ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Apr
18

T2108 Update (April 17, 2015) – Another Close Call With Overbought Amid More Chop

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 51.3%
T2107 Status: 52.9%
VIX Status: 13.9
General (Short-term) Trading Call: Neutral. Market still seems stuck in a chopfest. T2107 backs off its breakout. T2108’s close call with overbought conditions produces a slight overall bearish bias.
Active T2108 periods: Day #124 over 20%, Day #83 above 30%, Day #27 above 40%, Day #11 over 50% (overperiod), Day #1 under 60% (underperiod), Day #193 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
It was another week of chop for the S&P 500 (SPY) as earnings season kicked off. Little was accomplished again, but there were several developments of note.

First, T2108 had another close call with overbought conditions. On Wednesday, April 15, tax day in the U.S., T2108 rose as high as 67.8% before fading to a 64.9% close. That turned out to be the peak before the fade as T2108 finished the week at 51.3% with a one-day drop over 10 percentage points.

Accordingly, the S&P 500 (SPY) dropped to end the week below the 50DMA yet again. This important trendline continues to trudge upward, but it is VERY hard to feel a sense of progress in this chop! Despite this trendline, the fade from overbought conditions must be considered a bearish development until proven otherwise.


The S&P 500 is chopping its way higher ever so slightly and slowly

The S&P 500 is chopping its way higher ever so slightly and slowly


The week started with a great trade on volatility. The week would have ended with a similarly great trade but I was waiting for another over-extension of contentment by the market. The market failed to follow through on Monday’s small awakening in volatility. Friday’s move higher lasted 60 minutes, flattened out for another three hours, and suddenly came to life again for nearly 60 minutes. The final 90 minutes reversed that last outburst. The end result was a strong fade in volatility just under the pivot and a close almost exactly where the volatility index, the VIX, closed on Monday.


The volatility index, the VIX, faded just below the pivot point to end the week where it closed on Monday's spurt higher

The volatility index, the VIX, faded just below the pivot point to end the week where it closed on Monday’s spurt higher

The fade into the close was an exact reversal of an intraday breakout

The fade into the close was an exact reversal of an intraday breakout

ProShares Ultra VIX Short-Term Futures (UVXY) remains stuck in a well-defined downtrend channel

ProShares Ultra VIX Short-Term Futures (UVXY) remains stuck in a well-defined downtrend channel


The other big move for the week was on T2107, the percentage of stocks trading above their respective 200DMAs. T2107 broke out two weeks ago and slowly trended up from there. Friday’s close brought T2107 back to the breakout point. Lower levels from here should confirm the slight bearish bias on the trading call.


T2107's bullish breakout is in danger

T2107’s bullish breakout is in danger


The closely watched dollar index (DXY0) ended the week flirting once again with 50DMA support. The dollar has finally lost its upward momentum but the uptrend is not yet over. All traders should be watching dollar developments closely. A break below last week’s low would create a 50DMA breakdown and end the primary uptrend. Such an event could cause cascading events including surging commodities, especially oil, and a surging stock market.


Another challenge to the U.S. dollar's primary uptrend

Another challenge to the U.S. dollar’s primary uptrend


Speaking of oil, 50DMA support continues to hold quite well for the United States Oil ETF (USO). An uptrend channel is now developing between the upper-Bollinger Bands (BBs). I am currently betting on another 50DMA retest sooner than later…which in effect is a bet that the U.S. dollar is going to bounce soon and convincingly.


United States Oil ETF (USO)  is holding support and trending upward again but it now faces a challenge beating out  the February highs

United States Oil ETF (USO) is holding support and trending upward again but it now faces a challenge beating out the February highs


Schlumberger Limited (SLB), “the world’s largest oil field services company” reported results this week that included an announcement of massive layoffs. The market loved it and sent SLB into a critical test of 200DMA overhead resistance.


Good cheer has followed in the immediate wake of SLB earnings recently

Good cheer has followed in the immediate wake of SLB earnings recently


In late November, I argued for what I thought was a pretty good hedged bet in the oil patch in the wake of the Halliburton Company (HAL) dealing for Baker Hughes Incorporated (BHI). I thought April expirations would be long enough to let the bearish or the bullish case fully play out. Instead, what I got was a LOT of churn and a late rally that came just in the nick of time to let me salvage about half of the HAL position!


While Baker Hughes Incorporated (BHI) has twice come back to its value right after the announced deal with Halliburton (HAL)...

While Baker Hughes Incorporated (BHI) has twice come back to its value right after the announced deal with Halliburton (HAL)…

Halliburton (HAL) has yet to even close the gap down created by OPEC's failure to manipulate oil prices higher

Halliburton (HAL) has yet to even close the gap down created by OPEC’s failure to manipulate oil prices higher


Seeing this divergence in performance makes me think a new hedge – long HAL and short BHI – makes sense. Or could it be the market expects another BHI suitor willing to pay even more dearly than HAL?

