Tuesday, November 23, 2010
Been on the Sidelines
I have been sitting on the sidelines in terms of this blog for the past few weeks. Will begin updates again probably after thanksgiving. Happy thanksgiving to you and your family.
Wednesday, November 10, 2010
Palladium on the Move
Years ago I traded the palladium futures for a client who was using them as a hedge against this physical inventories. The market back then was anemic as I was literally trading against one trader in the pit it seemed each time I called down to get a market (this before the globex system evolved for metals). On the chart, around the 1100 level, was the area I was unloading palladium futures for the client. Now 10 years later, the futures look like now they are gearing up for another move towards those highs. The breakout occurred last month in this metal and has continued into November. Interestingly, the platinum contract, not shown here, it not showing the same breakout pattern. In fact, it is lagging badly. Since these metals are mined together, the breakout in palladium contract might find some stiff resistance ahead. In the past when platinum has lagged the move higher, that has spelled trouble for palladium. It has also signaled taht the move in gold might be long in the tooth (the breakdown below 1400 today could be an indication of this). Nothing solid has occurred yet but I will be watching closely in the days ahead.
In looking at the trend models below, you can see that momentum A model is not yet overbought. The contract corrected on the first break through the bands but bounced off the 13 month MA (strong move) and is now moving higher. A climb towards the 900 level should break the band. If it climbs towards the previous highs, it will be overbought again arguing for a move downward. In the meantime though, the bulls control the ball. in terms of momentum B, it is quite extended but showing know signs yet of moderation.
Going forward, I will be looking for pullbacks to get into this contract. Call be bullish on palladium.
Tuesday, November 9, 2010
Bonkers
First and foremost, Silver is closing in on the $28 target that I mentioned back in September. Upon review of the chart though, i would argue that $26 would have been a better target (which has been taken out easily) followed by a move towards $30 next. Like the GLD support that I mentioned a few weeks ago at $119, which happened to be a target level from the breakout from lower levels, Silver now has major support at the $26 target. If it holds after this parabolic move, then the $30 level would be my next target. At the same time though, if you look at the bottom two charts and the circles shown, Silver is now overbought similar to 2004, 2006, 2008 and now 2010 (every 2 years?). Each time this metal has corrected hard and given the open interest levels that historically have been in this contract, it will not take much to knock it down if a few hedge funds get interested in doing such.
So I am probably a buyer on dips above $26 with a stop below that level to play the decline down towards the $22/24 area. I wish I had followed my original note and held the silver that I bought at the time but what can you do! Trend is higher and the CRB is not quite at its target just yet. Thus the bulls still have supports.
Monday, November 8, 2010
Crude on the Move
In the middle of last month, I was of the opinion that crude would have trouble with the 84 level and head back down towards 80 on the way towards the $72 level. However, I did not really take into account how strong the buyers were around the $80/$81 level and this rendered the $84 resistance somewhat less strong than it appeared. Sure enough as November arrived and the leaves fell off the trees, the price of crude smoked to the upside and hit $87.50s late last week and overnight. It has since retreated back toward the projection point - which if you do a simple extrapolation between $79.50 and $83, you end up with a target of $86.50 or roughly in that area. The daily chart found support today at $86.So what is my plan going forward? Well momentum turned up just as the chart was approaching resistance a few weeks back. The breakout then became a formality. The fact that that the market blasted through $86 like it was not there, argues that $89 is probably the eventual target before a meaningful correction follows. A failure around the $86 level though does argue for a retracement back to the breakout point around $83 and change. Momentum remains bullish at the moment so I will continue to play the long side with the trade. Breaks below $86 might encourage some short sales from this trader.
Just one more note. Fundamentals for the oil barrel at the moment are lousy. Thus this move is all about the weakness in the dollar and stock market strength. To find real support, the fundamentals for the distillate end of things must improve but for that to happen, we would need some very high industrial demand on the electricity side or a cold streak forcing everyone to jack up their heat. On the gasoline side, mall traffic was huge this past weekend so we could start to see some better alignment with the fundamentals there.
