Market Analysis for Week of 3/23/15

"Back in 2009 if I went to the gym, I could bench press about 180 pounds, naturally.  And if I worked out every day for the last six years, I could probably bench press over 300 lbs by now.  But instead I took steroids, so now I'm in beast mode and I can bench press over 600 lbs!"  -said This Guy.

His name is 'Merica.  And the steroids he took are called ZIRP and QE.  So, how can you measure his real strength when all the data points are distorted by the steroids?

Here's what he looks like off the 'roids:

To be fair, his name could also be Japan, China, Europe, or any other nation with a central bank.  The sad part is he has cancer, but it's being masked by the steroids, so the doctors are misdiagnosing him with the common cold, and telling him the 'roids are making him stronger.  Unfortunately, if he stops the steroids his muscles will deflate and he'll have to deal a very painful situation that will take a decade to heal.  The good news is the human spirit is irrepressible and in the long run he will innovate a way to beat the cancer as his immune system naturally clears the excessive steroids to return him to health.  But what a painful journey it will be.

Here's a chart of the Fed Funds Rate dating back to 1955.  Take a look at the uptrend from 1955 to 1980 and then the downtrend from 1980 until the present and think about the overall economy that characterized each era.  You have the post WW2 baby boom from the beginning of the chart that not only unfolded in a mass simultaneous spending wave from the population expansion (i.e. buying houses, expansion of roads, cities, buildings...), but there was also an overall period of technological innovation that led to organic economic growth as loans from the bank were in high demand and issued hand over fist.  Not to mention Nixon's fateful mistake in 1971 when he unlinked the dollar to the restraint of gold and unleashed a tsunami of deficit spending that culminated in the 1980 need of Volker to slow down the runaway credit expansion train.

From that moment on, every time interest rates have gone up, they were forced to lower them again until finally reaching the zero bound in 2009, and then Bernanke's foolish attempt to get beyond the zero bound through QE.  What's really happening in this chart is an attempt to keep the baby boomer debt expansion and simultaneous spending wave going by making debt cheaper and cheaper when underneath the surface there is actually an extinguishing of debt as the new demand from the following generations is not sufficient to continually expand the credit in a natural way.  

Note the dramatic lowering of rates after the dotcom bubble burst to reflate.  And then the rate hike cycle from 2004-2006 as they attempted to slow down the housing bubble they were creating.

And now we're stuck at zero because the transmission mechanism of the Fed's futile attempt to expand the money supply to reflate their burst bubbles is all being funneled into financial products and not the real world, creating a third bubble.  I wonder what would have happened if Glass Steagall still existed?   What if the Fed bought bonds from banks who were restricted from using the free cash to speculate in the markets?  Would they have recklessly lent the money in the real world as they sought a yield by issuing loans to everyone who walked in the front door with a pulse and actually achieved inflation?  That also would have failed as the false wave of credit was unsupported by natural demand, but it's an interesting alternative world scenario that would lead to the same outcome: the deflation of a falsely created bubble that ends in depression.

The Fed will never create the kind of inflation they are trying to achieve because it's all going into the stock market.  There's your inflation.  Stock prices are up nearly 300% in six years.  If prices in the real world increased at that rate, the Fed would be forced to raise rates in attempt to slow down the overheating economy.  But since the entirety of the Fed's plan is some kind of magical "wealth effect" that occurs when you make rich people richer, they have no incentive to prick the bubble on their own.  I've heard a lot of comparisons to the Fed not wanting to raise rates too soon like 1937, but that's rooted in a misunderstanding of where we are in the process.  It's more like 1928.  The real correction of the excessive debt hasn't occurred yet.

To navigate the current market environment requires a proper diagnosis of three things: the real economy, the futility of the Fed, and the psychology of the market participants.  To understand the real economy you need to understand the unsolvable structural problems rooted in the demographic trends and globalization.  To understand the Fed you need to realize the difference between debt that is based in natural demand by the free market and debt that is forced into the market through central planning trying to compensate for the lack of the former.  To understand the psychology, you need to understand the bias of Wall Street for a bull market, how the broken transmission mechanism of the Fed's credit channel is funneling all the cheap debt into financial products, and how it is impossible to have sustained selling without the sustained fear of a real world crisis.

