Saturday, March 31, 2018

Market Thoughts - Week of 3/31

This will be my last comprehensive commentary for a bit.  My monetary system post will go up in the morning after I add one more thing.

The most important chart in the world is the EUR/USD.  Technically, the Euro is in a structural downtrend, but it's right at the backtest/breakout point.   You can make the case that the strengthening of the last year was pricing in the end of their QE and once it's officially announced, it reverses and continues its downtrend.  You can also make the case that the US dollar is the bigger basket case going forward due to blowing up the deficit with tax cuts, infrastructure, entitlements, potential trade wars causing recession...

But there are compelling reasons on both sides of the argument.  A dollar bullish view focuses on repatriation causing global dollar shortages (as reflected in the LIBOR-OIS spread), which is a potential powder keg being lit by tightening central banks and a cautious China.  

My personal belief is that US inflation is going to be largely shaped by what happens with the dollar.  Sure, there are some wage increases, but the US seems to be in a structural disinflationary situation due to the burden of debt, the lack of job security for the masses, particularly going forward due to robotics, and a demographic spending slowdown, not to mention we export a massive amount of dollars in the trade deficit.  If we didn't export our high-paying union manufacturing jobs, we'd probably be having the inflation of the 70s that those inclined to think it will repeat are fearing.  

I'm not a believer in looking at productivity data and concluding our jobs were not exported but taken by automation.  In 1992 Ross Perot stood before the world and pointed at Bill Clinton and said if you elect this man he's going to sign NAFTA, so me and all my manufacturing friends are moving our plants to Mexico.  He didn't say he was going to replace everyone's job with automation.  To look at another way, what if automation didn't exist?  Where would the manufacturing plants be?  China and Mexico, due to the trade agreements.  We exported our manufacturing base.

I agree that automation over the years helped to increase the productivity of the work that was left in the wake, and it's certainly the main problem now, but the original problem was NAFTA and the WTO allowing corporations to exploit the differences in standards of living, which created an unsustainable structural problem in the world economy that fueled the global Eurodollar credit boom and allowed us to export our inflation.  If these tariffs are agreeable enough to not cause trade wars and a global recession (not likely), and Trump does reduce our trade deficit, that is an argument for inflation that I can wrap my mind around because more dollars would be staying onshore and the cost to produce those goods would increase.  I can also wrap my mind around the long end of bonds selling off due to oversupply.  I can wrap my mind around inflation caused by a weak dollar.  But I don't buy the idea that we're on the verge of inflation caused by economic growth.  

Anyway, I like trying to understand the complex dynamics so I anticipate where I think the market is going, but ultimately the price action will speak for itself.  Here's the monthly Euro chart. Note the two reversal candles at the precious downtrend highs.  The easiest trade setup would be something like that happening again.       



Sometimes I like to invert the chart to look at it from the other way.  Here's the Euro monthly inverted.  Note how many times the horizontal line was the opening or closing of a monthly candle.  You can look at this like an ascending triangle breakout that is backtesting, and of course going a little further to suck people in and shake people out.  


Here's a zoomed in look at the inverted weekly Euro.  One scenario - if the Euro is topping and resuming its downtrend - is to wait for it to form a head and shoulders pattern by moving to the 1.16 area and then pulling back to form the right shoulder.  Remember this is inverted.  


That would be waiting for the dollar to get back above its breakdown level to tag the $95 area and pullback to form the right shoulder.  Of course, this is the conservative way to do it, waiting for it to show its hand and avoid the possible one last shake-out new low reversal that could happen.  Or the "you got it wrong it's a breakout in the Euro" scenario.  

Clearly, the best risk/reward is entering now, but I suspect once this announces what it's doing, it will last for quite awhile.  I'm thinking if the Euro does rollover and resume its downtrend, it could go all the way to the .70s against the dollar.  Conversely, if I'm wrong and it breaks out in the coming months, it very well could go all the way to the old highs.  That's why this is such a big deal.  I favor the global dollar shortage/Eurozone mess in the future more at this time.  But I will submit to the chart.  


If I controlled the universe, I'd rather trade gold from the long side, so I would prefer a Euro breakout, but I have trouble accepting that outcome on a fundamental basis.  The gold trade is quite clear.  If the Euro breaks out and gold breaks out above the $1378 level and both hold, then gold will likely move to the $1525/$1600 area fairly quickly.  If there is a breakout reversal and it happens on ECB or Fed news, I would not ignore that.  In fact, that scenario would create a nice risk/reward to short gold and the Euro.  Currently, there is no setup from a risk/reward technical perspective until there's a breakout, or a breakout/reversal.  I suppose a breakdown from this clear head-and-shoulders bottom is also a trade, but that's sketchy.   Horizontal breakouts are more reliable. 


