Market Analysis for Week of 1/26/2015

So Draghi finally does QE.  At least he didn't disappoint for once.  It's not going to work, but that's irrelevant at this point.  I don't understand all the confusion about inflation and deflation.  A deflation of prices due to increases in efficiency is unambiguously good.  A deflation of prices due to structural employment decline or the deflating of a falsely inflated asset bubble (which is what we have) is unambiguously bad.  Deflation is always bad for producers like miners and farmers, it's always bad for people in debt, and it's always good for consumers who buy stuff.  There is no casual link between inflation and economic growth.  They only happen simultaneously in a system that doesn't restrain debt issuance to the projected growth.  Then you get too much money in circulation at once.  When you combine that with optimism about the future it increases the velocity of money as people spend, but that doesn't mean inflation is desirable, nor does it mean that inflation leads to growth, especially when you're dealing with structural employment and demographic issues.  Why does a boob like me know this and not the big brains running the joint?  I guess it really boils down to the people who understand sound money and free markets (and how central banks and governments distort them), understand what is happening, and the people who don't, don't, especially the people doing the distorting.  Strange world we live in.

Dollar monthly.  Couldn't be happier with this.  I've moved in and out of it unnecessarily a few times to avoid the binary events, but still tracking $99.  A strong dollar can not work in the debt saturated world the central banks have created, so the Fed will be forced to stop this.  I agree with the folks who think the Fed will raise rates in August.  Except I think the year will be 2027.

EURUSD monthly.  The next spot for possible support is 1.0750.  It seems like this wants parity and eventually the all-time lows.  I'm doubtful we don't get a sizable bounce at some point that I'd like to avoid.  I'm hoping to see it through to the 1.0750 mark and see where we stand.

Gold daily.  Gold is kinda remarkable.  While I got the inflection point in the $1220s right, I was mistaken in the urgency of the Commercials to lock in prices.  They obviously have more confidence in the Specs to push prices up than I thought they would.  Technically, both gold and silver have head-and-shoulder bottoms.  Gold tends to be backtesty, so actually the most ideal price action for the bulls would be weakness down to the $1225/$1235 area and a V-shaped bottom.  But that doesn't necessarily have to happen.  It could make it to the next resistance point at the downtrend line from last years highs that runs through $1330.  I suspect a pullback from there if it happens first, which may in fact turn into a backtest.

USDJPY daily.  This tends to be a continuation pattern.  Equity bulls will want to see this break to the upside.

ES daily.  This is a little sloppy, but it broke the downtrend line.  If it holds the 20/50-day for support, it should continue higher.  Barring a breakdown in the USD/JPY, I'd expect new highs in the coming weeks. The top of that channel hasn't been broken in three years, so you have to be careful there.

I've been playing the NQ.  It's still in the daily downtrend, so it was an easy spot to take profits at the top of the channel.  I'm looking to reload this week, even if it's at higher prices.  I just want to get past the Greek election thing.  Apple earnings are Tuesday.  I'm thinking strong earnings will break this downtrend and we're off to the races.  We'll see.

NQ 4hr chart.  I used this uptrend line a couple times for entries.  If it comes down there again, I'll give it another go.  If this uptrend line breaks for some reason, I'll step back and see if it wants to go lower still.  I bet Apple resolves this issue.

Nasdaq composite monthly.  If we breakout this week, I'm still thinking we're headed for dotcom bubble highs, fueled by central banks of course.  You have to separate the corporations, who are doing fine as they expand due to globalization, and governments who have unfixable balance sheet issues as the jobs in their countries are stripped away, leaving them with exploding debt and dwindling workers to pay it.  

 Bonds resolved the giant triangle to the upside.  Equities would sure like to see bonds pullback a bit.  While short-term pullbacks could happen, I think they are buying opportunties.  Looks like we're headed to the highs.  I can't really reconcile being bullish on equities and bonds, but that's bubblenomics for you.  I think stocks are staying bid due to central banks and bonds are staying bid due to reality.

Oil daily.  The bounce at the monthly trendline was not even worthy of calling it a bounce.  It's been holding the 10-day EMA, which is what the strongest of trends do.  The monthly uptrendline around $47 isn't completely dead until Jan closes, though.  Here's a possibility to consider.  What if we get a final washout on Fed day this Wed that leads to a sharp reversal to get that close on the $47 monthly uptrendline?  I'm not predicating that or anything, but if they want to respect the technicals, it could be a fast lucrative trade.