Russia has apparently benefited from the bottoming in oil in the past month or so. It has followed oil higher from the March lows. Now Market Vectors Russia ETF (RSX) is struggling to punch through 200DMA resistance. I was a little early on two sides of a Russia trade. On April 10, RSX dipped, and I bailed on a position in Direxion Daily Russia Bull 3X ETF (RUSL) for a loss. I then promptly switched to Direxion Daily Russia Bear 3X ETF (RUSS) thinking RSX was starting a fresh extended sell-off. Instead, the trend continued until the massive sell-off on Friday. Timing is everything! I am holding onto RUSS unless RSX beats out 200DMA resistance. I am again counting on the U.S. dollar to bounce and/or oil to reverse.


Book-ends of high trading volume on Market Vectors Russia ETF (RSX). Does the sharp pullback from 200DMA resistance signal the end of the run-up?

Book-ends of high trading volume on Market Vectors Russia ETF (RSX). Does the sharp pullback from 200DMA resistance signal the end of the run-up?


Now I leave the oil-patch for the internet.

Netflix (NFLX) is of course the name for the week. My refusal to take profits on my pre-earnings fade when I had them proved costly. That position never got better than breakeven shortly thereafter. I did decide to hold through earnings simply out of disbelief that the huge consensus and rush of analysts to upgrade NFLX ahead of earnings could be correct. The chart below says all that needs to be said about how the herd absolutely nailed this one in a rare display of high expectations from the mass consensus playing out exactly according to script. Not only did NFLX fly well above its upper-Bollinger Band (BB), the stock pressed forward a second day after that. You simply cannot get more bullish than this. Also in NFLX’s favor is a plan to split the stock to “make it more accessible.” This whole thing is a wonder to behold and not to be forgotten given how rare it is to see such a combination.

One analyst got so enamored with the momentum that he issued a $900 price target! (See “Netflix shares are exploding higher and one analyst has a stunning new prediction for the stock“). This is a rare case where I actually fully agree with stubbornly bearish Doug Kass:



Netflix (NFLX) now looks like the clear king of the internet

Netflix (NFLX) now looks like the clear king of the internet


Zillow (Z) completely collapsed after an earnings pre-announcement. However, in classic manic form, the stock came roaring back and is essentially trading where it was at the open BEFORE the pre-announcement. My earlier skepticism on Zillow and its deal with Trulia played out to a tee, but I did not profit from it as much as I should have. I closed out my latest put options into the selling last week, but I was also holding shares as part of a hedged bet. I refreshed the hedge after Zillow’s comeback. I now suspect that last week’s collapse represents a complete washout of sellers.


Looks like sellers have finally exhausted themselves on Zillow (Z)

Looks like sellers have finally exhausted themselves on Zillow (Z)


Google (GOOG) has quickly transformed itself from a bullish to a bearish position. I guess the anti-trust action from the European Union (EU) is really throwing the company for a loop. The 50DMA breakdown that started the month has led to continued selling down a neat channel formed by the lower-BBs.


Google (GOOG) is now a bearish stock until it can break out again above its converged 50 and 200DMAs

Google (GOOG) is now a bearish stock until it can break out again above its converged 50 and 200DMAs


Moving on to the industrial economy…

Both Caterpillar (CAT) and General Electric (GE) faded recent breakouts. In the case of CAT, I was fully prepared and loaded up on a fresh put spread. The surge on Wednesday, April 15, looked on the surface like a powerful follow-through to a 50DMA breakout. Friday’s gap down completed the reversal.


Caterpillar, Inc. (CAT) runs into a brick wall at the February highs and completely fades the latest surge

Caterpillar, Inc. (CAT) runs into a brick wall at the February highs and completely fades the latest surge


General Electric (GE) pleased the market with a plan to complete its return to its industrial roots. GE will shed its financial unit and use the proceeds to gorge on its own stock and shower investors with dividends (make it rain GE!). This is a natural follow-up to a strategy outlined in 2014. The market loved it. However, the classic cool-off from an extended move beyond the BBs went into effect. By Friday, the incremental enthusiasm from last Friday’s surge had fully dissipated. The last two days produced doji’s that represent buy/sell indecision. I think a trade here makes a lot of sense with a tight stop below the lows from Friday. GE should be good to at least get back to $28.50 or so. If the lows break, look out below for a potential gap fill.


GE's actual earnings seemed to cool off the newfound enthusiam

GE’s actual earnings seemed to cool off the newfound enthusiam


Finally, what’s a chartfest without Apple (AAPL)? This was a week where AAPL’s behavior was closer to expectations with 2 of 5 days featuring follow-through to the opening momentum. Friday’s move was the most significant as 50DMA support finally broke down on high volume. This is of course an ominous move ahead of earnings on April 27th and the official release of the Apple Watch, but I will not over-state the case. Let’s see whether the next trading week brings follow-through selling or just more churn within the current range.