Bonds daily.  This is backtesting the neckline of a head-and-shoulders breakdown.  From a risk/reward standpoint, what I'm looking for is a clear reversal off the 147/148 area.  If there's no reversal candle there is no trade.  The long end could totally return above the neckline, making the high yield in for the year, but that bullish thesis would likely require a flight to quality during a stock market selloff, or I think a strengthening dollar would keep inflation down and possibly be bullish for bonds.

 In my view, raising interest rates is bullish for the long end, particularly against the short end.  I don't see why the yield curve won't continue to flatten, except if the stock market breaks down.  Then it makes sense to think the short end would rally more due to the Fed being forced to slow down.   The bottom line is the Fed will tighten until a plunging stock market stops them, so the default expectation should be a continual flattening until they break something.  The long end of bonds certainly has supply concerns over the next few years, which is why everything is very complex right now, but this is how technicals help.   

So if bonds recapture the neckline in the mid 147s/148 without reversing, you have to take notice.  I don't think you can be short the long end if it breaks through that downtrend line, which would likely only happen in a stock market selloff.  I will consider shorting bonds if they reverse off the neckline and establish a clear risk/reward, or if they breakdown to a new low (high yield) without reversing.  It makes sense to me that a stock market breakdown would cause a steepening, but I won't be trading that because historically the Fed tightens until the curve inverts, so I'm not going to fight history on this.     


The stock market is a hot mess right now. Take note of the volume.  The trouble right now is we're heading into earning season, which is typically hard to be short.  I don't think there's a good risk/reward in this unless it fights back to the downtrend line around 2720s, or if it breaks down below the 200-day, which everyone is watching like a hawk. 


Here's the ES daily.  NFP is Friday.  Maybe it will provide a reversal candle to short off the downtrend line, or a breakdown through the 200-day.  Whenever this gets outside a technical area you have to be on high alert for a reversal due to its nasty status.  Once you know how it works, it's way easier to avoid damage and play with them instead of being the stooge getting shaken out.       


The oil market has me the most confused. If I look at this chart, it looks very bullish.  A double-top interpretation needs to close back down near the recent lows.  If I was long, I would have taken profits at the test of the highs and waited to see what happens.  You can always get back in.  

I like to say there's only two technical trades: breakouts and reversals.  There's a modified third trade, which is a second breakout.  What I mean is a breakout reversal that closes back in the range because it ran into too much supply, but then it holds near the top of the range and chews through it and breaks out a second time.  That's a worthy risk/reward also.    


This helps me clarify my thoughts, but it takes too long, so I'm probably done for a bit.  Maybe I can just post one chart when it's relevant from now on.  Check out my monetary system post in the morning.  I think you'll enjoy it. 

Here's a few other people I pay attention to:
I watch the Jeffrey Gundlach webcasts every quarter at Doubleline
The crew at Mauldineconomics
Peter Schiff - I don't know why so many people give him a hard time.  He's got a thesis and he sticks to it.  Due to the binary nature of the Euro/Dollar setup, he's either going to be very right or very wrong for quite awhile, starting sometime this quarter, I suspect.  Maybe the June meetings.  Unless it's a data point first, not sure. 
David Stockman and Zerohedge understand that debt growing faster than income will always end badly.  It seems a lot of bulls like to look for sources to confirm their bias, whereas I like to seek out the potential risks.  I read a wide variety of perspectives and decide for myself.  Since I tend to have skeptical/sound money/bearish tendencies, my challenge is seeking out bullish views, which is not that hard to do. 




Sunday, March 25, 2018

Update and Charts - Week of 3/25/18

     It’s been two and a half years since my last post. I’ve had the most creative explosion of writing in my life, but I hit a wall again in terms of getting anything produced, so I’m moving in another direction for awhile.  I’m considering buying a small business for the cash flow, which is only 1.5 times the asking price, so if that happens, I won’t be posting much, but I did finish the article I started about how to solve the problems of our broken monetary system and I want to share it.  I’ll tweak it this week and post it next weekend.  I must warn the gold bugs, Bitcoin fanatics, and Libertarians, who I consider my tribe, btw, you’re not going to be happy because it involves none of that.  I’ve evolved back to the center politically, and in my opinion, Bitcoin and gold are not the answer.  You will understand when you read it.  I’ll even provide the criticism of my own idea, so no worries.  I come in peace.  Don’t shoot the messenger.