Oil monthly.  If Jan closes below $47, it's likely headed to the 2008 lows, which is another thing equities would like to see reverse.  While the central banks forcing stocks upward should continue there certainly are more cracks appearing in the illusion of their recovery.

I sure would like someone who thinks a real recovery is happening to explain why oil, copper, steel, iron ore, lumber, and all the rest of the commodities that actually create stuff in the real world are moving dramatically from the upper left to the lower right on the charts.  And why long-term bonds are staying bid.  And why the labor participation rate is at 38-year lows.  And why we keep going into greater and greater debt with nothing to show for it.

These three charts are pretty much the only thing you need to know to understand what's happening is not fixable by central banks.  Employment since 2000 and the demographic spending pattern of the baby boomers.

Ever since 2000 when globalization stripped the manufacturing base from the developed world and transferred the jobs to the emerging economies, the central banks and governments have been scrambling to fill the hole by creating false demand through a stock market bubble, a housing bubble, repressing interest rates, flooding the world with money, and deficit spending.   What should have happened in the late 90s as corporations sought higher profits through cheap labor is a lowering of developed world wages to keep the jobs onshore.  But governments impose a minimum wage on the free market and unions priced themselves out of work.  So the jobs went overseas and there's been nothing to replace them.  Globalization is deflationary.  When you compound the problem with the demographic spending pattern of the baby boomers on the decline and a world already awash with debt, there is no source of real sustainable demand, and certainly none capable of paying back the debt.  The central banks are trying to jumpstart a car with no engine in it.

Market Analysis for Week of 1/4/15

I hope everyone enjoyed their holiday.  Let's start with the dollar monthly.  While I still think we're headed for the 99 handle, there is an upcoming point of resistance at $92.60 that could lead to a profit taking pullback.  If you look at how the dollar trended up in the late 90's, it's rare to see 7 months straight up.  This also corresponds to an upcoming support level in the Euro.

Here's the dollar daily.  I'm not personally interested in stepping in front of this train to short it unless it creates the perfect scenario where it establishes a high and then retests it and gets rejected nearly to the penny.  Sometimes that happens intraday and if you happen to be sitting there watching it, you can literally have like two ticks of risk for a shot at the pullback.  That's the only way I'd do it.  The uptrendline, which was the bottom of the Fed day pullback, is a buy until it gets taken out.

Here's the Euro futures weekly.  It looks like it has its eyes on the 1.1880 horizontal support. Also take a look at the EUR/USD monthly.  The risk/reward for staying short diminishes as we approach those levels.  The next Draghi day isn't until the 22nd.   Ideally, it would be nice to see a dollar and Euro push into their levels for NFP, pullback for a few weeks, and then return to trend resumption on Draghi Day.  But he's a very disappointing man, so we'll see what he comes up with.

USD/JPY monthly.  Not sure if it can make it to the 124 handle if the dollar index respects the resistance line at $92.60, but this too could align altogether.  Just something to be aware of.  It would be nice to see a cup and handle form here.  Japan has no shot of avoiding inevitable default, so I can't see how their QE ever ends until the Yen is worthless.

The ES popped right back to the upper channel line from yet another VIX crush into Dec expiration.   I decided to trail a stop under the 20 period EMA on the 4-hour chart and got knocked out as a victim of The Law of Trailing Stops: when you take profits, you should have trailed a stop, and when you trail a stop, you should have taken profits.

I'd like to see how it acts this week before getting involved again for more than a day trade.  Every time the ES has taken out a swing low for the past couple years it has rather quickly made a new high.  Until we see a swing low get taken out and then fail to make a new high, I'm not interested in the short side.  I'd rather just wait for support.  The first spot to watch is the 2014/20 area of old highs and uptrendline from Oct lows.  Below that is the weekly trendline at 1990.  

NQ monthly.  There's room to pullback quite a ways and still be extremely bullish.  I don't see any reason for dire concern of a final top yet.  Is the oil meltdown problematic?  Yes it is.  But that could take months for real world effects to kick in.  There's all kinds of other reasons that could happen first, but until one of them does, it ain't ovah.  Yet.

