The Dollar

The dollar is a very key reading to understanding the market action. Above is what the dollar has done in the last month. It has had a 10% rally in the last month. For a currency this is truly garguantan, especially when the reason the dollar is rallying is not due to inherent strength but the weakness of other currencies. While we believe in the intermediate term (3-6) months, the dollar will continue to rally upto 80 or so, at this point in time, it look overextended. Points in favor of dollar bears,

1. The dollar is on a long term resistance trendline (not shown here), which is around 78 on this charts.
2. The recent consolidation in the dollar after this huge move is unhealthy. It has been consolidating sideways to upwards.
3. Bearish divergences on the all the momentum indicators.

Q. Would I short the dollar here and any targets?
We would wait for the stochastics to break below 80. Once that happens, we expect the next stop to be around 75 on the $USD.

Well, dollar weakening would spark a bounce in the commodities. Our guess is oil will see 130-135$ or so, before the dollar starts to regain momentum. We believe silver will atleast fill the gap upto 14$ and gold will rise to atleast 850$.

As for the markets - some of the correlation of markets and oil has started to unravel recently. We still slightly favor the upside for stocks, until the trend is broken. But airlines for sure will get clobbered should oil rise.

A Triangle appears

The Dow and SPY have frustrated the bulls and the bears alike in the past few weeks. Well, the charts show exactly that. We have been bouncing around in a triangle in the SPY, DOW and even in the transports. Triangles are explosive creatures, akin to keeping a spring coiled up within a box. Whichever edge rips, there is bound to be explosive action in that direction. We are slightly bullish still, we believe this market could rip higher next week. We believe the first target on the SPX could be around 1310-1320 or so.
On possible plays, look at XLV (the biotech sector - thanks to hil_feld for pointing us there). The sector has indeed been among the best performing since July 15th. It seems all the hot money is going into biotech. XLV looks to be consolidating nicely on the 200d. It just looks ripe to make another move.

Indices

Above are the charts of the NASDAQ, SPY and TRAN. We got the call for a rally in commodities and the downtrend in the market in the beginning of last week, followed by the nice bounce on friday almost perfectly. Where this bounce has brought is that, we are now sticking our heads up against against the same line which was providing support (for the past few weeks) SPY. Now it has turned resistance.

The charts are not suggesting one way or another to us here, decisively. We are slightly favoring the bulls with odds of 60-40. Our thinking is this, the NASDAQ is butting against the 200d. As seen from the chart in the past, the NASDAQ has always managed to penetrate the 200d, before turning back down. We believe NASDAQ could see the 2450 level. The TRAN has some more space to travel upwards. The first area of resistance is around 5150. Why we are unsure of the overall picture given we have upside wiggle room in these indices, is because the SPY seems to be missing this upside space. The SPY is against lots of resistances and it is entirely reasonable to assume we sell off hard after touching the ascending trendline. But somehow that trendline in our view, is kind of "artificial" or "too visible". It has had too many hits now that it has become so obvious. Previously, we called for that trendline to be broken on the downside, since it was too obvious. We figure, what the heck, why can't it be broken on the upside then? Bottomline, slightly bullish, but we will not prefer to play unless we have confirmation that the trendline is broken. If it does break, we could see 1320 on the SPX.

Next few days

The past few days' action has left many perplexed - as hil_feld rightly commented on one of the posts on this blog. The basis for the movement today was actually bullish in the face of oil going up and Freddie and Fannie getting spanked.

Naturally the question is where does the market head from here? We look at two charts the transports and SPY for an answer
First, the transports has a possible (perhaps sloppy) Head n shoulders. However, the right shoulder looks weak. It needs some more filling. Accordingly, we are expecting at least a rally on the transports to 5150 level - a possible upside of about 4-5%.
Another piece of evidence is more of a contrarian pyschological one. Almost every tom, dick and harry has been watching the ascending line on the SPX and the DOW. Once, it broke, there has been a sea shift into bearish mode. Somehow, we believe there will be another push upside, just because the market has its own mind. Our first target on the SPY is around 130.4.
Finally, the intra day volume in the past three days, is actually showing bullish divergences - low downside volumes and higher upside volume today.