Sunday, November 7, 2010
Highs and Lows
Now at first glance of the chart, the first word that comes to mind is overbought, if you look at the oscillators. If you look at the smoothed index, you could say "almost overbought" is probably the best way to describe things. Each time in the past, when the index has pierced this upper level, the market has either slowed down its advance for a few months but or corrected. You can also see if the index starts to decline while the S&P continues to climb, that is a warning that the underlying fundamentals or strength of the market is waning. That is not the case now but it was in the lead up to the bubble highs in 2000 and again in 2007.
In looking at the oscillators on this chart, the top oscillator is basically at resistance - this one is a slow moving oscillator and thus argues at the moment that the market could run into resistance around the current levels. At the same time, a break above the 20 period moving average could technically argue for another leg up in the S&P 500. The bottom oscillator is another story. It is approaching 2003 level highs as well as 2000 and 1998. In each instance, the market corrected hard within 6 months. The highs for the 2003 post period was early 2004 before a 9 month correction followed. The 2000 signal confirmed the bear market. The 1997 signal was a precursor to the problems that fall as well as the issues in 1998. At the moment, with its overbought situation, it argues that the current rally could be long in the tooth.
On balance, I am not too concerned yet as the NYSE Highs/Lows index has not hit the top level yet that signifies overbought. I will be watching though when it happens and what the index does next. Bull market remains strong but some headwinds seem to be forthcoming.
Friday, November 5, 2010
Upward Momentum
A month ago I posted a note on the S&P, using this "P Momentum Model," arguing that there was some concern that the rally was petering out. Well, a month of solid gains followed up by a breakout to the upside over the first week of November has rotated each piece of this model to the bullish side - for the first time since the March 2009 lows. What followed during that time was a monstrous move off the lows. That is not to say we see the same thing but given the momentum is now solidly in the bulls corner, higher prices are probably in store for the S&P. By year end? That is a tough one given the weak retail sales numbers. While the jobs report was better than expected, we need another month of such to get a confirmation that the employment situation is improving (contrary to what I am seeing).However, when looking at a chart, rationalizing things is not always the best method for looking at where we are going. So lets review quickly the implications of all four models in bullish directions. As mentioned, the 2009 lows led to a monstrous move. Before that, the breakdown in 2007 was a leading indicator of the bear market to come (and the pain that followed). Before this period, we had the 2003 lows that also was a period of rising prices. Before that we had the confirmation of all four models downward in late 2000. In each case, the next 12 months were strong for stocks which argues two things: The market breakout is sustainable and the 1325 level is a possibility now. By year end? That might be pushing it but nevertheless, stock momentum is once again very bullish.
The one caveat is from the chart I posted earlier - showing the extreme condition that the Russell 2000 versus Russell 1000 chart currently displays. In the past a top has arrived when the indicator is overbought. Thus for the next leg of this bull market, the speculative names cannot lead - the large cap names need to. So overall I remain bullish but given the risks from the Russell 2k/1k model and the possible inflation storm around the corner, I am watching intently for any signals that the bull runs out of steam. However, as I mentioned, the P momentum model turns have all resulted in solid market performance in the year ahead. I guess we'll see what wins out.
Fourth Time is a Charm?
I am left wondering what this means. Does the ratio breakout to a higher high pushing speculation levels off the chart or does it move to higher levels but reverse violently sending the markets to a deep oversold state that it probably should have gone in the summer? I could honestly make the case both ways. The bullish story argues that the ratio find firm support and a higher low arguing for a higher high. The bearish case is basically the fact that we had the higher low and did not fully correct the excessive speculation that existed in the spring. History tells us that markets which do not have healthy corrections, have major corrections. We saw this in 2006/2007 with the markets moving straight up in the fall into Feb 2007 and crashing with the Shanghai comp. We saw such in the spring of this year and the flash crash and three months of pain that followed.
So as we proceed through the end of the month, I will be watching two things closely. First, what the S&P does with current levels. Second, what the Ratio here does; will it breakout to higher levels and hold; will it fail to make higher levels and reverse lower; or will it breakout to higher levels, move to overbought and then correct? I will be looking for clues in the weeks/months ahead.