Apple (AAPL) finally starts to breakdown, but it remains comfortably within an extended trading range

Apple (AAPL) finally starts to breakdown, but it remains comfortably within an extended trading range



Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long USO put options, net long the U.S. dollar, long RUSS, long Z shares and puts, long RUSS, long CAT put spread

Apr
13

T2108 Update (April 13, 2015) – Volatility Stirs from Its Stupor

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 57.0%
T2107 Status: 52.8%
VIX Status: 13.9
General (Short-term) Trading Call: Neutral. Market still seems stuck in a chopfest. T2107 is still showing the potential for an important breakout.
Active T2108 periods: Day #120 over 20%, Day #79 above 30%, Day #23 above 40%, Day #7 over 50% (overperiod), Day #1 under 60% (underperiod), Day #189 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary


I tweeted my comments on volatility (through StockTwits) soon after the market open. I was looking at ProShares Ultra VIX Short-Term Futures (UVXY). UVXY was stretching below its lower-Bollinger Band (BB), but I did not know that the volatility index would gap up before declining toward Friday’s low. My data source (FreeStockCharts.com) has a 20-minute delay on the VIX. So, I just assumed the VIX was getting just as over-stretched as UVXY. This was a VERY interesting case of a divergence that quickly corrected.


ProShares Ultra VIX Short-Term Futures (UVXY) was trading well below its lower-BB as the current downtrend accelerated - the bounceback was sharp

ProShares Ultra VIX Short-Term Futures (UVXY) was trading well below its lower-BB as the current downtrend accelerated – the bounceback was sharp

The volatility index, the VIX, gaps up and closes higher for a rare wake-up call

The volatility index, the VIX, gaps up and closes higher for a rare wake-up call


Regular readers can easily guess what I tried after this tweet: I loaded up on UVXY call options. The trade turned into what will likely be my best trade for the entire week. I sold the position after it doubled late into the trading session.

This awakening of volatility out of its stupor is not as surprising as the stupor itself just ahead of earnings. I discussed my surprise in the last T2108 Update, so I was mentally ready to pounce on a contrarian trade. The rise in volatility occurred just as the S&P 500 stopped short at a minor downtrend line.


The S&P 500's small rally into earnings season takes a pause at a minor downtrend line

The S&P 500’s small rally into earnings season takes a pause at a minor downtrend line


This decline was enough to send T2108 back under 60%. I am once again standing down from expectantly waiting for overbought conditions (at or above 70%).

During the day I took note of two interesting charts. I post these with the standard caveat that earnings news usually trumps technicals.

Intuitive Surgical (ISRG)
Timing is everything. I have been waiting and waiting for a good re-entry for ISRG. In fact, it has been too long since I was last in this stock. Well, on Friday, ISRG tripped a price alert with a strong buying surge. I could not get around to making a trade. Today, ISRG demonstrated convincing follow through with more buying on high volume. The stock faded a bit from its intraday high but it still closed at a 52-week high. Earnings are on April 21st. I could not find any news to explain the move.

ISRG closed for a second day above its upper-Bollinger Band (BB). A typical pattern on a sustained extension beyond the BB is for latecomers to add one more day of follow-through before some kind of reversal or consolidation. I was of course trying to get into ISRG before such a surge got rolling.


Intuitive Surgical (ISRG) surges to a 52-week high on strong buying volume

Intuitive Surgical (ISRG) surges to a 52-week high on strong buying volume

Can't blame a short squeeze: bears gave up on ISRG with a quickness last summer

Can’t blame a short squeeze: bears gave up on ISRG with a quickness last summer


Source: Schaeffer’s Investment Research

Netflix (NFLX)
Netflix (NFLX) has also surged toward its 52-week high (which is also an all-time high).

After hours on Friday, the company released its proxy statement. It included a request to shareholders for approval of the issuance of a tidal wave of stock:

“To amend our Certificate of Incorporation to increase the number of shares of capital stock we have authorized to issue from 170,000,000 (160,000,000 shares of common stock and 10,000,000 shares of preferred stock), par value $0.001, to 5,000,000,000 (4,990,000,000 shares of common stock and 10,000,000 shares of preferred stock), par value $0.001;”

The market being what it is, responded very favorably to the news, egged on by big analyst upgrades in the morning. Benzinga noted five bullish analyst calls going into earnings on Wednesday evening. Perhaps most important was the 180 degree turn by UBS to jump off the bear truck to the bull train. UBS delivered an upgrade from neutral to buy and a revised price target from $370 to $565. MKM Partners also encouraged boldness going into earnings on Wednesday evening: “MKM Partners also projects strong results and outlook, and ‘would continue to own the stock into the report,’ a recent research note assures. The analysts model EPS of $0.68.”

Altogether, NFLX experienced a tremendous gap up that represents a climax of sorts on top of the rally going into earnings from churn around 200DMA support. Given the leap, of course I attempted a fade. It went well for the first 15 to 20 minutes or so until the stock got a second wind and rallied as high as $485 and a 6.8% gain. The stock did fade from those highs and sent me back to even on the fade. These kinds of gaps well beyond the Bollinger Bands are just about the most dangerous moves imaginable ahead of earnings. The risk of a reversal becomes extremely high as expectations become extremely high (or low in the case of accelerating downside). I am considering holding through earnings…unless I get a good enough fade before that.


Accelerating exuberance and increasing expectations ahead of earnings as NFLX retests its all-time high

Accelerating exuberance and increasing expectations ahead of earnings as NFLX retests its all-time high



Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long NFLX puts and short shares

Apr
12

T2108 Update (April 10, 2015) – The (Strained?) Calm Before Earnings

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 60.6%
T2107 Status: 54.2% (faded back from a breakout)
VIX Status: 12.6
General (Short-term) Trading Call: Neutral. Market still seems stuck in a chopfest. T2107 is still showing the potential for an important breakout.
Active T2108 periods: Day #119 over 20%, Day #78 above 30%, Day #22 above 40%, Day #6 over 50%, Day #1 over 60% (overperiod), Day #189 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
Earnings season is about to kick-off in earnest and all is as calm as can be. The volatility index, the VIX, closed at levels last seen in December.