Our vehicle to play this upmove, would be the QLD, since it is now resting on support. Furthermore, the AAPL chart looks prime for another blast upwards.

Where is the money going?

Money has rushed out of commodities in the last month and undoubtedly stocks have rallied. But somehow, the action is not commensurate with the bashing of commodities. We believe this is going into the dollar and the bond market. The bond chart shown above has raced, unlike the stocks which have drifted upwards. However, the chart is unsustainable and is at key resistance levels. The bearish divergences are showing blatantly. Fundamentally, this is the market saying, drive the real interests down since there is no threat of inflation.

We believe, a reality check is imperative here. Stocks rallying on decreasing commodity prices is unsustainable, since there is a fundamental conflict of interest.

On a longer term (a year or so) :-
The US dollar has been rallying based on the belief that the US was first into the recession and the world is lagging 6-12 months behind. And it will be the US bringing the world out of recession. We don't believe this is quite true. The US economy is dominated by consumer spending. The US has proved to be a credit defaulter, with massive writedowns. Consequently, the US will not get loans to consume once again. The world is barfing now because it lent the US economy. We believe the world will come out of it. And ofcourse, credit lenders around the world will continue lending, but only to more credit worthy customers, just not to the US.

The Rime of the Ancient mariner

Above are charts of EXM and DRYS. We got in DRYS too early last time and got burned. But this time around, we believe the shippers are just getting ready to go again. They have broken their downtrend lines. With a commodity bounce on the horizon and the baltic dry index (BDI) beginning to come back to life, these shippers may get back to their top portions for a decent 15-20% profit.

The outperformers -- Russell 2000

Above is a 3 year weekly chart of the russell 2000. This was trending up gently all along and then broke this line at the beginning of 08. We have tried to get back above the line and failed. I believe, if there is another rally (our guess is either tomorrow or on friday), the $RUT will have resistance around 770.3. Our guess is this tryst will fail too.

Momentum indicators are mixed and are not very helpful here.
In case, RUT gets back into the channel, we will change our stance to a slightly bullish one.

A bull in china -- FXI

Above is a long term 3- year chart of the FXI which reflects the hang seng HK index. In the last year Hang seng has seen sympathy selling reflecting the Dow and the other world indices.
First some bullish technicals
1. The FXI is at a long term support trendline
2. Bullish divergences in place.
3. Stochs and other momentum indicators oversold.
4. We see a huge descending triangle pattern, which has been forming for the last year or so.

The thing to note is that this is a long term play, probably in the order of months. But we believe, the returns will be spectacular as well.

On the Fundamentals side, we believe china is facing near term hiccups are the US is barfing big time. Analysts on TV are right in that US slowdown will affect china. More directly, the huge $ dollar reserves in china are growing worthless as the dollar depreciates. But what we think analysts miss is that china has a much larger reserve of its own currency the renminbi, which we believe is going to strengthen further. The ideal vehicle to exploit this unfolding economic scene, would be to probably buy good chinese stocks and collect dividends in the renminbi directly rather than buy dollar denominated ADRs or a "lame" index like FXI. If there are such vehicles out there, kindly let us know.

This post has gone long enough and pardon me for my ramblings. Any suggestions/criticisms are welcome.

Finally on a more psychological note, if you see the china Yahoo message boards, there are so many people saying the boom in china is over after the olympic circus closes. We differ, after seeing the olympics opening celebration, we can only requote Jim Rogers- "China in the 2000s is akin to the US in the 1900s ".

