Market Analysis for Week of 8/24/15

Big bad bull fall down go boom.  I think the official term inside the Fed is: uh-oh spaghetti-O's.  Is there anyone out there who is still in denial about the value of technicals?  Because there is no greater example than what just happened to stocks.  And I'm not here to pick fights with anyone.  There's a lot of different ways to trade.  All of them can work with the right risk control and trade management.  It will forever and always, with no exception, be about position size.  Everything else is a guide to help you make decisions and give you confidence to make a trade, or stay in a trade, or cut it loose.  Using technicals is not some holy grail of trading, but it IS grounded in the psychological positioning of the underlying players and it helps with timing and risk control because there are spots on the chart where your idea is either working or it's wrong.  Essentially, it helps to protect you from yourself.

There are people who subscribe to all kinds of traditional philosophies that involve numbers and data points and all kinds of information like valuations and cash flow and earnings per share, and I'm not criticizing that approach in the least.  I've always maintained that it's all about how you're wired and finding a method that works for you.  But disregarding technicals can get you in serious trouble.  In terms of using fundamentals, the biggest advantage of having a strong fundamental conviction is that it will keep you in a trade far longer than you would be normally.  But the biggest disadvantage of having a strong fundamental conviction is it will keep you in a trade far longer than you would be normally.

There's a lot of people who have a conscious or unconscious belief that equity prices will always go up in the long-term, so they just keep dollar cost averaging every week of their lives.   This belief gives them an insane tolerance to hold through vicious pullbacks and even market crashes.  It's kinda the philosophy of the entire industry.  And if you're looking at an equity chart a hundred years from now, they will likely be right to have that belief because the world's capital base grows over time as technology evolves.  But thanks to the loss of restraint in the money supply when the dollar lost its gold backing, and the Federal Reserve's ignorance of its own policies, we don't live in a buy-and-hold world anymore.  We live in a boom-and-bust world.  And while all the major stock indices just put in major technical topping patterns, I'm not suggesting this is THE generational top because most likely next year the Fed will be back in QE4.  However, it certainly could be, which is the whole point of respecting technicals in your decision making.   Nobody knows.

If you want to know if you're talking to a perma-bull or perma-bear, ask them at what price they consider their idea wrong.  If their eyes glaze over and steam comes out their ears like they never considered that possibility, you have a perma-view on your hands.  Those people are heroes when the market is moving their way because they hold through all the crazy pullbacks, but when the market turns they never see it coming.  And I'm not trying to be critical of perma-people either.  Whenever I talk in universal terms there's always someone who sees their reflection and thinks I'm talking about them, but what's actually happening is a subtle form of mental vanity, which is in everyone, that maintains the illusion of separateness by solidifying the walls of the ego through the perceived and self-created feeling of being personally attacked.  For the most part, I save all my criticism for politicians and central bankers.  Fuck them.  Other than that, what people do is between them and whatever you want to call the spiritual force that pervades this world.   My point about perma-people is those temptations exist within us - to be seduced by an idea of forever-ness, so you don't ever have to change or make hard decisions.  It's helpful to at least be aware when you might be under the influence of that temptation.  Sometimes objectivity is hard.  When you're under the influence of perma-thinking, you end up rationalizing away all the signs that were there all along if you weren't so blinded by your conviction.  Ideally, the place to be is right in the middle of self-doubt and conviction, constantly holding up your point of view to any new information that threatens its validity.  And have I mentioned in the last five seconds that it's always about position size?

I would also like to point out that the options market is always wrong when it matters most.  AFTER Thursday's big selloff (after!), which took us to the psychological edge of the technical cliff from an 8-month trading range, the expected move for the ES on Friday was 14 points.  And I'm also not trying to be critical of options pricing either, but it doesn't factor psychological inflection points into the prices.  And I get the whole systematic approach that over time the implied expected move will end up bigger than the realized expected move and you can capture the difference and moments like Friday are the outlier events on the distribution curve.  My point is there are times when you can reduce the number of outlier events you have to absorb by being aware that certain situations have a higher likelihood of blowing out the expected move because they are driven by the psychological pain point of a technical breakdown.  None of the approaches to trading refute any of the others.  Actually, I think combining them all creates a synergistic effect that puts you in the best possible position to maximize your chances for success.  However, even by combining fundamentals, technicals, and the expected move priced into options, all of that is only like 20% of the recipe for success.  At least 80% is the psychological battle of managing your emotions, which usually boils down to applying the proper position size at the proper time with the proper level of conviction.