No fear ahead of earnings

No fear ahead of earnings


This lack of fear will make the market particularly vulnerable to negative surprises, but it is of course very possible Mr. Market will refuse to express surprise.

T2108 closed the week at 60.6% and made no progress from Monday’s close. The S&P 500 diverged a bit by managing to build on its gains from Monday’s rally to close over 2100 again.


The S&P 500 is creeping higher again

The S&P 500 is creeping higher again


Now that the S&P 500 has returned to the top of its current chopping range, the risk of the low VIX is further amplified upon negative surprises.

Adding to the drama is the U.S. dollar index. Contrary to popular expectation, the re-strengthening of the dollar is NOT hurting the stock market. However, I suppose with the index re-establishng recent multi-year highs, we have yet one more element of tension as companies roll out earnings and repeat refrains from January to complain about the impact of dollar strength on financial performance.


The U.S. dollar index still has a well-support uptrend

The U.S. dollar index still has a well-support uptrend

On a monthly basis, the U.S. dollar's extended strength is VERY clear - what happens over 100?

On a monthly basis, the U.S. dollar’s extended strength is VERY clear – what happens over 100?


Earnings usually trumps technicals, so I will be very cautious with the charts over the next two weeks or so. However, here are three of the top charts I am watching right now.

Apple (AAPL)
Last week was a rough week for the Apple Trading Model (ATM). My attempt to simplify the model happened to come during what should be an outlier week. An average week should feature ONE day where Apple (AAPL) does not follow through with its opening momentum. Last week, AAPL reversed course THREE times. On one of the two consistent days, the stock had to bounce back sharply to maintain the momentum from the open. Looking back, you can see that support at the 50-day moving average was the defining story. Lesson learned!

Note how AAPL has yet to close higher than it did the day before the announcement of the Apple Watch. In fact, it looks like a wedge is forming where a breakout, up or down, should lead to significant directional momentum.


The tension builds as Apple (AAPL) follows its 50DMA steadily higher into its pre-Watch trading price

The tension builds as Apple (AAPL) follows its 50DMA steadily higher into its pre-Watch trading price


iShares MSCI Emerging Markets (EEM)
China continues to rip higher as it drags EEM along with it. I established my hedged play just in time (described in the last T2108 Update). The huge burst above the 200DMA was just what the doctor ordered. It was so strong that, much to my pleasant surprise, it generated profits that more than covered the cost of my puts – by a large margin. I closed out the long side of the trade that day and can now just coast on the puts.


The EEM surge continues in style with a very bullish breakout above its 200DMA

The EEM surge continues in style with a very bullish breakout above its 200DMA


Breaking news: As I was putting the final touches on this piece, Chinese trade balance numbers came in VERY low – from FXStreet.com:

“…China Trade Balance (Mar), which came at CNY 18.8 bln vs exp CNY 250.0 bln, with exports -14.6% y/y (in yuan terms), while imports were -12.3% y/y (yuan terms), all components being a big miss…”

Baidu (BIDU)
BIDU is getting more and more interesting for swing trades. The downtrend channel I have been following seems now to be transitioning into more of a trading range. On Thursday, BIDU essentially broke free from the downtrend defined by its 50DMA only to run into stiff resistance at its 200DMA again. I traded call options into the top of what I thought would hold as the downtrend channel. It turned around on Thursday and faded the 200DMA breakout. I suspect the downside opportunity is limited to a test of the 50DMA as support as the stock tries to play catch-up to the strong rally in Chinese stocks (poor trade balance numbers notwithstanding).


Baidu (BIDU) has broken through its 50DMA downtrend only to meet fresh resistance at the 200DMA in what looks like a transition from a downtrend to a trading range

Baidu (BIDU) has broken through its 50DMA downtrend only to meet fresh resistance at the 200DMA in what looks like a transition from a downtrend to a trading range



Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net long the U.S. dollar, long put options on EEM and BIDU

Apr
10

Profit Opportunities In The Federal Reserve’s Spread of Rate Scenarios

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on April 9, 2015. Click here to read the entire piece.)

{snip}

The most striking feature of the minutes for the mid-March meeting was the Federal Reserve’s very mixed feelings toward the timing for the first rate hike: {snip}

There are multiple scenarios in play. I accompany each one with the prediction from the Fed Funds futures.

June rate hike: 6%
{snip}

At least one rate hike by July: 15%, Sep: 32%, Oct: 50%, Dec: 61%
{snip}

Jan, 2016: 76% (44.7% chance for rate hikes up to at least 0.75%), Mar, 2016: 82% (54.5% chance for rate hikes up to at least 0.75%)
{snip}

There is a likely irony in all the time and energy spent divining the first rate hike: when it finally happens, the event seems likely to be very anti-climactic. {snip}

This likely volatility represents an opportunity. The persistent uptrend in the dollar is at least partially a result of policy divergence. Until that fundamental difference changes, every event that appears to or actually does stretch out the timing of the rate hike is an opportunity to buy weakness in the U.S. dollar (UUP). On the other hand, the increasing uncertainty in the timing of the first hike means that the dollar’s gains are likely tightly capped, all else being equal.