     In the meantime, I can't resist a moment of market commentary.  During my writing break, I’ve only lightly paid attention to the markets, but I haven’t been involved all that much because I can’t seem to be creative and have risk on at the same time.  I like figuring out the ever changing puzzle of the markets, but I don’t really like the emotions of big position short-term trading anymore.  I’m thinking about trying to automate a few of the strategies I use, or become more of an investor with longer time frames and smaller size.  Peace of mind is valuable.

     One quick thing about Bitcoin.  You shouldn’t believe this because I didn’t post it, but I called the top to my dad nearly to the day.  I only bring this up because the reasons why still exist and you should consider them.  However, you should also consider that I came to the conclusion that Bitcoin wasn’t going to work when I found it at a dollar.  It’s the single biggest mistake of my trading career, and I might have adjusted if I wasn’t so deep into writing the last few years, but the point is I’ve been wrong about Bitcoin since its inception.  Keep that in mind.  Also, I’m not a conspiracy bug, but I do recognize the reality that there are powerful forces who don’t want things to change, so it’s kinda naive to think they don’t at least try to influence things.

     I told my father the worst thing that could happen to Bitcoin is a futures market.  I believe the rapid rise in November into the opening of the futures in December was the market makers acquiring inventory at any price.  This serves several purposes.  1.  It allows them to take on the short side of futures with little to no risk.  2.  It extends a parabolic move exponentially, which makes it easy to shake out anyone buying at those levels, which amazingly people do.  I know three totally separate people who have no interest in financial markets who asked me about Bitcoin the week before the futures opened.  I refused to give them advice, but I pointed out that I don’t own them for a reason, and yet I’ve been wrong for 8 years.  In the end, I believe I’ll be right, but what difference does it make if I missed out on the greatest wealth generator of my lifetime?  Two of them bought the highs.  Maybe it works out for them, but it shows you the psychological pressure FOMO puts on people.  Same thing happened in the stock market in January.  Same thing happens in short-term trading all the time.  It takes enormous discipline to not get involved.  You have to make that mistake over and over until the market teaches you otherwise - the hard way.  Then it goes on a run that never lets you in because you learned not to chase.  It's a stupid game. 

     Anyway, so the market makers buy up all kinds of Bitcoin inventory and then take the short side of the futures trade for the chasers, assess the strength of the market and realize it's weak, then sell their digital Bitcoins near the highs of the blowoff top they just created, force the market down, buy the Bitcoins back at the lows, shake out the futures shorts, push the market back up both in futures and the Bitcoins, then cap it and repeat.  Do you know how easy it would be to control this market?   Even if there’s no nefarious conspiracy, whoever the market makers are saw an opportunity to profit and they are crushing it, I’m sure.  Does this mean every rally will be capped and it’s the end for Bitcoin?  I have no idea.  Again, I remind you that I passed on it when it was a dollar.  I'm an idiot.  Truly.

     I don’t want to cause anyone FUD, which is ridiculous, btw.  Fear, uncertainty, and doubt is the entire game of risk.  If you don’t have FUD, you’re not paying attention to the risk - both the initial risk and the unrealized gains.  The hardest part isn't the losses, it's what to do with open profits.  The game of trading and investing is developing a strategy to deal with and overcome the FUD both in your head and from the people who believe the opposite of you.  The only way I’ve found to deal with FUD is taking ¼ or ½ off and letting the rest run until the market structure of price action dictates you’re wrong according to some kind of objective rules that override your emotional bias.  Sometimes you get shaken out of winning hands, but the consequence of not taking any profits is watching your entire unrealized gains go to zero when you're wrong.  This is why the game of trading and investing is one of dealing with perpetual disappointment.  You will either exit too soon, or too late.  It’s just the way it is.   There are certainly rare times when the market makers are wrong and get forced to cover - for example, what if central banks decide to use Bitcoin as a settlement network?  The market makers go scrambling and Bitcoin doubles overnight.  My personal belief is that science has yet to develop technology capable of measuring how small the chance of that happening is.  But what do I know?  I passed when it was a dollar.

     Here's a few charts.  I’m not posting for the first time in over two years because I suddenly have great certainty about what comes next.  It's just the timing of the end of my writing phase.  However, there happens to be critical moments coming up in all of these markets, which I will point out below.

     The dollar is coming into a dual support zone.  Since this has gone straight down for over a year, you have to be careful of a reversal bottom, which is the theme of this post: beware of reversals.  If there's a hammer on the daily or weekly charts, you have to respect it, even if it makes no sense.  Sometimes those reversal candles make great risk/reward setups if they happen right.  Other times it's best to wait for a higher low to get put in, or the downtrend line to break.  There's really only two kinds of trades: breakouts; and reversals.  I find it's best when these things happen around a surprising news event like a jobs report or a change in Fed or ECB policy.  Maybe it's an inflation print.  Either way, all these markets are at potential inflection points.   