Zero sum markets (futures, forex, and options) are essentially a wealth transfer mechanism from the weak hands to the strong hands.  And I'm not suggesting that account size is what determines the weakness of your hand.  It's actually leverage.  You can be a billion dollar hedge fund and turn yourself into a weaker hand than the guy with a ten thousand dollar account by using too much leverage - the wrong size at the wrong moment that creates a small window to be right and forces you out of the trade when it moves too much against you.  The wealth transfer happens as the market moves from one pain point to the next.  In order for the winners to make money they need to washout the losers.  What happened on Thursday and Friday in equities was a wealth transfer from the people who were long to the people who were short.  Less dramatic moves happen every single day to the short-term traders.  That's what stop runs are all about.  It's just a bunch of liquidity in one spot for profit taking by knocking out the weaker hands.  From what I read, that's how the pits used to work, and that's clearly how the algos are programmed.  That's why the market often reverses after a poke to a new high or low that runs the stops.  The sellers, or buyers, often cease because they just took profits by hitting those stops.

To illustrate how the psychological challenge is always what's most important, I'll tell you why I only did "ok" on this equity breakdown even though I saw it coming.  The reason can be boiled down to two words: options expiration.  For the last year and a half, the vast majority of my equity profits have come from OPEX short squeezes.  There's been at least 8 or 9 selloffs right before or early in the OPEX week that predictably reversed sharply, cut the heart out of the bears, and fed it to them with a side of fava beans.  It's been my favorite thing to do.  So, out of the 4 weeks of possible trading days both before and after this cycle, this breakdown HAD to come the last two days of options expiration, which totally messed with my mind.  Since I wasn't short from near the highs like I should have been, I was only emotionally capable of getting on a small short and every time there was a weak intraday bounce - that any other time I would have pounced on - I couldn't force myself to do it because I was afraid of being a victim of my favorite trade from the other direction, even though it was obviously not going to happen this time.  When I said think of the nastiest thing that could happen because that's likely to happen, I didn't think I would be included in the trickery.  Even if you controlled every tick of the market, you couldn't have designed a nastier unfolding of this breakdown than letting price spike up after the dovish Fed Minutes on Wed and then slamming it through major technical levels into a waterfall decline the last two days of expiration.  But that's trading.  Well done Shorty and the Shorters.

When I reflect on how I could have done it better, I feel like it was like one of those hands in poker you just can't get away from.  Have you ever lost with a 4-of-a-kind?   Or maybe more commonly, losing with a full-house?  When you think back on it, you realize there's no way I could have folded that hand.  It was "in the cards" that I was going to get knocked out.  So, the people who got PAID the most during this breakdown were the ones who've been suffering on the short side waiting for their ship to come in.  And good for them.   I could never trade that open-ended way myself because that kind of unending generalized anxiety would ruin my life.  I'd be walking around scowling at everyone, kicking puppies, and telling old ladies who want to cross the street to pound sand.  But the downside of the way I trade, which has to be more surgical in its timing, is instead of the constant annoyance and anxiety of wondering WHY people are STILL trading opposite of me and what the HELL are they thinking, my pain is more localized to moments when I don't get the timing right, whether that is missing the trade altogether, or being early, or just getting it wrong.  Then it's over without a single puppy kicked.  Big hedge funds can't trade like that because they're too big.  It takes days or weeks to build their positions, which greatly affects how prices move, so it's worth thinking the implications of that through, btw.

Regardless of the style, I would describe trading as the daily management of anxiety and disappointment with the occasional moment of pure joy and satisfaction, which is likely just the temporary absence of disappointment.  Not to mention the constant battle with the subtle force inside you trying to get you to go bigger, or just wait that loser out a little longer...   Greed and fear.  They will always be there, lurking.  Kinda like being an addict.  It's not something that goes away.  It's something that must be disciplined.  So, in that regard, I've come to respect the more systematic ways of trading with strict trade and money management rules.  I used to see it as too restricting, but I've come to realize it's like using technicals in the sense that the rules are there to protect you from yourself.  There are trades you're going to miss because they are outside your rules.  If they happen often enough and the risk/reward profile is favorable then you have to expand your rules to include that kind.  I will add, though, that there are moments when your rules should allow you to go big.   But it should require all the stars aligning in a special way.  If this wasn't options expiration week, this would have been one of those times for me.  What I've learned in my style of trading is that out of ten trades, 90% of the profits will come from one of them.  If the rest of the time I can just hang in there and scratch out a positive number, I'll do fine.  So it's not a big deal when an opportunity isn't maximized as there is always another one around the corner.