All of this is creating the greatest bull market in history with no economic legs to stand on.  Is anyone going to seriously make the case that the economy is overheating to such a degree that for the first time in 9 years the Fed needs to raise rates to slow it down?  And for the first time in 35 years, we are about to embark on a sustained rate hike cycle that will finally end the downtrend of interest rates?

The only reason the Fed wants to raise rates is because they're backed in a corner and want to be able to reload the gun in the near future.  The last six years has proven that the Fed is incapable of creating inflation in the real world.  They are inflation impotent and there isn't any Viagra to help them get it up.  The deflationary wave they are fighting is too large.  Even if they go back to QE there are not enough bonds to purchase.  The government would have to return to multi-trillion dollar deficit spending.  And it won't work anyway.  We just tried that.  The experiment is over and it failed.

There's two things that are most important to get right over the coming years: the future path of the dollar; and the likely path of the Fed.  No one can know for certain if the Fed will be able to accomplish a pointless 25 or 50 bps rate hike.  That doesn't matter.  What does matter is understanding that it's impossible for them to normalize interest rates without bursting their own bubble.  So the Fed is on a leash when it comes to rates.  That is important for bonds.  

The dollar recently played out how I thought it would, although the flash crash was a surprise.  I can't remember the last time a market got so crowded to one side in anticipation of something that wasn't likely to happen.  The kind of volatility we've seen the last two weeks is typical of what happens when a lot of the big players are exiting and letting the trend followers push it back up only to sell into them again.  This is why I often say strong trends don't just stop and reverse on a dime.  There's an unloading period.  Note the distribution volume.  I'm thinking this is the start of a larger correction that will take us to the uptrendline around $93/$94.  I would think any bad data releases will be met with dollar selling because it pushes out the Fed.  Despite what Yellen says, there is zero chance the Fed raises rates for the first time in nine years at a meeting without a press conference, so that means the date for the possibility of their next mistake is June 17th.

There are three main reasons the dollar will likely bottom and go much higher:

1.  The Fed is incapable of creating inflation in the real world.  Ask Japan how that's working out.
2.  The Euro is based on a flawed union that is destined to fail.
3.  The dollar is the most widely used currency in international transactions.
Bonus reason: In the 2008 financial crisis the dollar was a flight to safety.  

Dollar daily.  I'm thinking we pullback and consolidate for weeks.  The point where I'd have to reconsider my view of the future would be if the dollar ever loses $90, which seems highly unlikely.

Euro weekly. I'm thinking the Euro could make it to 1.15/1.16 before rolling back over.  This would all be perfectly normal.  The Euro seems destined for all-time lows.

Clearly, commodities are responding to the dollar.  I would think gold and silver should maintain a bounce as long as the dollar keeps pulling back.  I'm staying small in my counter trend trades, which are dangerous.  I'm more interested in the resumption of the overall major trends, so that would be shorting gold from higher prices and getting long the dollar again from lower prices.  

COMP monthly.  There's no way we've come all this way and we're gonna stop short of the all-time high.  I'd be highly attentive to how it acts upon the pierce of it.  There's a good chance you'll see big money selling there and a pullback similar to what we just had.  So the breakout is guilty until proven innocent.  I do believe, however, IF we pullback from there, it will be contained and once price establishes itself back above the all-time highs, we will go much, much higher.  Like hundreds of points higher.  Why?  Because selling can't be sustained in this environment until there's a crisis and the Fed is in no hurry to create one.  Clearly, the degree of selling off the all-time high pierce, if there is any, would influence my opinion.  But I suspect it will be contained.  

NQ daily.  We might consolidate to build up energy for the run to new highs, but stocks will likely break upward sometime over the next two weeks.  