The U.S. dollar index continues to maintain a well-defined uptrend

The U.S. dollar index continues to maintain a well-defined uptrend


Also capping the potential for additional appreciation in the U.S. dollar is the identification of the dollar as a disinflationary force in the economy (emphasis mine):

{snip}

The euro (FXE) is a key component of the dollar index. {snip}


The euro remains under pressure

The euro remains under pressure


The euro promises to be particularly volatile because speculators remain extremely bearish on the currency. {snip}


Speculators continue to lean heavily against the euro

Speculators continue to lean heavily against the euro


Source: Oanda’s CFTC’s Committment of Traders

The opportunity space for the uncertainty on Fed policy normalization even extends to oil, particularly trading oil-related equities like United States Oil ETF (USO). On Monday, USO was able to hold onto its gains despite the dollar’s comeback from intra-day lows and an accompanying affirmation of its uptrend. USO extended its gains on Tuesday despite a strong day for the U.S. dollar. Wednesday’s sharp reversal demonstrated that such divergences are not likely to last long. {snip}


The United States Oil ETF (USO) is trying to confirm a bottoming process

The United States Oil ETF (USO) is trying to confirm a bottoming process


Source for charts: FreeStockCharts.com

There are a myriad of supply and demand issues that also impact oil so of course it is not sufficient to consider currency impacts. {snip}

Click for a larger image…


The EIA's forecast and NYMEX futures suggest that oil has essentially bottomed already

The EIA’s forecast and NYMEX futures suggest that oil has essentially bottomed already


Source: U.S. EIA

I still prefer to wait to see an inventory drawdown before I consider the technical bottom in USO shown above more or less confirmed. {snip}

Click for a larger image…


The EIA expects crude oil stocks to start declining in the next two months or so

The EIA expects crude oil stocks to start declining in the next two months or so


Source: U.S. EIA

{snip}

Be careful out there!

Full disclosure: net long the U.S. dollar, long USO call and put options

(This is an excerpt from an article I originally published on Seeking Alpha on April 9, 2015. Click here to read the entire piece.)

Apr
10

China May Drop the Next Shoe On Iron Ore

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on April 9, 2015. Click here to read the entire piece.)

{snip}

China looks likely to drop that next shoe on the the iron ore market. According to Reuters:

“China is drawing up plans to subsidise its struggling iron ore sector, official media reported on Wednesday, with many high-cost mines forced to shut as a result of a collapse in global prices.

{snip}”

Later, the Sydney Morning Herald reported that the relief is taking the form of a tax cut:

{snip} Even though the tax is a small fraction of current prices even at their low levels, the tax action seems to confirm that China will do what it can to keep its industry alive through the current shakeout. As a result, expectations for a bottom in iron ore should drop to lower levels.

Gina Rinehart is one Australian miner who may not be worrying about what is going on in China – at least for now. Bloomberg recently reported news I was not aware of earlier: Rinehart’s Roy Hill mine has signed guaranteed supply agreements with several non-Chinese steel mills:

{snip}

The upshot of this news is that the Roy Hill output will displace current suppliers who will now compete, if possible, for other customers. This shift will effectively concentrate more power among the remaining buyers. So, the guaranteed contracts will help Roy Hill to the detriment of other miners at least at the margins.

{snip}


Rio Tinto has essentially held its lows for the last 32% or so of downside in iron ore

Rio Tinto has essentially held its lows for the last 32% or so of downside in iron ore


Source: FreeStockCharts.com

Be careful out there!

Full disclosure: long RIO put options

(This is an excerpt from an article I originally published on Seeking Alpha on April 9, 2015. Click here to read the entire piece.)

Apr
8

Cliffs Natural Resources CEO Yearns for Iron Ore Collusion, uh, Cooperation

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 12, 2015. Click here to read the entire piece.)

When I last wrote about the colorful CEO of Cliffs Natural Resources (CLF), Lourenco Goncalves, he was lambasting the Australians for manipulating their currency as a last desperate measure to save the economy. Now, he has essentially recommended that the major producers of iron ore collude to constrict supply and help support prices. According to Goncalves, this cooperation will save Australia from bankruptcy and ruin. {snip}

{snip}

While these characterizations make for good headlines, Goncalves is not telling the whole story of the Australian economy. The economy is in transition from one that is excessively reliant on commodity exports. The decline in the Australian dollar (FXA) has not been about manipulation but a lot more about a market and economic adjustment to the fall in commodity prices and Australia’s terms of trade. It is NOT the Australian dollar that is driving commodity prices lower. Indeed, the Australian dollar has remained stubbornly higher than it should be as a result of global monetary policies and weaker currencies that still make the Australian dollar relatively attractive.

{snip}


Iron ore is Australia's single dominant export, but it is far from the only one. Total services exports are now roughly equal with iron ore.

Iron ore is Australia’s single dominant export, but it is far from the only one. Total services exports are now roughly equal with iron ore.