Gold miners

We saw possible signs of bottom formation in gold miners today. Ofcourse we want confirmation in the following week. Quite a few of them caught on sizeable tractions gain today. We would like to scale into HL this week and next. We like the stochastics, RSI turning over, bearish MACD histogram divergences. We also particularly like the rather bearish looking candle with a huge topping tail that HL put in today. We treat this like a contrarian indicator - sort of misplaced topping candle at the bottoms. Our first target is the 20MA, which is around 8.15 today. Remember, this is descending and it could be around 7.5 by the time we touch it. Good luck

fun trade -- CPSL (part 2)

We fun traded CPSL last month for a quick 13% profit
http://maybeitsclarke.blogspot.com/2008/07/fun-trade-cpsl.html

The stock is back to its baseline again. We will watch it closely, it could happen that a bounce in metals will produce a bounce in CPSL and possible breakout of this formation. GLTA

Energy Bounce -- CHK

Energy/Commodities have been flogged the past few weeks. CHK was a star performer and a darling of many portfolios, the past few years. The last few weeks have seen the violent unwinding of the CHK positions. CHK is near its long term trendline. We will look to add CHK near the 42-43 area. Our first target is around 51 on CHK. We are seeing positive bullish divergences on multiple momentum indicators. We expect energy and oil to rebound in the short term for about 2-3 weeks, starting end of this week/early next week. We saw early signs of that in the gold miners today.

On a side note, we made one roundtrip ETF short today, when the SPX touched 1291 today for a scalp profit. We don't want to be take L/S positions when the indices are at a crucial juncture, and the week is opex.

While the intermediate term picture is up in the air, as of now we are leaning towards a scenario like in Jan. We believe the energy rebound, may cause the markets to break the (too closely watched & too obvious) ascending trendline or even the July 15 lows ( probably take it out by a few, bringing on a lot of shorts on board). After that we may see a healthy bounce upto SPX 1350 levels by election time. Ofcourse , predicting markets is solving a puzzle - the more pieces fill in, the easier it is to arrive at the solution. As of now, this is our view. Lets see how things pan out.
Good luck to all.

Near Term

Above is a chart of the transport average. They say, this is usually the leader of the market. This chart has some major resistance around the 5281 area, just another 1% ahead.
The $TRAN had an inverse head n shoulders breakout and we used it correctly to predict the reversal picture in july.
http://maybeitsclarke.blogspot.com/2008/07/pivotal-position-to-go-long-or-short.html

And here we are now, bumping against that same ascending trendline. Usually, when charts break out of such steep trendlines, they rarely get back into them. We expect the $TRAN to bounce off this trendline too, the bearish divergences are also beginning to appear.

But there is good news if you are a bull - since, this trendline is ascending, the resistance on this channel keeps increasing continuously at the rate of ~200 points per month So until we see signs of a top being put in, we are long this market, though not aggressively since the divergences are beginning to show. Every new resistance area, we take off some more profits from the table. Also, from the previous posts on the dollar and USO, they both are near year long trending resistance and support lines respectively. We don't think these will break on the first hit, at least for the USO.

Good luck to you all.

Dollar

This is an update to our earlier post "Dollar versus Renminbi"
http://maybeitsclarke.blogspot.com/2008/07/dollar.html

We were clearly myopic in our vision of the dollar then. We were made to eat our words by the action in dollar this week. As can be seen from the charts above (dollar and Euro), the dollar has broken short term down trendlines and the euro is now a bearish looking chart with divergences all over. One might ask, what was it that the FED did right to strengthen the dollar, nationalize Fannie and Freddie's debt was infact bad for the dollar? Well, it seems that the ECB by not increasing interest rates has stated that growth in Europe is stifling, meaning our friends across the atlantic are also in mess. Technically, the euro chart has been in a bull run and was beginning to show topiness (with bearish divergences). It is now beginning to correct.

We believe this is the time when the fibonacci retracement will occur. These retracements are healthy for the trend. We believe by Dec end, the dollar could break its 3-year steep downtrend line and touch the 81 mark. Conversely, the euro could drop to the low 140s depending on how badly europe does. We will know better as the charts fill in and momentum indicators fill in. Mind you, breaking a descending trendline, doesn't mean there is an uptrend, it only means the rate of descent has lessened. This is what will happen with the dollar. The macro-economic view point is as the dollar weakens, the exports will gain strength and imports hurt - meaning the current fiscal deficit will start shrinking. This is necessary medicine for the US, which has been binging the past decade.