ES daily.  Same thing.  The upper channel hasn't broken in 3 years.  I'm looking to lighten longs at new highs and hopefully reload from slightly lower prices, which may be timed with the COMP pierce.  There's more room on the SPX cash, so it's just a matter of how we approach the new highs and what the price action is when we get there.  Maybe it happens on NFP day in two weeks.  The market seems more like it's in "two steps forward one step back" mode now that QE is over.  

Bonds daily.  There's no reason why bonds will have any significant selling ever again.  Not until the US defaults one day, but that's years away.  (By significant I mean the second half of 2013 selling, not the recent pullback, which, while severe, was normal.  The end of the 30-year uptrend in bonds is not likely to happen.  Deflation is the problem.)

TLT daily.  Just showing this to see how far bonds have to go to get to the recent high before the pullback.

Oil.  I could not be less interested in this.  It was a nice short to new lows. But whenever a market makes new lows or highs and can't hold it, red flags go up.  Mostly because that's often how big pullbacks happen and it's never possible to know the extent of the pullback with certainty, so I always err on the side of caution.

I have no idea how much oil will respond to a potential multi-week dollar pullback since oil has fundamental reasons to go lower, which is why I'm not interested at the moment.  Too many conflicting forces for me.  I still think we haven't seen the lows in oil, but until I feel like the dollar has bottomed, I'm fine with missing out if oil keeps going down without me.  I'm hoping oil retraces higher and offers a better shorting opportunity that is timed with the dollar bottom.

 

Market Analysis for Week of 3/9/15

The dollar go boom.  I'm still thinking it reaches the mid $99 handle.  If the price action allows it, there might even be an opportunity to get short for a sizable pullback just below that $100 level.  Because it's counter trend I would need a high to get put in and a retest that fails.  Then you can use that high for a small risk with potential big reward.  In the bigger picture I do believe for multiple reasons that the upside in the dollar is going to surprise a lot of people.  But a lot of that is going to come from a flight to safety rather than a sustained rate hike cycle, which is impossible.

I'm thinking the Euro bottoms when the dollar approaches $100 and the pullback will last a couple months.  It's likely the Fed removes the word "patience" at the meeting in 10 days because the "strong" jobs number is forcing their hand, but since the economy is actually very weak under the headlines, Yellen will downplay any rate hike and may even take June off the table.  So what we could see is continued dollar strength into and through the announcement,  but the possibility of a reversal during her press conference.  Take this with a grain of salt.  I'm just trying to envision a scenario that causes the dollar to temporarily top out.  This is one way.  I think it's important to anticipate things before they happen, but you have to be willing to let it go if it doesn't happen or if price doesn't confirm it.  The best trades are when you envision a scenario ahead of time, and then it happens, and price acts exactly how you expect it to.  Those are trades that give you opportunity to push open profits.

Gold is going way lower.  I thought we might see a bigger bounce from the $1200 area, but it never happened.  If the dollar does pullback from $100 for awhile, I could see gold putting in a double bottom at $1130 for a sizable bounce, but I wouldn't trade the long side of gold without a small defined risk.  It certainly doesn't have to bounce just because the dollar pulls back.  It could easily blast through $1130 into the 1000 handle.  A test of the downtrend line could offer a small risk entry around $1180.

Gold weekly.

Gold daily.

I'm leaning toward stocks selling 5% or so till the Fed meeting.  Maybe NQ 4220/30 area.  Fed week is options expiration, so if we get back into last year's rhythm, how about the idea that we bottom out after the Fed (or that Thursday) and have a vol crushing rally into Friday and then into the Spring to pierce Nasdaq Comp all-time highs?  

The ES has the 50-day EMA at 2064, so a close through there would open the door all the way to the 200-day and trendline around the 2000 area.  If things accelerate and go through there, I'd expect a stop run under all those lows and a reversal.  I don't think we've seen the highs in stocks yet.  But it'd definitely a time to err on the side of caution.    