Not sure where that came from, but onto the charts.  Let's start with the ES.  In my opinion, the game just changed from BTFD to STFR.  I'm thinking a mechanism just got put into place that needs to work itself out over several months, unless, of course, the Fed realizes they're living in fantasy camp and commits to no rate increases for the rest of our time on Earth.

Most likely we need more selling first, but I'd bet my life once the first short covering rally comes that we test just shy of the neckline, which is at 2032-ish, or 2040 SPX, probably in the 2020s.  That's where Shorty and the Shorters will be looking to defend plus anyone who wants to get out from the long side.  If the panic selling continues on Monday, I'm looking to get to the 1930-ish area as a potential spot to be watching for bottoming signs because that's the range extension, but I don't really have a level per se.  What I'm looking for is a low to get put in and then a failed intraday test that creates a higher low, or preferably a stop run reversal.  The worst thing that could happen from the bottom is a big gap up and run.  That would make it hard to size up because you can't have confidence they won't run it down to the lows one more time to shake you out.

ES weekly.

 
The Fed has me all coiled up about this dollar/Euro trade.  If I believed the Fed was actually data dependent in their decision, then it wouldn't be hard to say they're never going to raise rates.  But it just hasn't sounded like that's what is driving their thinking, so it's way harder to figure out.  It's like trying to measure how crazy someone is.  There's no gauge for that.  I'm thinking if they have ANY intention of raising rates in Sept, they will signal those intentions at Jackson Hole this Thursday and Friday.  I originally thought Janet Yellen would do it, but it's going to be hard for her to pull off when she's not scheduled to be there, so maybe one of her minions will drop the hint one way or another.  Just f-ing commit to something.  That's all anyone wants.  If nothing comes from there, then they've done the worst possible job at communicating that I can possibly imagine, so you would have to think it's not gonna happen.

Dollar daily.

As for this dollar/Euro trade, I'm not surprised the Euro made it to the upper trendline of the triangle.  I grabbed a solid piece of it but the early Minutes release caused me to miss sizing up on this too.  Can we at least stick to the schedule people?  A guy can't hit the gym anymore?   Can I go to sleep or will NFP be released at some random time during the night?   I'm sure nobody benefited from that.

Check out this interesting difference in the Euro futures chart and the EURUSD chart on the weekly.  The futures show the Euro not breaking out yet but the forex shows it is.

Euro weekly.

EUR/USD weekly.

I don't know what to make of that, but I'm going to stick with the futures charts due to that's what I usually trade and both the dollar and Euro are in sync.  It's at an inflection point that will likely be resolved soon.

Gold hit its first downtrend line and backed off like $9.  Like the Euro, this is right where I want to short it, but with the Fed at such a critical juncture, it distorts the risk/reward, so I'm either going to wait, or keep it really small.  I would think there should be at least a small pullback this week.  The point of all these dollar related assets is they are all shaping up for a big move based on what happens with the Fed in Sept, which could be indicated earlier than that, but once there is some kind of catalyst these "should" all act accordingly and run.  That's why I don't think there's necessarily a hurry.  I'm usually talking on here about bigger moves to hold.  There's always short-term trades available.

Bonds are approaching the weekly upper channel.  I think the reason bonds didn't rally more on the equities selloff was because the dollar selloff kept them in check.  I can't see myself getting involved in bonds again for a long time.  There's just more technically sound charts to trade because it's too close to resistance that I don't want to deal with and I'm just not all that interested in the short side.  It's just not my thing.

Oil daily is still using the 10-day to keep the pressure on.  It should be noted that the Large Specs have liquidated somewhat but they are still heavily long oil.  I don't understand it myself, but it is what it is.  More downside fuel to shake out.  So if you're not already short, the Commercials aren't lifting their hedges and the Specs are already longed up, so there's no one to buy to create a bounce other than spec shorts covering.

Check out oil on the monthly forming an RSI divergence, which is just noteworthy at this point and could take awhile to play out, but it is something to keep an eye on.   I'm thinking oil will break the 2009 lows and force a capitulation, but I am concerned about a possible dollar breakdown causing a short-term rally first.  It should be noted, though, that oil hasn't flinched with the dollar coming off nearly $4 lately.  