Source: Reserve Bank of Australia

In other words, Australia will not likely go bankrupt as iron prices continue lower.

Of course, Goncalves’s concern is not for Australia per se but for the profitability of his own company. {snip}

I highly doubt the WTO can or will take action on companies behaving within the confines of expected competitive practices. {snip}

The brutal competition in iron ore is a result of over-investment when times were good and a very successful drive for efficiency and productivity. All the downstream customers of iron ore are benefiting from lower prices. {snip}

One commentator who buys into the argument that these lower prices benefit next to no one is Clyde Russell from Reuters. {snip} In other words, Russell completes the logic of Goncalves: the RBA is at the center of this price debacle. Surprisingly, Russell skips right by all the buyers in the supply chain. He generally cites low margins and weak demand to explain why buyers are not benefiting. Yet, it is low input costs that are surely keeping more of them in business than would otherwise be the case under current economic conditions.

{snip}

Russell even skips over the most dependent buyers of steel: “The main beneficiaries of the iron ore glut have to be makers of steel-intensive products, such as cars and white goods, but competition in their industries may not allow them to build margins on the back of lower input costs.” Since higher input costs will not help build margins or increase demand, a better perspective here is to think of the businesses that could not survive with higher iron ore prices (and thus higher steel prices) because they are less able to cut costs elsewhere. Or imagine how many more workers might lose their jobs as companies try to use wage savings to afford higher input costs.

{snip}


Pick any iron ore series: an epic collapse that has continued nearly unabated now  for over 15 months

Pick any iron ore series: an epic collapse that has continued nearly unabated now for over 15 months


Source: barchart.com

An epic boom and bust for Cliffs Natural Resources (CLF)

An epic boom and bust for Cliffs Natural Resources (CLF)


Be careful out there!

Full disclosure: long RIO put options

(This is an excerpt from an article I originally published on Seeking Alpha on March 12, 2015. Click here to read the entire piece.)

Apr
8

While Cliffs Natural Resources Lashes Out, Rio Tinto Coolly Maintains the Pressure

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 20, 2015. Click here to read the entire piece.)

I extend a hat tip to the Sydney Morning Herald for alerting me to the incendiary comments made by Lourenco Goncalves, the Chairman and Chief Executive Officer of Cliffs Natural Resources (CLF), during his company’s earnings conference call on February 3, 2015. Goncalves had some choice words for monetary policy in Australia. He essentially accused the Reserve Bank of Australia of manipulating the Australian dollar (FXA) to lower levels. {snip}

This was a curious accusation: the RBA’s rate cut that same day was the first in about 18 months. {snip}


The Australians have had a stubbornly strong currency, much to the chagrin of the RBA

The Australians have had a stubbornly strong currency, much to the chagrin of the RBA


The Australian dollar would likely be a lot weaker except that monetary policy across much of the rest of the developed world has remained highly accommodative, leaving Australia’s rates relatively attractive. {snip}

Goncalves predicted major doom for the major iron ore miners (or is he trying to put a curse on them?). This quote is a direct accusation of supply dumping. However, the majors are not technically dumping given iron ore is still selling for well above the cost of production. {snip}

And there is plenty of room yet to fall for iron ore prices without some abrupt surge in demand. Here is Walsh describing the comfortably large margins RIO still earns on iron ore even with prices at 5-year lows:

{snip}

Fortunately for CLF, its sole Australian mine also has extremely low costs. {snip}

After reading through the transcript of RIO’s last conference call, I think CLF is under-estimating the staying power of its competitors in Australia.

{snip}


Rio Tinto (RIO) continues to trade with a very loose relationship to iron ore prices

Rio Tinto (RIO) continues to trade with a very loose relationship to iron ore prices


Source for charts: FreeStockCharts.com

RIO is of course well aware of the sustained challenging operating environment:

{snip}

The company also has little sympathy for those companies desperately trying to hang on long enough to survive the downturn (emphasis mine):

{snip}

Suffice it to say that there is less profit and more pain ahead in 2015.

Be careful out there!

Full disclosure: long RIO put options

(This is an excerpt from an article I originally published on Seeking Alpha on February 20, 2015. Click here to read the entire piece.)

Apr
8

Negative Feedback Loops Should Continue Pressuring Iron Ore Prices Lower

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on January 19, 2015. Click here to read the entire piece.)

{April 8, 2015 addendum: negative feedback loop is not the accurate term. I should have left it at feedback loops or even destructive feedback loops}

{snip}


Rio Tinto has recently trended downward with iron ore prices...but not in a direct relationship

Rio Tinto has recently trended downward with iron ore prices…but not in a direct relationship


{snip} There is every reason to believe that prices will continue converging upon the marginal cost of production of the three biggest players that are driving the market into severe conditions of over-supply: Rio Tinto (RIO), BHP Billiton Limited (BHP), and Vale S.A. (VALE).

Here is a summary of the key pillars that keep on the bearish side of the fence (albeit hedged):

Oil prices
Oil prices (USO) have fallen off a cliff and have reached lows last seen during the financial crisis.