Thursday, November 4, 2010
Breakout...Almost
Well if you look at the position of the current candle and look at the highs, they are basically sitting around the same point as the levels in the spring. A failure form this trading area will get the bears all over the screens selling futures, SPYs and anything else related to the markets as they will see a double top and a retest of the 1000 level next. I believe the jobs report will be a bit better than most believe so this should not come into play but the markets are extended and a correciton is overdue. From where is the key. I remain bullish but now concerned about the outlook for the markets with the Fed's error from yesterday. QE will be something we wished was never implemented.
Here Comes Inflation
Not much to say this am (since I am on the road this week) so this will be brief. The Fed said yesterday that inflation was tilted to the downside and this the $900 billion (includes maturity reinvestment) was necessary to facilitate growth. First, the threat is not deflation but inflation and it is here folks no matter what the CPI says. The CRB is climbing, General Mills and other food distributors are now passing prices through and profit margins are going to be squeezed. This is not stock friendly - the question is at what point it becomes painful to corporate america?
This is not to say I am not bullish on stocks. However this is a threat that could upend the stock market. Incomes and job growth are not rising quickly enough to offset the current levels of inflation...never mind 4 or 5 times! Also bonds now do not have fed buying support or inflation support. In other words, long rates are going to climb. And the dollar, well I would be looking for a test of the lows now no matter how much I dislike the Euro.
This is not to say I am not bullish on stocks. However this is a threat that could upend the stock market. Incomes and job growth are not rising quickly enough to offset the current levels of inflation...never mind 4 or 5 times! Also bonds now do not have fed buying support or inflation support. In other words, long rates are going to climb. And the dollar, well I would be looking for a test of the lows now no matter how much I dislike the Euro.
Tuesday, November 2, 2010
Aussie on the Move but....
BUT (and you new there was going to be a but), my favorite confirmation of the Aussie Dollars move, the price of copper, is not confirming as the chart shows as it remains stalled in the 250 to 400 range. In the past when the copper contract has confirmed the move by breaking beyond resistance (or breaking through support), the Aussie dollar has continued higher. However, when the copper contract fails to breakout, the Aussie dollar rolls over and then collapses downward - 2008 was an example of such though it fell much further than I thought it would. Now the Aussie is on the move higher yet again and copper is sitting right at the same resistance levels that contained the contract in the past. A failure at the current levels would be very detrimental to the breakout in the Aussie leading to at least a correction to the bottom of the previous range around the 80 level.
So in short, I can project the levels that the Aussie can trade to but if the copper contract does not breakout to the upside, my stops will be on the other side of 95 looking for a very swift move toward the 80 level.
Monday, November 1, 2010
Microcaps on the Run
In terms of the momentum models, A and B, momentum is generally rising though the "A" model has not made a higher high and the "B" model has leveled off for the most part since late September. This argues that with the leveling in gains, that the speculators are pairing back in this index. IN terms of the Oscillator, the index is close to the April highs in terms of momentum but given the slowdown lately, this sort of overbought state is unwinding some which in the grand scheme of things is bullish for the overall long term uptrend in the index. In regards to the Power and Force end of this index, the model remains solidly bullish even with the breaks of the trend moving average since early June. Lastly, in relation to the S&P 500, the index broke out above resistance in September only to back off as the S&P charged higher through the end of October. This argues that risk taking is falling which happens to be inline with my overall market model which showed a drop in risk taking as well (though a bounce back on Friday to the primary trend).
So overall this model is bullish as the volume confirms the uptrend and momentum models are both bullish at the moment. The fact that momentum A is still lower than the level in the spring bothers me a bit but given the strnegth of momentum B, the overall structure is still higher. The oscillator should unwind with this continued sideways action but if the GOP takes the house and the senate, you can bet the outperformance will pick up in the index versus the S&P and push the oscillator to overbought.
From a trading standpoint, I would probably be a buyer on further consolidation in the index. Ideally the index would backtrack to the trend MA of its relative performance with the S&P and then turn higher. That would give me the greenlight to add to microcap positions and look for a challenge of the previous years highs.
Markets on Hold
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