 Nasdaq Composite monthly.  Dot-Com bubble highs.  Why not?

NQ daily.  It held the 50-day on Friday but not convincingly.  I'm waiting to see if we test the old highs again around 4100.  

Gold is doing its triangle thang.  I'm thinking it breaks down, but I am noting the extended dollar and the possible need for a pullback.  I will short the downtrend line but that spot is an inflection point.  If it closes to the upside, I will likely look to go long for a short-term trade.  I'm currently expecting that downtrend line to hold, but the market tells me what to do, not the other way around.  Note the two previous lower highs at $1255 and $1240.  Gold usually respects its trendlines, but it could maintain that structure by putting in another lower high in the $1220s and remain bearish, but it should close beneath the trendline if that happens.  I'm also looking at the 1200 area where the 50-day EMA is for a possible rejection short.

Same thing for silver.  Any move up to the downtrend line is a gift until proven otherwise.  This looks more like a bottom than gold, but it ain't acting like one.  If the metals break down it will get ugly fast.  $13.10 silver is my next target.  Like gold, if it happens to breakout of that downtrend line for whatever reason, I will look to go long.  I just don't think I'll have to do that.

Oil monthly.  I would be surprised if oil doesn't bounce at the monthly uptrendline around $47.70, possibly as high as $68-$70, but I would think the Commercials will be eager to lock in prices, and the longs currently have the fear of God in them, so it seems more likely we'll see a return trip back down in the months ahead.  And if it fails on the return trip, all hell breaks loose in that industry, which may finally affect equities.

Oil daily.

Bonds weekly.  I had the right idea for bonds in 2014 but I didn't trade them much.  I should remedy that.  I would think the short end would come up in yield until the Fed realizes it has to back off from its tightening fantasy, but the long end should continue pricing in the depression we're headed for and headed higher in price.  Maybe we get some short-term positive data that causes the long end to pullback to its uptrendline, but I'm thinking they grind up to the downtrendline off the highs and eventually resolve this giant triangle to the upside.

I don't really trade the Russell, but check out the weekly TF.  If this consolidates along the highs and holds its uptrendline and breaks out, watch out upside in equities.  At the moment, though, it's a failed breakout, so time will tell, but it's worth noting.

I updated the VIX chart, using the index this time.  The vertical red lines are monthly expirations.  Eventually, there will be news driven price action that overrides this, but if it's working, it's working.
 

Draghi Day is Thurs Jan 22nd
Fed Day is Wed Jan 28th
Options expiration is Fri Jan 16th

Smack My VIX Up

I don't have time to expound on this, so I'll leave you to draw your own conclusions.  Presented below are 4 charts that show the VX futures over the last 3 years. (The VIX itself follows the same pattern).

The vertical red lines are equity monthly option expiration days.  Keep in mind that the purchase of put insurance generally peaks with the spikes higher in the VX.  That is when they are most expensive, which leads to the ensuing VIX crush that transfers a lot of money from the put buyers to the put sellers.  

There are two ways I consider a VIX crushing to be successful.

1.  If the VX spike happens early in the expiration cycle and then leads to a slow drain into expiration, as seen in the upper left to lower right chart movement.

OR

2.  If the VX spike happens near the end of the expiration cycle and then gets crushed into the current expiration and also has a slow drain into the next expiration because a lot of the puts purchased will be made in the next month out.

Utilizing this definition of a successful VIX crush, there has been only 3 months in the last 3 years that haven't been a success, and all were muted months.  As you will see, some months are more dramatic than others.

The fourth one from the left is the closest to a VIX crush fail.  But note there was still a crush into friday and how dramatic the continuation was into the next month where most of the puts were likely purchased.

March 2013 - Oct 2013

Oct 2013- May 2014

Here's the current month.  Keep in mind, even if something was 99%, you never know when you're dealing with the 1% it doesn't work.  So while I think equities will bottom this week and have a VIX crushing rally over the holidays, there is no certainty in trading.

May 2014 - Dec 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.   

