Sunday, October 25, 2015

Market Analysis for Week of 10/26/15

I've been busy wrapping up a few things I've been working on and haven't had much more to say.  I considered the top of the flag in the ES at 1992 to be a shorts-are-in-trouble inflection point and the 2034 bottom of the 8-month range to be a short-are-toast line in the sand.  I'm not all that surprised at the rally but if I had conviction this was going to happen I would have bought and held the Oct NFP reversal.  Clearly, that was the game changer that scared the shorts and empowered the bulls, but all I've done is traded a few short-term moves.  

Let's be clear about the narrative, though.  I read an article saying how the China stock market was the reason for our big breakdown in August, but I would give that reason a 0% weighting of why we broke down and a 100% weighting to the fear of interest rates rising.  The China stock market was booming for months while we were in a range and it was busting for months while we were in a range.  It was all about the Fed. 

If you asked 100 traders if they thought a 25bps interest rate increase would have any economic effect, I bet 100 of them would say no.  So the fear is not the actual rate rise, it's a fear of whether enough other people would be afraid of the rate rise.  And that uncertainty prevents confidence when breaking a market out and that lack of confidence is a vulnerability that allows shorts to cap rallies and over time enough of the positioning changes sides and gains confidence and a trendline emerges as we enter the time frame it's possible for the rate rise that the Fed has pounded the table about all year and boom, massive selloff.  0% about China, 100% about the Fed.  

It's a central bank driven rally.  Easing made it go up, tightening will make it go down.  And I don't necessarily mean right away.  For example, right now would be the perfect time for the Fed to raise rates.  The shorts just got rolled and the perma longs just got an opportunity to build a cost basis way off the highs.  A selloff now is not likely to sustain downside action.   It would take time to reset the positioning, imo.  So if the real reason the Fed chickened out was because they're afraid to pop their bubble, which they should be since their whole plan is based on a "wealth effect" then there will not be a better time than after the obliteration of shorts.  Do I think they will do it?  No.  

I've been tracking this dollar consolidation for seven months now, taking short term trades but essentially waiting for the central bank fuel, and the ECB delivered on Thurs, but it's terrible timing with the Fed on Wed, GDP on Thurs, and NFP  next Fri, so there could not be a more turbulent set of events lined up right now.  

Personally, I bought the dollar on Thursday post ECB but I will be selling half before the Fed.  This could either play out perfectly, or be a nightmare.  Technically, we closed the week at the trendline.  A high percentage of significant breakout trades will return to backtest the breakout area, so if we breakout and see a price extension on Mon and Tues into the $98 or $99 level it will be an easy decision to take off half, or more, before the Fed and look for the dollar to get crushed on Fed day and possibly GDP day as well to backtest the trendline break.  If that happens, I'm thinking it gets bought up and closes the week strong and off we go, assuming GDP isn't zero.  

The nightmare scenario is if we sink back down away from the trendline heading into the Fed.  I will likely close the whole position and start over.  No one thinks the Fed is going to raise rates on Wed, so it's really just a matter of whether the big buyers step in post Fed or post GDP and whether it's supporting a trendline backtest or making a breakout from within.  As long as GDP isn't way below expectations, I think a Fed on hold and an ECB projecting dovishness for December will lead the pair toward parity.  But I also think you have to be really careful with the unfortunate timing of news events coming up.  

Dollar monthly.  The end of Oct is Saturday, so if the dollar breaks out and closes strong, picture what the breakout bar and the chart will look like. 

Dollar weekly right at the trendline. 

EUR/USD weekly just below its trendline. 

ES weekly backtested its trendline breakdown.  I'm sure more shorts got washed out, but the COT report as of last Tuesday still showed a huge net Spec short position.  Even if a lot of it is a hedge for a long equity portfolio, it still exists, and no one wants to lose on their hedge forever.  I would think a selloff would give them an opportunity to buy em back.  Again with the crazy news events coming up, but I'll wait at 2037-ish but with Apple earnings on Tuesday it might go higher first.   

Check out Apple on the weekly.  It basically formed a big head-and-shoulders pattern and is backtesting the neckline breakdown at $120.  At this point I would think any earnings that aren't zero will be an opportunity for the longs to put a nail in the coffin of the shorts.  A head-and-shoulders is a pretty powerful pattern, but it's just as powerful in the other direction when it fails.   

Regardless of the actual earnings number, if they break this market up huge on Tuesday, I would think the overall NQ and ES longs would have to unload into that.  It's straight up.  

Oil and gold broke out, ran a bit, and then reversed.  I kinda suspected that.  Unfortunately, I traded the long part and never flipped back around.  The reversal day in oil couldn't have been more obvious.  I dropped the ball on that one. 

Oil daily came all the way back.  I can't imagine this sustaining upside with fundamentals the way they are and a potential dollar breakout.  But I can't short it here.  It needs to breakdown through the trendlines and then backtest and reverse for me to be interested. 