The plunge in oil prices

The plunge in oil prices


Source: St. Louis Federal Reserve

{snip}

Government intervention
Unemployment makes for bad politics. Governments in resource-rich areas have few options to keep voters happy and protect lost tax revenues than to do what they can to help prop up their local producers. {snip}

China
It goes without saying that the Chinese government is helping to keep its iron ore miners in business. {snip}

Canada
The investment arm of the Canadian province of Quebec is reportedly talking to Cliffs Natural Resources Inc. (CLF) to reopen its high cost Bloom Lake iron ore mine. {snip}


Hope springs anew as Cliffs Natural Resources Inc. (CLF) bounces nearly 50% off recent lows

Hope springs anew as Cliffs Natural Resources Inc. (CLF) bounces nearly 50% off recent lows


Speculators
Hellenic Shipping News recently ran a story called “Chinese funds aggressively shorting commodities linked to copper dive.” {snip}

Insufficient retrenchment by Chinese producers
The big hope for almost a year now is that the Chinese will shut down high-cost mines as prices drop below their costs of production. In June, 2014, a Citigroup analyst was bullish on iron ore given his observation of “daily mine closings” in China. {snip}

Incentive to continue producing regardless of current market conditions
All the major producers have insisted that the long-term outlook for Chinese demand is very bullish. I believe they have generally stayed bullish on prices every year since the 2011 peak. Only BHP seems to have finally cracked a bit recently. {snip}

The commodities crash playbook
Using the revised playbook on commodities, I have to assume that the current downtrend will persist. I maintain no predictions for when a bottom may occur or where prices might be this year or the next. {snip}


With an acceleration of its decline in recent months, VALE sliced right through lows last seen during the financial crisis

With an acceleration of its decline in recent months, VALE sliced right through lows last seen during the financial crisis


Source for stock charts: FreeStockCharts.com

Be careful out there!

Full disclosure: short RIO, long VALE, long CLF

(This is an excerpt from an article I originally published on Seeking Alpha on January 19, 2015. Click here to read the entire piece.)

Apr
8

Rio Tinto and The Iron Ore Version of “Dancing Until the Music Stops”

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on October 5, 2014. Click here to read the entire piece.)

{snip}

Almost any piece these days discussing the price of iron ore refers to the growing supply gut caused by major iron ore miners who continue to produce and ship as much of the commodity as they can despite falling prices. Rio Tinto (RIO) and BHP Billiton Limited (BHP) are the main culprits as they take advantage of their low cost structure to push higher-cost competitors over the edge and out of the iron ore business. {snip}

I have yet to see anyone wonder about scenarios other than the carefully planned and executed destruction of most of RIO and BHP’s competition. What if instead of RIO and BHP managing the market into a near duopoly (Vale SA of Brazil should also be a major survivor of the iron ore carnage), what if the spiraling downward of the industry is actually a path to mutually assured destruction? {snip}

In other words, I think enough real risks exist in this iron ore game of brinkmanship to justify extreme caution. I feel well-justified in remaining short Rio Tinto as I recommended in “The Australian Dollar Finally Breaks Down Amid Signs Warranting Increased Caution.” {snip}


A breakdown to a fresh 52-week low

A breakdown to a fresh 52-week low

A very loose relationship to the price of iron ore underlines the market's relative optimism that RIO will survive the current collapse in price relatively OK

A very loose relationship to the price of iron ore underlines the market’s relative optimism that RIO will survive the current collapse in price relatively OK


Source of charts: FreeStockCharts.com

{snip} I juxtaposed the quotes from Citigroup CEO Chuck Price in 2007 and RIO CEO Walsh in 2014 to call attention to these parallels.

{snip} His unbridled confidence was on full display in a speech he gave in Tokyo, Japan on November 18, 2013 at a joint event by the Australia and New Zealand Chamber of Commerce. In this speech, Walsh spoke of bravely facing the need to innovate even when others are hesitant, timid, and conservative:

{snip}

Be careful out there!

Full disclosure: long put options in RIO

(This is an excerpt from an article I originally published on Seeking Alpha on October 5, 2014. Click here to read the entire piece.)

Apr
6

T2108 Update (April 6, 2015) – Bulls Pressing At the Border Again

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)

T2108 Status: 60.2%
T2107 Status: 53.3% (on the edge of a breakout?!)
VIX Status: 14.7
General (Short-term) Trading Call: Neutral. Market still seems stuck in a chopfest BUT now T2107 is showing the potential for an important breakout
Active T2108 periods: Day #115 over 20%, Day #74 above 30%, Day #18 above 40%, Day #2 over 50%, Day #1 over 60% (overperiod), Day #185 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary

“The market was closed on Friday, April 3rd, so we still have to wait until Monday, April 6 to see how the market reacts to the job report for March. If the drop in the U.S. dollar is any indication, the market should at least open lower…

…Then again, the U.S. market supposedly does not like a strong dollar. If so, it stands to reason that stocks could rally. After all, a poor jobs report means the Fed stays easier for longer.”

I began the last T2108 Update with this quote. It formed my premise that the stock market remains deeply entrenched in a chopfest. Sure enough, the S&P 500 (SPY) gapped down, bounced, and almost never looked back (the gap down is much clearer in the chart for SPY).


