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‘Risk-off trade’ Likely Has More Room

November 22, 2010 Leave a comment

Markets, across all asset classes (risk-on, risk-off trade), suffered sharp losses, with modest bounces taking place during the last few days. We are now left with the question – was the downdraft just another “buy-the-dip” opportunity, or could the sell-off be the beginning of a trend change? There are indeed several sentiment measurements published by different folks which point to the possibility that we might be in the process of forming an intermediate top. One of the more notable polls, in equities, the II (Investor’s Intelligence), recently reached up into levels seen at previous peaks, including the one made in 2007. Commodities such as Oil and Gold saw record levels in speculative holdings in their respective futures contracts.

Recently, there were several great short opportunities, especially in the commodity sector where obvious signs of speculative fervor were prevelent. One needs to look no further than silver, sugar, ags and cotton to see this. Now is the time for the ‘risk-on trade’ to prove its worth it’s salt, or fail.

At this juncture, one of a couple of scenarios will likely play out. a.) Markets will settle out and form a basing pattern, allowing market participants to gather their breath for another leg higher. Or, b.) we will see volatility in the form of see-sawing price action, whereby the buyers and sellers duke it out before seeing the bulls succumb to selling pressure. Furthermore, if we are in the process of forming a top, then we should see many of the high correlations between assets demonstrate reversion to the mean; this is not to say they will completely diverge, but rather dance to slightly different beats. The first correlation, or ‘anti-correlation’, which is likely to see the biggest correction to the mean is between the Dollar and equities. During recent months, equity traders have in effect become currency traders, and vice-a-versa. However, it is still very possible that the correlations will break down, whether we are amidst a top or simply digesting recent gains before thrusting higher.

Bottom line; be patient, opportunities of significance will, as they always do, rear their pretty heads. My biggest focus right now lies in the FX/Commodity sectors. The Dollar bullish trade looks like, from where I’m sitting, to be the best opportunity on this small pullback. Last week, I touched on this trade in a bit more detail, click here last weeks commentary. Technically speaking: EURUSD – weak bounce, looking for uptrend line going back to June to get tested in the 1.33 area; AUDUSD – head-and-shoulders pattern forming (should it trigger, .9275-.93 will be the target; GBPUSD – trying to maintain a a trend-line extending back to early September – trust until broken.

EURUSD Audusd

Precious metals also look like they will experience another leg lower, as the speculative excesses, particularly in silver, have not likely been purged enough to warrant bullish bets at this time. Gold appears to be forming a head-and-shoulders pattern, which may have a very weak right shoulder should the next push lower begin shortly. Stay tuned for further updates.

Dollar Could Pullback, But Intermediate-term Prospects Remain Positive

November 15, 2010 Leave a comment

The Greenback, thus far, has experienced a solid 4% bounce off its two-year trend support, with the strongest move taking place in the EURUSD. The bearish excesses, built up during the weeks leading into the FOMC meeting, reached an extreme consistent with trade-able lows. In the two days following the meeting, there was a final thrust lower as the ‘johnny-come-lately’ crowd piled into the ‘risk-on trade’ one last time. This pushed price down into a strong support level where a clear divergence in momentum was also present; creating a low-risk opportunity to initiate a bullish campaign in the Dollar.

Extremely Bearish Sentiment + Long-term Price Support + Momentum Divergence = Low-risk Entry

Today’s trade took the Dollar Index (DXY) up to the 50-day sma/ema, which resides just under a trend-line extending back to the June high. I expect some weakness to develop on the initial test of this resistance area, however, as long as the low created on November 4th holds I will remain constructive looking out over the intermediate-term. At the moment, in the absence of an immediate technical pattern or overtly positive fundamental driver, I am leaning on the notion that a correction in the imbalance of market participants’ positioning will eventually fuel further price advancement. The potential for a bullish bottoming formation is also in the cards should the Dollar experience an orderly pullback in the sessions to follow. (See chart below)

Dollar

Categories: FX, Short-Term Trader

Barron’s, Nice Timing!

May 5, 2010 Leave a comment

The post below was written by Evan Lazarus from T3LIVE.COM regarding the April 26th Barron's cover and it looks like they have nailed yet another turning point, at least for the time being…….now these guys aren't always this accurate as contrarian indicators, but I mean they shouldn't, right? They have lots of  'experts' working over there………right?

If I can dig it up I will post a piece of research I once did pertaining to magazine covers, namely involving mom-n-pop publications like TIME, Newsweek, etc. I remember in many instances these covers marked multi-year and in a couple of instances even multi-decade turning points! I am in no way suggesting that this is the case today, I am just simply pointing out the power of this indicator.

The Magazine Cover Indicator was first brought into popularity by Paul Montgomery, who had performed extensive research dating back to 1914. By clicking on the above hyperlink you will arrive at his web site where you can read past samples of analysis in which his firm utilizes several unconventional methods for deriving investment theses. Indeed, very fascinating stuff! Here is an article written some years ago where Paul discusses the statistical significance of his findings——-> Click        

Moving on to Evan's article……….

by Evan Lazarus

This post is not about charts, but rather about magazine covers that tell a story of market sentiment. One of the magazine covers that always catches my attention is Barron's which is released every Saturday of the week.

As you can see in the big picture to the right (Barron's March 9th, 2009 cover) shows a Bull lying dead on the floor as if he had fallen of the Empire State Building. It was official, Barron’s had declared the bull dead. Coincidentally, that very same month, the market proceeded to begin what would be a multi-month massive snap back rally.

Having picked up this weekend’s copy of Barron’s (the smaller picture of a bear being run over by a bus being driven by a bull of course), immediately brought a cynical laugh to my otherwise boring Saturday morning.

This cover makes me think that market sentiment may now be at or near extreme levels (just like in March 09). If I could stand on the rooftops and shout a piece of advice at the mom and pop investors of the world, it would be to tread the markets very lightly right now or even get to a position of protection.

Come on Barron’s. Fool us once, shame on you. Fools us twice….I don’t think so. Are you here to completely destroy the retail investing public?

Now, this post is not meant to rouse up all the conspiracy theorists but I think active traders need to look at this overtly bullish market sentiment with a glass half empty approach. With the markets having retraced a lion’s share of the 2008 massacre not to mention we are just a stone’s throw away from the 200 Day Moving average (in the S&P’s) traders need to be ready for a potential multi-week/month turn here in the markets as this would not be completely unexpected.

Stay tuned to see how this story develops and thank you Barron's for what I'm sure will amount to another dead wrong and ill-timed cover story.

 
Categories: FX

Apple (AAPL) Sentiment at an X-treme

April 20, 2010 Leave a comment

Apple earnings tonight could have HUGE implications. Here is why. The 5-day moving average of calls vs puts, as pointed out by Jason Goepfert, is at a staggering 2.5 to 1. This means traders are betting heavier than ever that the black turtle neck  will continue to deliver stellar numbers.  Apple accounts for nearly 17% of the Nasdaq 100. So goes AAPL goes the NDX. Consensus estimate is for $2.45 per share and 12036.34 Rev.

Apple put
www.sentimentrader.com

 

Categories: FX Tags: , ,