Sunday, July 26, 2015

Market Analysis for Week of 7/27/2015

Clearly, the deflation trade has resumed over the last month.  The Fed announcement is Wednesday but the chances of a rate increase without a press conference are not very likely, so the reaction of the dollar will be very interesting.  Even though it has strengthened lately, it hasn't broken out yet, and the last few "no hike" announcements have led to selloffs, so there's still room for one more pullback before this takes off.  If it does selloff on Wednesday and gets immediately bought up, you have to assume the bottom is in and it's front-running September.  If the selloff holds, then the confidence of front-running isn't there yet and we need more time to back and fill, in which case there are several spots to watch.  The 50-day EMA is at $96.39, but it could go all the way to the bottom of the channel at roughly $93.70.  I suppose the safest way to play it remains waiting for the breakout, but if we do get down toward support, I'd like to start sneaking in early.

The concern with the continuation of the deflation trade is that it makes no sense whatsoever that the Fed will raise rates.  But they keep pounding the table about how appropriate it is.  They aren't in the business of bluffing.  They're in the business of setting expectations, so what would be completely inappropriate is pounding the table about how appropriate it is to raise rates and then not do it.  That's why I started thinking about other motives they have that aren't economic in nature.  Who knows how long they can go down the tightening fantasy path before they are forced to back off. The point is, regardless of their motives, and regardless that they will cause a recession, if they continue down this path then the dollar could have months and months in it to the upside.  Keep a close eye on this.  If the train leaves the station in forceful way it can really run.

The downtrend line in the Euro is from the highs last summer.  If we make it that far thru sideways movement or another bounce, it will force the action one way or the other.  I would consider a strong close above that downtrend line, which currently runs through 1.1350, a signal to back off the short side (or you could say putting in a higher high above 1.15).   That's why it would be a gift to see it rally following this week's Fed.  The closer you can get to the point of failure the smaller the risk OR the bigger the size.  The point is this trade is gearing up and the potential is just as big as when it was breaking down through 1.20.

Think about the reasons going forward for why this dollar trade has the potential to be special.

1.  Economic data tends to lag for quite awhile (although it's already pretty weak), so the Fed may have more room to do stupid things than we think.  Maybe they can pull off a couple hikes before they cause the next recession.  (Or should I say reveal the depression we're in.)

2.   Think about all the international corporations who should be realizing right now that they need to buy dollars to hedge their currency risks.

3.  What about all the dollar denominated debt borrowed overseas that needs to buy dollars to hedge.

4.  Momentum.

5.  If there's a crisis earlier than anticipated, safe haven flows will go toward what is working.

6.  The Eurozone is a mess now.  The US is a mess later.  The only caveat here is it should be noted during the Greece turmoil that the Euro gap-downs were aggressively bought up when it looked like Greece might exit, so when that eventually happens, we could see the Euro strengthen, but that's down the road.  What the Eurozone should do is have a northern Euro and a southern Euro with fiscal unions but that's not politically viable and won't happen unless there's a crisis.  If I was any of the PIIGS, I'd be printing roomfuls of my old currency.

Gold monthly.  The support level could be the top of the March 08' wick at $1033, or the closes at $980.  You would think since I made this call last year largely based on the fact that the creative force of the universe showed me silver going to $9 that I just made enough money to buy Greece myself, but you would be wrong because what you're not factoring in is that I'm an idiot.  Unfortunately, I got it in my head that the dollar was going to have one more leg down in its pullback so I kept looking for just a little higher in gold to get short, and by the time the dollar firmed up, I took an ill-timed break from trading and here I stand with nothing, I get nothing, I lose.  Now I have to wait for a rally.  

Gold daily.  Note the high volume hammer on Friday.  It might be wishful thinking, but if the dollar sells off from a "no hike" Fed, it's possible we see gold fight back a bit.  It usually finds a way to backtest breakdown areas.  Gold rallies are shorting opportunities until the Fed stops talking about raising rates and starts talking about QE4.  That should take awhile.

It should also be noted that the Spec position in gold is net short for the first time ever, so it's possible they get squeezed out before we resume the downtrend.  Usually what happens now is they'll use the moving averages to hold the pressure downward, but the rare positioning and a temporary dollar selloff could lead to a higher fight back rally than usual.  We'll have to see the reaction to the Fed.  Personally, I'd rather just trade the dollar bigger, but we'll see what's what later this week. 