Oil looks like it's starting to roll back over.  It's holding beneath the 50-day like the dollar held above its 20-day, which means large sellers are defending it.  So it's going to take some kind of massive change in sentiment to get through there.  I don't see it happening.  

While I figured bonds could pullback this much, I'm surprised they actually did.  I think it's approaching overdone, but I'll wait until after the Fed to see how they react.  Bigger picture, I don't think downside prices in bonds are sustainable.  First, even if the Fed makes it to the point where they can pull off a token 25 or 50 basis point rate hike to take a little heat off of them, there's just no way the economy can handle a full-on rate hike cycle back to historical normal levels.  I don't even think they can make it to 1% before they have to retreat back to zero and they're going to be in no hurry about hiking.  Bonds don't have to worry about interest rate risk.  

I expect a massive flight to safety bid in bonds and the dollar when the stock market has even the normal and inevitable 20% correction, let alone the collapse of the current financial system that we're heading for.  I used to think the Japan default would be the cause, but I'm warming up to the idea that it will come from a China implosion. Either way, the US is not an island of strength in a sea of economic woes.  We're in big trouble, just less than the rest.  When they go down, we go with them.  And tons of money will flow into the dollar and US bonds.  To think the economy can handle a full-on rate cycle increase is kinda silly.  There's a reason why interest rates have trended down for the last 30 years.  There's no economic Renaissance.  There's a multi-decade asset bubble suppressing reality. If the economy was actually strong and in need a rate hikes then bonds would be in trouble.  But it's not.  

Here's the chart for notes because the bond chart is all screwed up from the rollover gap. 

In short, this "strong" jobs number is scaring everything into thinking the Fed will hike sooner, and while they definitely want to change forward guidance to give them more freedom, I'm thinking she pushes out expectations in the press conference and that could be a turning point into Spring.  We will see.  

  

Market Analysis for Week of 2/9/2014

Here's a brief big picture outlook, also known as my best guess based on current information.

Dollar daily.  Me likes higher.  I'm thinking $99 then $90 then $120.  Note how the dollar held the 20-day.

  

The Euro is doomed.

   

ES daily.  The clue of breaking out for a run higher now will be putting in a higher low by holding either the 2045 Friday low or the 2031 20-day/50-day convergence.  The Greece situation could determine whether we need one more trip down to the lows of the range or not.  Regardless, I'm still thinking one more leg higher in equities before this bull dies.  

NQ daily.  Same thing.  Need to hold a higher low to go.  Can't rule out one more trip down first, but I'm thinking a breakout that holds will double this range for another 300 points.  

Gold weekly.   I think gold will make its way down to the $1205 area and hold that uptrend line off the Nov lows and make a solid rally, possibly back to the recent $1300 highs.  But I believe gold will eventually resolve this triangle to the downside and we will see triple digits either later this year or 2016.  Note how gold couldn't even make it to the downtrend line from last year's highs. 

Bonds weekly.  If we assume equities hold and breakout now, I'd expect bonds to continue being weak, possibly as far as that uptrend line off last year's lows.  A lot depends on the Greece can being kicked further down the road.  Eventually, though, the equity bull dies and bonds return to their highs.  I'm thinking either later this year or 2016.  

Oil weekly.  You have to be open to a further bounce here.  Too early to tell.  A simple 38% Fib retracement would take us all the way back to $68.  The 50-day looms at $55 though.  Wherever this does stop, I'm thinking we roll back over and test the 2008 lows at $32.  I would need a risk point to play in order to get involved.  

Obviously, as information changes, I will adjust, but that's what I'm thinking at the moment. 

Bonus Track: 

For your amusement, here's one of the funnier bits I've seen lately.  Give it a minute.  