This is what it's like being on the wrong side of the trade, every time you look at the computer screen:

And this is what it's like being on the right side of the trade.  Stole my moves:

Market Analysis for Week of 8/10/15

I kinda had a feeling it was a little early for the dollar breakout.  I wouldn't be surprised to see this bang around for several weeks, even getting below last week's low to run some stops.  But the bottom line is I will trade the breakout in whatever direction it chooses.  I believe it will be up.  Ideally, it will be driven by a news event like the Fed raising rates.  Btw, another non-economic reason to raise rates is that they don't even know if the new policy tool of using Reverse Repos instead of Fed Funds will even work, and there's only one way to find out.

It's entirely possible the Euro makes it to the other side of the triangle.  This is very much like the oil range from earlier this summer.  The downtrend line is from the highs last year.  It should not go through there if this is going to eventually rollover and breakout to the downside. The closer it gets to there the smaller the risk.

Gold is currently using the 10-day to keep the pressure on it, but if the dollar comes off a little, this could certainly backtest the breakdown.  I have no interest in this right now.  I expect it will go lower, but I'm not shorting it here.  If it bounces and tests the downtrend line or the breakdown area around $1130 then I'd be interested.  

Oil is also using the 10-day to keep the pressure on.  I'm thinking we could see some profit taking near the March low.  

Oil weekly.  If we get the dollar breakout, most likely oil will trade down to the 2009 low at $33, however it would be nice to see a bounce at the March $42 low and a test of the downtrend line.  That would create some buyer exhaustion profit taking and a low risk entry.  If oil just barrels through $42 full speed ahead, I'd wait for the retest of that low and look to enter there.

When trying to figure out what might happen next, I find it helpful to consider the nastiest thing that could possibly happen, and that's probably going to happen.  In the case of the ES, the big line in the sand that would knock a lot of longs out of the market is 2032-ish, or 2040 in the SPX.  So it wouldn't surprise me to see a washout below that area that gets bought up like crazy.  The key would be when it happens.  If we're crashing through that level early in OPEX week, I'd be looking for signs of the bottom to buy.  This could very easily turn into a bear trap.  Also, don't forget the uptrend line thru last Oct's low is a monthly trend line, which means it's all about the close.  

I'm liking bonds to test the upper channel line in the 160s, then it depends on whether stocks are sustaining a downside technical breakdown or whether it was a bear trap.  

The Dollar and The Euro

You can put the world's greatest dollar bull in a room to debate the world's greatest dollar bear and all of their arguments will soon be obliterated in the event horizon of price as it breaks one way or the other.  While NFP could be the deciding factor, it should be noted that there are several weeks of room to whipsaw around and run stops before the action is forced.  But these are usually continuation patterns.   A picture is worth a thousand words:

As with every breakout trade, be aware of the fake-out.

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. 

Market Analysis for Week of 6/15/15

Whether they play out or not remains to be seen, but there's a few things you have to be thinking heading into this week.

1.  The Fed will not raise rates and Yellen will continue to be market friendly in her remarks.   This should be dollar negative, gold positive, equity positive, oil positive, and bonds who knows-ish.

2.  It's option expiration week.  We've seen this movie many times now.  If we get continued equity weakness into Wednesday you have to be looking for a vol crushing bottoming reversal that afternoon, or Thursday morning.  

If the dollar breaks down below the $93 double bottom area it will be interesting to see if it runs into a wall of buyers around the 200-day EMA at 92.41.  A close below there makes this look like a top and opens the door to the high $80s or $90 area.  

If the EUR/USD spikes up and closes above its swing high peak at 1.1530 post Fed, it will look an awful lot like an inverted head-and-shoulders bottom and should lead to a retest of the multi-year breakdown in the lower 1.20s.  If the big sellers are serious they will defend that swing high.  Seems more likely they're waiting for higher, but we'll see.  It's down on Greece news at the moment. 

Here's the monthly EUR/USD triangle breakdown.  If this does roll back over post Fed my plan is to buy the dollar on a break of the downtrend line off the highs.  I'm thinking the dollar is going to selloff though, so I'd like to find a way into long Euros for a few weeks if it allows.  The Greece situation makes this a bit tentative, but if they follow the American script they will wait until the last moment and then concede to make a deal.

I'm interested in getting long gold.  But not until the Fed announcement for a hold longer than a day trade.  There's a trendline that could break tonight or tmrw for a short-term trade, but I'm looking at the trendline that cuts through the $1205 area for a play to somewhere between $1250-$1280.   It has to respond to the Fed in order to work.