Market Analysis for Week of 12/8/14

My overall thesis continues to be that the Fed is forced to walk the plank toward tightening while the ECB heads toward its own QE as the BoJ bounces off the walls of the insane asylum they live in.  A week from Wednesday, December 17th, is the next Fed meeting.  The risk is dropping "considerable time" from their language, which would certainly add fuel to the dollar rocket ship, and crush gold and silver.

There's minor overhead resistance in the dollar just over $90, but I would think the $92.53 peak from 2005 would be a decent spot to see some profit taking and form a new base to launch from on its way to $99.  

The Euro looks on its way to short-term targets that would correspond with that.  Apparently, the ECB is announcing the scope of their LTRO this Thurs, I believe, so be aware.  

The USD/JPY blew by 120 and looks headed to 124 to test the 2007 peak. The pullback here should coincide with the eventual pullback in equities, so it might not happen until Jan, but both are very overextended, so it could happen anytime.  

Gold and silver are likely in big trouble.  I picked up my puts on Friday after the jobs number.  Fortunately, the market rallied into the US open so silver was only down like .15 cents and Gold was just under $1200.  I was hoping to get a spike upward from NFP, but it was not to be. I'm not worried about a few ticks on what I think will be a big move.  The best prices were actually Thursday due to a little premium erosion during the consolidation this week, as opposed to the top of the big spike on Monday.  There's no reason to be long this market unless it clears its downtrend line.  The risk is very high of gold and silver getting destroyed over the next couple months.  Target in gold is $1040/50 and silver $13.  Then another move lower after that.  A close above the downtrend line would negate it.  If it grinds up to the $1204 area you might be able to find a low risk entry, but that's a game time decision.  

Gold weekly. 

If you're someone who sees the bullish side of trades better than the bearish side, here is the inverse of the gold chart.  See how it's just pulling back into support?  Would you short this?  Not unless the trend line broke.  

Silver daily.  The yellow line is the 50-day EMA.  See how it stopped price?  It's not likely to get through there now, especially as we head into execution day on Dec 17th, and especially if it continues rolling over this week.     

Silver weekly.  Why would this downtrend not continue in the face of a soaring dollar? 

Equities are at a point that I can no longer psychologically handle.  There's never a time that you can't day trade, but I can't hold anything here.  For me, it's pick-up-some-blinds-as-you-wait-for-a-premium-hand mode.  Check out the weekly ES chart.  Note how every time it reached the top of the channel it eventually snapped back to the yellow weekly uptrend line.  I would like to avoid that even if it means missing out on upside.  Being that we're headed into holiday season, chances are we grind along this upper channel line in the most annoying price action possible.  In order for me to build a position to hold I will wait for a pullback to the old highs at 2014, which may not happen until January.  With the ECB sounding likely to initiate QE in the 1st quarter, and the soaring dollar, which should keep pressuring the Yen and keep the carry trade alive, I'm expecting the overall uptrend to continue into the Spring.  It's just a matter of dodging the bigger pullback that will come at some point.   

The only thing I have to say about oil is it's not likely done on the downside.  The Specs actually added to their already net long position on the OPEC crushing, so there's plenty of longs still to liquidate if it keeps going lower.  I'd really like to know who these funds are and how they are still in business.  Check out what the bottom looked like in 2008.  See how it went sideways for several weeks and tested the bottom before turning back up?  There's really no reason to try catching the knife until you see something like that happen.  Keep in mind that the rocket ship it turned into out of the 2008 bottom was driven in large part by QE and a loosening Fed.  Now we're headed into a soaring dollar and a tightening Fed.  This could stay ugly for a long time.  

I don't think it's even possible for the Fed to normalize interest rates, but they can head down that path until the soaring dollar forces them to back off.  I would love to believe in the magic of QE but I don't.  All they've done is mask the symptoms of a depression and the lack of real demand that can't be compensated for by flooding the economy with cheap debt. Eventually the consequences of defying the laws of nature will catch up with the central banks, so while I'd love to see a strong jobs number every month for the next three years, I believe this "recovery" is dependent on repressed interest rates, creating money out of thin air, and deficit spending, all of which would be impossible if we lived in a world with any wisdom or respect for history.  Until we see the gov't balance its budget, the labor participation rate return to normal levels, interest rates stabilize at 4%, and the rest of the world not collapse into default, all the people proclaiming "the recovery is real" should be forced to stand in front of  "Mission Accomplished" banners.