As for the short term, the next week or so, for the dollar, the first hit of such a long lasting trendline after a huge rally of the bottoms serves as resistance. This could happen sometime next week. The trade would be to sell any commodities into strength and to buy short basic materials especially steel on any pullbacks in SMN.

Do we think the commodity markets are dead? This is a story for another post.

How much more legs does this rally have?

Above is a chart of the SPY, which is supposed to track the SPX. We have been trending higher in an ascending wedge pattern in the last 3 weeks, the rallies and pullbacks have been definitely tradeable. We expect one more iteration in this wedge, wherein we run either into the 50d or even hit the descending trendline. But one way or another, we are going to break out of this wedge pretty soon. Usually, ascending wedges are bearish (Possibly the psychology behind this is that despite, the lower baseline providing increasing support, the bulls are unable to extend the top line higher, indicating waning bullish strength)
The MACD divergences are just beginning to appear.

Accordingly, we will be looking to put on a small speculative SSO(L) position either tomorrow or dayafter, whenever we hit that ascending trendline, looking for possibly the one final gasp towards 1310 (which is our first upside target).
It is possible that the commodities will start getting attention once, these roll over. Lets see.
Good luck to you all.

Is there any more air left in the Oil Bubble?

Above is the chart of the USO which tracks oil. Oil has taken a beating in the last month. As can be seen, oil was in a steep uptrend and recently broke it and everybody has been claiming that speculators have been the cause of this bubble. We don't believe so. The way we see it, the broad channel (in blue) is what is a possibly sustainable growth in the price of oil. The green line shows what speculators did with it. Oil was getting "jammed" in a rising wedge. We got this call almost spot on even timewise, which is usually very difficult, when everyone was looking for another iteration.
http://maybeitsclarke.blogspot.com/2008/07/is-oil-bubble.html

As of now, we are not short oil or (buying airlines any more, at least for the intermediate term, sure may be a quick trade here and there. For the long term, we believe airlines are attractive, but that is another story and we will believe we can get it at slightly better prices than today) which we were a few weeks back. Sure, oil is not showing signs of a bottom, but it is showing declining selling strength. We believe the USO could go down some more around the low 90s. Maybe there is one final shakeout, before ripping higher. Bullish divergences have started appearing on the chart too. This is a difficult call (for us), but as of now, we are biased towards the USO holding this channel.

On a different note, thinking the FED has coyly gotten away with prices by maintaining the most inflationary policies in the last decade doesn't give us closure. The US will have to pay the price for printing greenbacks, while the other countries around the world have been raising interest rates to > 10%.

We are on the side of those people who believe speculation only amounts for a 20-30% rise in oil prices. Fundamentals and inflation account for the rest of the 1200% increases from $12 to $144. If we are right, the time is near, when Oil will return to its rightful owners.

Damage Control -- uaua

bah! Blogspot is not behaving nicely today, Anyways,


http://maybeitsclarke.blogspot.com/2008/07/aces-high.html

is the link to our earlier post for airlines and we have made some nice profits on this. However, our UNG position is not showing any bullish signs bar for some bullish divergences. What we have been doing is playing damage control by buying airlines. We like UAUA and AMR for this. For e.g. today, we played UAUA as a hedge and sold it off at the close to the falling UNG. Our reasons for not selling UNG is we still believe this is somewhere near the lows. Unfortunately, all the commodities are being treated like trash. We believe USO will find traction around 115 atleast, if not at these levels. Nothing goes up/down in a straight line. If oil needs to fall to $100, it must more likely rise upto $133 or so first.

UAUA is currently facing stiff resistance aroung 9$. There are some downtrend lines too. However, there are also some bearish divergences on UAUA and on SMN(but that is a story for another post). Our strategy will be to buy the UAUA on break of 9$ on strong volume. For now, we are holding onto our UNG. We are taking a chance against our discipline of cutting off losers quickly - we are hoping it doesn't make us pay.