Market Analysis for Week of 2/1/15

A brief comment about the Fed, then I'm done with them for awhile.  It occurred to me that they fit the definition of a crazy person.  Meaning, the map of reality that exists in their head doesn't match the real world outside of it.  The problem with ALL of the data points the Fed apologists are using to make their case for an improving economy is that they are all distorted by (and, imo, dependent on) ZIRP, QE, and the hope that the Fed knows what it's doing.  To back me up, I would point to the markets.  There is a massive amount of money that is all trading in a way that is opposite of the reality the Fed is trying to propose.  And if you pick apart the Fed's map of reality - like using the unemployment number as a reflection of "full employment" - you'd have to be willfully blinding yourself to not see the gaping difference between the map of reality the Fed is proposing and the map of reality the markets are proposing, particularly the bond and commodity markets.

So my last comments about the Fed for awhile is that it sounds like they are intending to raise interest rates later this year.  Are they bluffing, or are they crazy?  I've been pretty poundy on the tabley about the fact that it's never going to happen.  But that's because I'm listening to the message of the markets and the structural reasons at the root of the problem that they can't fix.  But the Fed seems to be operating from a different map.  If they believe their map is what is actually happening, maybe they are crazy enough for a token 25 or 50 bps rise.  But they're going to find out that they aren't in control anymore and it won't be long before they reverse back to ZIRP and likely more QE in 2016.  They might talk like they don't care what the markets do, but they'll start caring when the trillions in inflated stock prices starts to disappear and their wealth effect becomes a poor effect.  They created the box.  Now they have to live within it. 

My market comments will be brief because it's a whole bunch of I don't know.  I do believe there are inflection points approaching for several markets though. 

ES daily.  My overall bullishness about equities was based solely on a continuation of the positive reaction from the ECB QE last week because the fuel for the broad market has been QE.  However, we just put in a lower high and reversed back into selloff mode, so I'm thinking the fear is coming from the Fed's insistence that they can raise rates, which could easily turn into a downward spiral for equities (not to mention dozens of other reasons).   The only reason we're at the height we are is because it's been impossible to stay short due to the parade of Fed governors who emerge at the slightest downtick and cause a short squeeze.  So I have little confidence in either direction at the moment.  There are a few red flags though.

First, there's a head and shoulders top forming in the ES.  If this breaks down it should lead at least to the uptrend line from the Oct low currently crossing through 1900 area.  But equities have a way of suddenly reversing due to Fed comments, not to mention the Commercials like to cover shorts into high volume areas, which breakdowns tend to be.  So clearly the breakdown would happen under 1960.  I'd rather wait at support for equities to bottom with high volume buying coming in and play the bounce.  THEN I might be interested in the short side if it appears to fizzle out.  

Second, this selling has been different than other corrections, which were more like two days screaming down, followed by a day straight up, then screaming straight back down...  This selling seems to be spending a little more time, as if it's more of the big money sitting on the offer and unloading.  Do I know that for sure?  No I do not.  But it does have a different flavor to it.

Third, the Large Spec long position has been liquidating, which isn't slam dunk evidence by itself, but another red flag to be aware of.   One of the bigger red flags that could happen would be if a Fed governor comes out and tries to stick save the market by promising patience and the possibility of more QE, but the bounce only lasts a couple days and then rolls back over.  1960 is important.  And the 1890/1900 trendline is vital.  

NQ daily has a clear downtrend channel that will run into the weekly uptrend around 4000.  That is the battlefield that determines the next couple month, imo.  If we lose the uptrendline this will get very nasty very fast.  But I'm thinking we bottom there and break the channel to the upside.  It should be noted though I am currently flat and won't get hurt if I'm wrong.   

Gold had a perfect backtest of the 20-day EMA and a solid reversal.  It should at least climb back to 1300 and potentially to the downtrend line thru last year's highs that currently runs through 1320.  I would be very attentive if you're long at both of those spots.  So far it's doing everything it needs to do to be bullish.  However, the net long position of the Specs is over a two-year high and it's at a level where the market peaked twice last years.  (See next chart after gold.) 