Gold will obviously be affected by the big news events.  This is why I tend to trade in halves when I'm not confident in the move sustaining itself, or it's counter trend.  I did well on the first half and gave too much back on the second half.  There's really nothing I'm interested in here.  I suspect gold will form a big triangle over the next month or so.   The COT positioning for gold and silver is almost as net Spec long as it was when gold was near $1300 only now it's $130 lower.  This is what I mean by the long side getting full on these bear market rallies.  It will likely take QE for this market to sustain upside action.  QE seems unlikely unless the stock market rolls over hard and they have to save it, so I'm expecting the metals to eventually breakdown again, unless, of course, the dollar reverses but with the ECB more dovish than the Fed, that doesn't currently seem likely.  

Bonds tagged the downtrend line off the highs and pulled back then stopped at the 50-day EMA.  I'm avoiding this space for awhile.  If you must trade bonds I'd use that downtrend line off the highs as an inflection point.  A breakout to the upside is a sign to backoff the short side.  If you wake-up everyday and must short bonds, you could look to a loss of the 50-day, which is Friday's low or the next test of the downtrend line, but I'd wait until after the fireworks of these big news events.  It should be noted that bonds have been making lower highs, so until that downtrend line gets taken out, shorts have hope.   I'm not personally interested in shorting bonds.  I rather long stocks.  Close enough. 


Sunday, October 4, 2015

Market Analysis for Week of 10/5/15

There are 3 things I wish for this world: the end of poverty; world peace; and a VIX permanently in the 20s.  Probably in that order.

I love more active trading because I prefer to take half off as we go and reload, and the higher VIX makes for lots of bounces.  If I try to hold the same position from the beginning to the target, I end up making stupid decisions, so it's really just a way to protect me from myself.  Otherwise I end up bailing out when I should be reloading.

ES daily.  The SPX double bottom was an easy decision to bail entirely on the short side.  I even considered going long but didn't, except for a quick trade on Friday.  While the "bad news is good news because the Fed can't raise rates" idea is enough to scare the shorts, I don't see the long side having the conviction to change the overall sentiment, which is "uh-oh QE doesn't work - the doomers are right."  Meaning, the entire bull market since the 09' bottom was fueled by massive injections of liquidity and driven by the idea that the central banks have a clue of what they're doing.  But they don't.  And more people are starting to figure that out.   If you want to make the argument that the market will rally in anticipation of more easing, at least that makes sense.  But I think it's too early.

Those are massive reversal sticks on the weekly charts, but you have to factor in the context that it was mostly a short squeeze and not natural buying.  Which means it will likely fizzle out.  The big buyers never chase so usually what happens after a short squeeze is the market comes back a little the next day (even if Sunday night goes higher).  I'm thinking around 1930-ish on the ES.  Besides short-term trades, I will likely be waiting to see if the buyers can take it up to test the 50-day around 1978 in the ES, 1985 in SPX.  That's where I'd like to take a shot at the short side for a longer play (if we make it that high).  Hopefully, they give me an easy spot to get back in.  At the moment we're in the middle, and I don't play middles, so it either has to come up to me, or I need to see the sellers step back in and push it right back down where I'd be looking to play the breakdown of the trend line off the August lows, or find another way in.

A break above the top of that flag at 1992 would make me stop shorting and question my view of the sellers in control, but technically a bounce could go all the way to the downtrend line off the highs and still be bearish.

SPX monthly.  Ultimately, I think we're headed for this monthly uptrend line in the mid-to-upper 1700s. but it's a matter of how hard the bulls are going to fight.

 Bonds daily hit the 160 trend line target and then some, but pulled back.  I'm likely not interested anymore.  I do think if equities resume the selling, hopefully after a continued bounce, that there could be a breakout trade above this trend line in bonds.  But I'm probably just going to focus on the ES or NQ instead.  It's kinda the same trade.

Gold daily reacted how you would think to the idea that the Fed is screwed and will eventually be forced back into easing.  It stopped just shy of $1140, which is a very well-defined trend line that turned into a fake-out last week.  I think this is a playable breakout and if it holds, I'm looking for gold to make it to the lower $1200s, possibly all the way to the next trend line at $1230-ish, although I'd be taking some off around $1180 because that's how I trade.  I'm not a believer that the metals have bottomed, but a close above $1230 would go a long way to convince me, so until then I'm thinking of this as a counter trend bounce play, if it breaks out.

Oil daily is still going sideways and approaching the big weekly downtrend line off the highs from last year.  A breakthrough that holds should run quite a bit.  I'd expect a fight though.  Check out the smaller inner triangle fake-out on Thursday.  You always have to be aware of those fake-outs.  Like gold, this will be very influenced by the dollar.  Clearly, the ideal scenario is for the dollar to breakout or breakdown at the same time oil and gold break significant areas but chances are it won't happen together so you just have to be aware that things could reverse or amplify later this month when the ECB and Fed meet next.

Nothing to see with the dollar daily.  It did recapture the 50-day on the last 3 pokes to the downside.  And you have to wonder why it recovered so much on Friday.  That is a sign of strength that shouldn't have happened.  I'm expecting the dollar and the Euro to stay in these ranges until the central bank meetings, but I'm watching closely.  If they break these patterns on fundamental news it should lead to a trending move for many months.  

     EUR/USD weekly.