Oil is consolidating into a tight range.  Whichever way breaks and closes beyond it should run a bit.  It would be helpful if it waits until Wed.  I would like to trade it long if the dollar is selling off post Fed and oil breaks upward.

The ES, or more likely the NQ, is also interesting to me if they repeat the same vol crushing movie we've seen so many times.  If we get the sharp reversal, it needs to run to new highs and not form another lower high on the chart, though.  I will be highly suspicious of it the whole way.  

Look where bonds stopped.   A breakdown and close below the lower trendline would be a big deal, partly because it just acknowledged its existence.   It will be interesting to see if this fills up the triangle first.  A breakout in either direction is playable.  Just don't let it go against you in case it's a fake-out.

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.

Market Analysis for Week of 4/20/15

The most important day for the dollar is Wednesday, April 29th.  It's GDP and Fed day.  It seems like GDP is going to disappoint and the Fed isn't going to raise rates without a press conference, so I'm thinking the dollar gets crushed and continues the correction to the lower $90s.

Dollar daily is currently holding the 50-day.

Dollar weekly has trendline support around the $95 level.

Dollar monthly has horizontal support at $92.50.  This is the level I'm hoping it gets to.  But it might take a June Fed meeting with no rate increase and a couple average job numbers to get there.  Ultimately, I'm still thinking the dollar goes way higher, more from anti-Euro sentiment than pro dollar sentiment.  If the Fed does attempt to raise rates in Sept it will only help.  In the meantime, a band-aid for Greece, a poor GDP print, and no rate increases from the Fed should continue to pressure the dollar as a natural unwind of extreme positions happens.

Gold and silver are a mess.  I have no idea.  You would think as long as the dollar is correcting lower, the metals would sustain a bid.  I'm not interested personally.

Oil too should benefit from a dollar correction.  The 200-day is currently at $69, which is also the approx area of a 38% Fib retracement of the big down move.

 Oil weekly had classic RSI divergence, which I didn't notice.  I regret not going long, but when it didn't hold new lows that was a warning sign to at least stop the short side.

 One more oil consideration.  Take a look at this China growth chart that shows it peaked in 2007, roughly correlated with the $147 top in oil, which was also the top of the Fed induced housing bubble.  We know China has created the biggest debt bubble in history, so most of that growth is unnatural and unsustainable.  Since the oil bottom in 2009, much of the rally has been fueled by Fed QE and the hopes of it fixing the economy as oil traded in an $75-$115 range.  But what if the natural demand for oil when you strip away all the debt based QE and China fuel is actually in the $40-$75 range?  Meaning, what if everything over $75 is based on the false optimism of QE working and false demand of deficit spending from both the US and China?  I'm no oil expert.  It's just something to consider.  Everyone seems to think below $75 is the aberration.  What if it's the other way around?    

Usually when you see stocks selloff like they did on Friday, it's the first of two or three waves that tend to stair step downward.  There is a trendline at 2057, but I'm leaning toward this going to the bottom of the range at 2037 where I'm looking to be a buyer.  Monday, April 27th is Apple earnings and since Apple is the entirety of the stock market, as long as they come in decent, I'm expecting stocks to bottom and make another move toward the top of the range and likely attempting the breakout. 

If you look at the consolidation in January there were three peaks before it broke out.  We just put in our third peak, so maybe the next time will be the charm.  I'm thinking there could be another range expansion on the backs of short covering and then another rollover.  Without QE there just isn't the conviction of the large players to absorb the amount of contracts they need to sustain new highs.  So what they're doing is buying the bottom of the range, selling the top, getting others short, and then they break it out and expand the range as they unload their longs to the shorts forced to cover.  Then there's not enough new buyers so it rolls back over.  I would expect this process to continue until there is some kind of catalyst one way or the other.  The bulls haven't lost control of this market for one second.  It just seems that way at times.  

The ideal scenario is the start of a breakdown below 2037 that runs into a black hole of buying that closes near the highs.  Every move from bottom to top and top to bottom of these ranges have seen pretty violent intraday swings, and if it works again, this time won't be any different with GDP and the Fed upcoming, so it's not exactly the easiest trade to sit through.  But if you want to be long you have to buy when it's hard at the bottom of the range.  Use smaller size to start.  This way if the range breaks down you take a small loss and can fire another bullet at the monthly trendline closer to 1940.  I'm thinking Apple, GDP, and the Fed will all be bullish catalysts though.  The other thing these long sideways ranges do is create room to the upper channel line.