:1 by any means, but you can't ignore them either.  

Oil had a clear topping tail two weeks ago when it found an abundance of sellers in the $63 handle.   But Friday it had the opposite as it found buyers in the mid $59 area at the 20-day EMA.  

I'm thinking oil should make it to at least that down trendline around $64/$65, and if we get dollar weakness through June possibly as high as the $75 breakdown level.  At that point, I'm thinking the deflation trade will resume, but as I said I'm open to the opposite depending on what looks likely to happen with the Fed and the dollar later this summer.   

Gold is sitting just under its 200-day EMA, but the way it recovered on Friday to close there is encouraging for the bulls in the short-term.  There may be a low risk breakout trade above Thursday's $1227 high that should not hesitate or you bail and could run to the downtrend line around $1270.  I'm expecting it to fail there, but it's all tied into the dollar.  That is an inflection point.  A strong weekly close above let's say $1280 would open the door for an extended move up in gold, but it's only likely to happen if the sentiment starts to shift toward prolonged weakness and therefore trend reversal in the dollar as we head not toward rate hikes but more QE.  It's just a matter of getting the order and timing correct.  In my view, futile rate hike first followed by ZIRP and more QE second. 

Silver has more clearly defined spots.  Should this short-term move up in the metals continue, a likely target for silver is the $18.50 high, which would hit the top of this multi-month range.  But check out the space it has if it broke through there.  For the first time in quite awhile there is hope for a prolonged move up in the metals, but it will be dependent on the dollar, imo.  

The biggest surprise for me was the move in bonds.  Clearly, it was kicked off by the Bunds, but I believe it was amplified once the dollar breakdown became obvious.  Meaning, strong dollar = deflation trade = good for bonds, weak dollar = inflation trade = bad for bonds.  This is the continuous contract adjusted for rollover gaps.  Note the poke to new high failure as a warning.  Have I converted anyone into being scared of that yet?   (I think on the front month contract it ran a little higher before losing the breakout).  It's not like it works everytime, but I'm afraid of it for a reason. 

Needless to say I'm not a believer in the end of the 35-year bond bull.  To me that could only happen in one of two ways.  1.  The economy revives to the point of sustained growth that leads to real wage increases for more than just the bosses that leads to real inflation (and not just dollar weakness) caused by increased demand for everything, especially bank loans, and we reach escape velocity and all hail the Fed, QE worked! (I'm trying not to laugh)  or 2.  Everyone figures out the US is going to default.  I believe it will be choice number two, but it won't happen for years.  First, a deflationary depression will happen. 

If you look at the bonds monthly chart, it just got overextended to the upside and had nowhere to go.  German Bunds selling was surely fueled by the Euro bottoming.  If that trade reverses like I'm expecting it to later this summer, then I would think bonds will resume their uptrend, or at least be contained within a range.  I don't want to talk anyone out of their position, though.  Just don't sell em' in the hole.  

In short, I think roughly July-August will be a major inflection point for all the above markets.  Either the deflation trade will resume, or we will be reversing the trend of the last year and returning to an inflation trade in anticipating of more QE by the Fed.  Look how far bonds could fall without losing the uptrend.  If you want to talk end of 35-year bull market, it needs to first breakdown in a meaningful way for sustainable reasons.

 Stocks are in a world of their own.  Clearly, in the long run a super strong dollar is bad for overseas earnings and therefore the stock market.  But stocks don't care about reality until its too late.  If we go down the road of more QE without ever getting to rate hikes, the sky is the limit for stocks.  

In the short-term, I'm thinking the Nasdaq is going to at least pierce the dotcom high above 5131 on the Comp.  I'm worried about that spot, though.  First we have to get there, but it seems like the perfect place for big sellers to linger.  A strong reversal there could be a technical event that leads to a decent 5-10% pullback.  However, if the sellers aren't there and we stabilize above the dotcom high, we could go hundreds of points higher.  We just have to wait and see.  It is worth noting the Russell has been lagging and they've led the market on many occasions.  Clearly, market internals have been weakening.  And the buyers have been very short-term orientated for months now, selling into strength and not holding breakouts, so I don't see why they would suddenly have the confidence to buy with abandon to sustain the dotcom high, but stranger things have happened I guess.  You have to be open-minded.  

In the short-term I'd like to see some selling early in the week down to the 20-day EMAs and then make a run at that dotcom high.  Then we see if there's sellers or not.  Could be quite the short if they are.  

NQ daily.  The 20-day is 4440.  Until the up trendline is lost on a closing basis the bulls still control this market.  

The ES range continues but the higher lows will run out of room soon, so there will be a resolution in the coming weeks.  We're either gonna make a legit breakout and another run higher, or the buyers simply won't have the conviction and a big move lower will take us to the bottom of the channel likely led by the Russell and possibly timed with a dotcom high reversal.  We can only hope it's that clear and easy.  It never is.  

That's what I'm thinking at the moment.  Till next time.  Not sure when that will be.  Best of luck to you.