The S&P 500 keeps hugging the 50DMA

The S&P 500 keeps hugging the 50DMA


I know the move bewildered some folks, especially bears. Honestly, even with my suspicion that the market could still close with a gain on the day, I was taken aback by the nearly unfettered buying spree that sent the stock market soaring as if genuinely good news had occurred in Friday’s jobs report. Just one of those days where you have to stay nimble, remain skeptical, and accept what the market IS doing and not what it SHOULD do.

The NASDAQ (QQQ) has more of my interest than usual as it seems to be forming a head and shoulders pattern. The current bounce has formed the right shoulder of a head and shoulders pattern. The head is conveniently placed right around the 5000 mark. If the NASDAQ finally achieves that fresh all-time high, look out above. If the NASDAQ confirms the head and shoulders top with a close below the low of the pattern, look out below.


The NASDAQ is toying with its 50DMA support as a declining 20DMA converges upon the support

The NASDAQ is toying with its 50DMA support as a declining 20DMA converges upon the support


Also catching more of my attention now is T2107, the percentage of stocks trading above their respective 200-day moving averages. As regular readers know, I have marveled at how this technical indicator has stayed in a downtrend during most of the post-recession move off the March, 2009 lows. It is a sure sign that the heavy-lifting in the persistent uptrend in the market has occurred among an elite core. Well, today, with T2108 closing at 60.1% and teasing us with another approach to overbought status, T2107 is now teasing us with a potentially major breakout. If T2107 can continue advancing, the crop of stocks reclaiming the all-important long-term 200DMA trendline could cause an important domino effect. This crew could nudge the S&P 500 to a fresh all-time high. T2108 could FINALLY revisit overbought status after an amazingly long hiatus of 185 trading days.


A long-standing downtrend for T2107...

A long-standing downtrend for T2107…

...yet, could a big breakout be around the corner?

…yet, could a big breakout be around the corner?


Speaking of teasing breakouts, here is iShares MSCI Emerging Markets (EEM) continuing its streak higher. Can this latest peek above the 200DMA last? I certainly think EEM is stretched enough to warrant a refresh on a hedged play (a call and put option combination called a strangle).


iShares MSCI Emerging Markets (EEM) continues to soar - time for a fresh hedged trade!

iShares MSCI Emerging Markets (EEM) continues to soar – time for a fresh hedged trade!


In currency markets, the descent of the dollar helped rationalize a lot of gains in commodities and the U.S. stock market. Yet, the U.S. dollar actually spent the day creeping back. This move left the story ringing a bit hollow as the uptrend from the 50DMA support held firm.


The U.S. dollar knocked down but far from out

The U.S. dollar knocked down but far from out


So, who really knows what in the world was going on Monday except traders and investors with sufficient buying power decided to fade the gap down from Friday’s jobs report. More traders and investors interpreted that move as a bullish sign (the Fed will never raise rates again perhaps?) and kept the momentum alive for most of the day. And who knows whether this conviction will last. Another earnings season is now right around the corner, ready to challenge bulls and bears alike.

The day’s reversal helped drive (or maybe IT was driven by) a fantastic reversal for Apple (AAPL). The timing could not have been worse for my Apple Trading Model. I JUST published an update showing a long overdue “revelation” that AAPL makes exactly THESE kinds of moves only 20 to 25% of the time. Helping to reinforce the trading loss I made on Monday was the lack of trading Friday, so I did not have the other half of my model to at least warn me of a contrary prediction for a positive close. I even ignored the picture-perfect bounce off the 50DMA and went to work fading AAPL once it hit near even on the day. The chart speaks volumes on how poorly THAT worked out!


A rare moment for me: missing a picture-perfect bounce off (50DMA) support for AAPL

A rare moment for me: missing a picture-perfect bounce off (50DMA) support for AAPL


I suppose the “good news” is that AAPL has “used up” its one reversal per week, and I can look forward to more compliant behavior going forward. The odds are very high for an up close for Tuesday: 62% using data starting in 2014 and 85% using data starting in 2015. The odds of AAPL maintaining its momentum from the open are similarly high. If AAPL opens in the red, I will just sit. If it opens in the green, I will assume another bullish day. If you look closely at the chart above, today’s move helped to put a subtle upward bend in the upper-Bollinger Bands. This signifies good odds that the momentum for AAPL is finally swinging out of the downtrend in place since the last all-time high.

Finally, here is a look at Google (GOOG). I had identified the stock as an unqualified bullish stock no matter what was going on in the rest of the market. I granted GOOG leeway down to the 50DMA. As luck would have it, the 50DMA rushed up toward the 200DMA quickly, and the stock ran right out of room. The 50DMA breakdown that started last week has me back to neutral. However, with traders fading gaps all over the market, I could not help but refresh the bullish vibe with GOOG. I locked in my profits toward the close; as a reminder, my assumption that market remains in a chopfest has me eager to take profits more quickly than usual on short-term trades.


That bullish feeling has ended with Google (GOOG) with a 50DMA breakdown

That bullish feeling has ended with Google (GOOG) with a 50DMA breakdown



Daily T2108 vs the S&P 500

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108
Weekly T2108
*All charts created using
freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: net long the U.S. dollar, long AAPL puts

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