Silver daily.  In hindsight I wish I had the conviction to have shorted every pop higher, knowing this would keep grinding lower, but it's not easy to stay short when the market goes sideways for so long and they run the trailing stops the way they do.  Check out the most recent rally high.  It poked above the previous rally high to clear out any stops before heading lower.  I'm not a billion dollar hedge fund.  I have to protect open profits.  This was hard to stay short.  I don't entirely blame myself.  I did lose focus a bit, though.  

The first wave of the oil breakdown was a solid trade, but my ill-timed break from trading caused me to get flat and now I find myself on the outside looking in.  It's possible if the dollar sells off from the Fed that we could get a bounce in oil too.  Ultimately, this is likely going to new lows and if the Fed hikes in Sept who knows how low it can go.  When oil trended down hard last year it used the 10-day and 20-day EMAs (the blue and green lines).  So that's something to watch.  Also, the downtrend line is off the highs from last year.  When that breaks eventually, it will likely lead to a big short-covering rally, but that shouldn't happen for awhile.  

As for equities, the big money medium-term players are still short-term trading.  When the market trends it's because the active big money is holding their positions.  When they don't have the confidence to do that they become short-term players and we get a range.  It's a market maker's kind of market.  Sell the highs, buy the lows, sell premium. 

If we keep going sideways we will run into the monthly uptrend line in Sept or Oct.  Since that's where markets go to die, and the Fed is still sounding like they're gonna raise rates, it's kinda important that the bulls take the reins and break this sucker out.  The 61.8% Fib retracement from the recent low to the recent high was hit practically to the penny at Friday's low at ES 2070.  So if we go through Friday's low with force you have to be thinking bottom of the range.  But we have the Fed's likely "no hike" on Wed, which is usually bullish, so Friday's low could be it.  The Dow and Russell charts have a head-and-shoulders kinda look to them.  The S&P is running out of room in its long-term channel.  And the Nasdaq Comp is still struggling with the dotcom high.  The upward momentum is waning.  

The end of July is at the end of this trading week, so it's kinda sneaky important.  Meaning, if we close this week down, the Nasdaq Comp will put in an ugly monthly candlestick, the Dow and Russell will lose important "neckline" support and the S&P will close down at the bottom of the range, moving even closer to losing that monthly uptrend line.  However, if the bulls pull another miracle out of their hat and we close back near the highs, it will greatly shift the momentum.  I just don't see why, after all these months of sideways range-bound action, the confidence will come back to hold a breakout.  But it wouldn't be the first time I'm surprised by market action.  We'll see who's got the mojo to make a move this week.  If I trade anything long it will be the NQ.  

Nasdaq Comp monthly.  If the Comp does manage to stabilize above the dotcom highs, it ain't ovah. I would love to see a deeper pullback, but the market not only doesn't stop for me to take a break, it also doesn't ask where I want it to go.  

ES weekly.  We're running out of room in this multi-year channel.  A breakdown on volume would likely be the end for awhile.  That's why it's important for the bulls to make a move this week.  There's times when I have strong directional confidence.  This isn't one of them.  

ES daily.  Clear range.  Note how it's going to run out of room.  Comes soon, the breakdown or breakout, says yoda.  

YM daily.  While not perfect, it does have a head-and-shoulders look to it. 

Russell daily sitting on important support. 

Bonds daily.  It's not all that surprising that bonds have firmed up and found a base along with the dollar.  I do wonder if the selloff in bonds was completely due to the dollar (inflation and carry trade related), or whether there is some degree of rate hike fear even in the long end, which, if so, doesn't make sense to me.  Slowing down a pathetically limp, structurally broken economy by hiking rates should not hurt the long end.  But I also don't own a boatload of bonds, so it doesn't hurt me to believe that.  Personally, I think the bond selloff had much more to do with dollar weakness than rate hike fears.  I guess we will find out shortly if the Fed hikes in Sept.  If bonds selloff, they either know something I don't, or they will be getting it wrong for awhile because the bond bull market isn't going to end in a depression, and that's where we're headed because that's how free markets shake off and heal from the imbalance of excessive debt.  When humanity does foolish things, the laws of nature are there to correct them.