Dollar monthly.

Dollar weekly.


Dollar daily.


Euro monthly is consolidating at the edge of a significant breakout.  It certainly looks like it wants to breakout, but I'm suspicious.  I think breakouts need to prove themselves right now.


Euro weekly.


Euro daily.



Gold weekly.  Obviously, this is dependent on the dollar.  In full disclosure, I'm long gold right now, but I'm looking for a reason to sell into a breakout.  If there's no reversal I'll stick with it.  But I don't mess around with breakout reversals in patterns as significant as these.  These markets need to prove themselves.  It feels early, but I am open.


Bonds weekly.  Check out this trendline.  I know fundamental guys want to think technicals don't work, but come on.  It looks like it wants to backtest the head and shoulders breakdown, but then watch out.  I'm not making any predictions, but later this year and through the next few years a massive supply of bonds is available and we haven't ever seen the infrastructure bill yet.  In my opinion, the long end has nothing to do with interest rates rising, or the anemic inflation that is dependent on a falling dollar and not organic growth.  Bonds are weak due to over supply and the fact that the Fed is a seller and not a buyer. 


Oil monthly looks like it wants to rally to the downtrend line and horizontal resistance, but you have to respect a new daily high that reverses.  There's RSI divergence on the weekly and daily charts, which is often a red flag, but the monthly chart still has room, so it's hard to say.  What the dollar does could make the difference. 


Oil weekly.  RSI divergence.


Oil Daily.  RSI divergence.  It's just a light warning of potential trouble.  There needs to be a breakout and a reversal for it to mean anything.


ES monthly.  The bull market is still alive and well until this uptrend line gets taken out on a weekly or monthly basis and there's a long way to go to even test it.  We could technically enter bear market territory without losing the uptrend line.  That's how parabolic this got.  I can't imagine a scenario where there isn't another strong rally from either the 2016 highs or this monthly uptrend line dating back to the 2009 low.  Note the extreme RSI reading on this monthly chart.  If we make it back up to the highs any time this year it's going to put in a massive divergence that should be duly noted.  It's not like RSI divergences work all the time, but when they do and you ignore it, it's usually a horrific experience.


ES weekly.  You always have to keep in mind that the stock market is the biggest piece of shit market on the planet.  More than any other market it will do the nastiest possible thing at all times.  I would keep a very close eye on a break of the Jan lows.  If there's a V shaped hammer reversal on the daily or weekly chart, there's no choice but to trade it as a bottom.  It might not happen or hold for long if it does, but that's how this idiot market acts.  I'm leaning toward an eventual test of the 2250/2300 area, which would be the best buying opportunity of the next year, but we might need to make it difficult by putting in a short term reversal to rally back to resistance first.  We'll see. 


Bitcoin daily.  The futures market opened and the market topped.  You would think there would be sucker rallies that take out a previous pivot high because that's how this works, but the bottom line in Bitcoin is the real money was made by people who believe it has a future and held through all the drawdowns, but unfortunately, if you're a believer and it doesn't work out, you're going to hold on through the final drawdown all the way to the starting point.  It's really about position size, taking some profits as protection against the unknown, and thinking of it as a nice diversification in a portfolio if you got in early, as opposed to someone who is way too big trying to get rich in something completely unknowable.  If you think I'm buying at $8k you out cho mind.  I think it's worth zero dollars.  Good luck, though.  I hope it works out for you.  I've accepted my idiocy a long time ago.



Look for my article next week.  Most likely, I won't be posting again anytime soon.  Best of luck to you.

I assume everyone who used to read this blog already knows these people, but just in case:

Hashgraph - as far as I can tell this technology is way better than blockchain.  In my article next week, you'll see why I don't think distributed public ledgers have any place as a currency, but this has a lot of use cases running in the background as a trust layer on the internet. 
Hashgraph

Hidden Forces Podcast - I heard of Hashgraph from Demetri Kofinas, who used to produce Capital Account on RT.  This is his podcast.  Lots of interesting topics.
Hidden Forces

I assume everyone knows Mike Maloney and his Hidden Secrets of Money videos:
Mike Maloney

And Rao and Grant at Real Vision:
Real Vision

And the Peak Prosperity podcast with Chris Martenson:
Peak Prosperity

And the Macro Voices podcast with Erik Townsend.
Macro Voices

And Kevin Muir, the Macro Tourist:
Macro Tourist