You have to remember that the motivations behind what drives the "paper" futures market is not the same as owning the physical metal, which is essentially an insurance policy against inflation and a currency crisis.   The futures market doesn't go long because all fiat currencies eventually fail.  And they have buying capacities which are more determined by market sentiment, not to mention they actually have to deal with unrealized PnL.  Meaning, they have to cut positions eventually, which shapes the psychology of their strategy on the profit taking side too.  You also have to keep in mind that the crazy run in 2011 was based in the unknowing of the inflationary consequences of QE, plus the geopolitical events at the time, including the Middle East flare up, the tsunami in Japan, and the downgrade of US debt by S&P, all of which acted as catalysts for a blowoff top of the decade long bull run.  I personally believe the physical metals will be very valuable one day, but I don't know that for certain, and I have no idea how long that will take, or the path it will take because I also believe there's more need for hedging physical risk than there is for speculating.  

If you look at the COT positions in silver at the time, most of the move in the $40s to its peak at $49 was the rare Commercial short squeeze.  They lost control of the market.  Ever since, though, they've capped every peak as the Specs run out of bullets.  There is a great danger of that happening again soon.  If gold can clear the downtrend of last year's highs at $1320, it opens the door to the $1525 breakdown, but based on positioning it's at least time to be cautious.  I've played the long side lightly lately and fairly short-term.  But I will be looking for an opportunity to get short in the battleground of $1300-$1320.  That area is another inflection point just like the $1220s.  Failure there and it could be the top.  A breakthrough there should lead to a big move and renewed interest from outside money.  Either direction, you just have to know your risk of where you're wrong.  I personally like to see a high get put in and then use it for my risk point. A lot of times it will consolidate near the intraday high it just put in and have one last blip that falls short.  That's the ideal entry for me, using just beyond the high as my stop.  Sometimes it can be as little as a couple of points.  Trading is much less about knowing what's going to happen and much more about finding the inflection points.  A true inflection point will lead to a very profitable trade even if you're wrong by simply reversing directions.  

Dollar daily.  The Spec long position here is at a record.  Likewise for the short position in the Euro.  So while that is always dangerous, the difference between gold and this is simply the sentiment.  I still think the dollar goes much higher, but I hate being in trades that get this lopsided in positioning.  With NFP this Friday, sometimes they use a news event to take profits, which leads to a spike down that others buy up.  It's just a matter of how much tolerance you have for pullbacks if we have one.  I personally have very little tolerance for pullbacks, which is what I'm trying to improve on the most as a trader.  I have no answers here.  Bigger picture it's going higher until the Fed starts backing off, which doesn't seem imminent, although a tumbling equities market could change that.  Like everything else if you find a low you can use as a risk point, you take it and move to breakeven when you can.  

Euro monthly.  Like the dollar I don't know if we pullback further or not.  But I do believe the next spot is the 1.07 low and eventually parity, possibly beyond.  Greek turmoil will only help in this regard.

Oil had that strong move to close Jan above $47, except it happened on Friday and not Wed.  I missed it.  I have no interest in this.  No idea what happens from here.  There are still a ton of Spec longs in this market, so it's important to see if there's any follow-through to the upside this week.  If we roll back over, I agree with the people who've been saying we won't see a bottom until there is complete long side capitulation as stubborn funds blow up.  You have to be aware that they did get their Jan. close, though.
    

Bonds weekly.  I'm thinking they should test those highs, especially if equities breakdown to their possible support points.  I'm currently thinking equities will bottom and at least make a sizable run back up, which may coincide with bonds piercing to a new high and reversing.  It's just an idea.  I'm not interested in playing bonds short, but I will be watching closely if we pierce to new highs and reverse, so I will be trailing a close stop.    

My overall philosophy is that every year there are times when things seem fairly obvious and it's your job as a trader to reasonably push it to maximize the opportunity, and then there are times when things are shifting and there's way more uncertainty so you have to change gears and slow it down, unless of course you're selling volatility.  Sometimes the most profitable trade is not taking one.   

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