USDJPY – Triangle Forming

November 8, 2010 Leave a comment

The USDJPY is in the process of carving out a triangle and should breakout within the next 2-3 days. Given that the prevailing trend is down and the wave structure, at this time, another thrust lower looks most probable – with a target of 79.25-50.  However, one can't rule out the possibility of a breakout to the upside with a target of  82.75-83. Stepping back, glancing at the big picture, I still remain optimistic that a low of significance is in the works in the not too distant future.  Bullish sentiment, along with price,  is near historical levels creating a potentially explosive opportunity.  But, for now, I will remain focused on the short-term set-up at hand.

 

Usdjpy
 

 

 

Weekly Preview: Nov. 8-12

November 7, 2010 Leave a comment

Equities:

Heading into last week, despite bubbling optimism for stocks, consensus had grown widespread amongst market participants, even in the bull camp, that profit taking would set in once the FOMC outlined their intentions for QE2 (sell-the-news). Indeed, thus far, this has not been the case. Financial stocks have benefited the most, shooting up over 5.5% during the two days following the meeting. The size of the LSAP program was within market expectations, however, the average maturity of the new purchases was not. The average maturity will be between five and six years; thus putting the curve steepening trade back in play, helping boost bank's profitability.

At some point this week I expect weakness to develop in the 'risk trade'.  I am by no means calling for THE top to take place, but risk appears to be strongly favoring a pullback. On two prior occasions during the month of October I anticipated a pullback in equities, but to no avail. This time, however, the market is demonstrating signs of "blowing-off" with the most recent surge appearing to be coming from capitulating bears and panicky bulls. The S&P may hold below the top-side of the multi-week rising channel, providing a backstop for bearish bets. Once markets pullback, we can access the damage and get a better idea as to whether the pullback is the beginning of a larger reversal or simply a healthy correction.


Es

Commodities:

Commodities have been the hottest game in town. Both industrial and precious metals have been racking up huge gains while agricultural sectors have been acting simply outrageous. Cotton and Sugar have been leading the speculative frenzy with price charts bending back to the left – registering multi-month percentage gains in the triple digits. For those with the intestinal fortitude, a high yielding short set-up is in the making.

In the months to follow, it will be interesting to see how much of an impact the rising cost of raw materials will have on profit margins. To what extent will businesses be able to pass through rising cost to a consumer stuck in a balance sheet recession? This will be, to say the least, an important development to pay to attention to. If the economy can take the torch from the Fed and grow on its own, then this may turn out to be a non-issue, however; if the economy continues to muddle along then an unintended consequence of QE2, squeeze on profit margins, could rear its ugly head. As they say – only time will tell.

Currencies:

On Friday the Dollar Index (DXY) bounced off a long-term trend-line. My bias since mid-October, based on historically extreme pessimism, has been that the downtrend in the Dollar is closing in on a reversal, however, price action — the final arbiter — has yet to cooperate. From a pure risk/reward viewpoint, establishing a long position off the long-term trend-line makes a lot of sense; regardless of the outcome. Presently, I am leaning towards short positions in EURUSD, GBPUSD, and long positions in USDCHF, and possibly USDJPY. I will follow up with more details surrounding these pairs as the action unfolds.


Dollar

Interest Rates:

I don't see a particularly strong edge in making any moves against the short to intermediate term maturities, however, a rally in rates would be consistent with the before mentioned biases. The 30-year could become an interesting trade in light of the fact that the Fed isn't going to be focusing their purchases on the long end of the curve. A bearish topping pattern is in the cards for the 30-yr futures (US) which will further support this idea.

Bottom Line:

Dollar bullish trades look to hold very favorable risk/reward opportunities as long as the long-term trend line holds. In addition, purchasing puts in Index ETF's, considering how inexpensive volatility is, looks like a solid risk/reward play off the upper band of the rising channel. Also, on the radar are a pair of short set-ups in individual equity names –NFLX, LVS — click here for the NFLX trade outlined late last week, and check out the chart below for details regarding LVS.

 

Lvs

 

 


NFLX On The Radar: Gap Fill In The Cards

November 5, 2010 Leave a comment

Netflix (NFLX) reported better than expected earnings on October 20th,  sending the stock up to new all-time highs. However, since breaching the old high made in September it has fallen back below, and underperformed the Nasdaq considerably over the past week. Equity markets, as a whole, look pretty rich; any correction in the near-term is likely to tip NFLX over the edge.

In addition, and more importantly from a technical standpoint, NFLX is forming a head-and-shoulders pattern with the neckline residing just at the bottom end of the range created post earnings announcement. A firm break below 165 will put NFLX under the neckline and 20 day, squarely in the gap. Some trend support might come in around the 160 level. The projected target for this quick-hitter is for a fill of the pre-earnings gap –153. The 50-day ema/sma is ~154 and rising, so this will be another area of support to watch as well.

There is the alternate possibility of a bullish triangle. If this comes to pass as the dominating pattern, then the recent relative weakness was just a breather and the rotation effect will be in play. At this time, however, the first scenario looks most likely; but, as always, I will let the price action be the final arbiter.

  
Nflx

Categories: Short-Term Trader

EURJPY: Time To Buy?

November 3, 2010 Leave a comment

The EURJPY is nearly complete in carving out a bullish multi-month Inverse head-and-shoulders pattern. If the recent pivot low of 111.51 holds ―then it is likely the right shoulder is in place, and a significant rally could already be underway.

Adding further support on the 'TA' front is today's breach of an imposing long-term downtrend line extending back to mid-2008, which has capped rallies on several occasions. The most recent failure came less than a month ago. Today's daily close above this line is a good start, but a weekly close above will be even more convincing.

A major factor likely to impact the performance of not only the EURJPY, but JPY crosses in general, is the extreme bullish sentiment accompanying the Yen's move. Dollar bearishness is generally high versus all of its G7 counterparts, but it is most extreme when compared to the Yen; this makes sense considering the Yen is flirting with its all-time high. Upon looking at Sentimentrader.com's "Public Opinion" model, a composite indicator of various sentiment metrics, we can see the bullish JPY reading of 77.55 is considerably higher than current levels in other G7 currencies — EUR: 58, GBP: 49.17, CAD: 56.43, CHF: 67.65. (There is no data for AUD, which might rival the JPY reading, as it is at a 28 year high.)

Even if the Dollar's decline continues to persist, I hold the view that the Yen has reached a point of bullish saturation; whereby there aren't enough participants left to jump on the bandwagon in order to sustain the current trend's momentum, thus causing it to under-perform relative to other currencies. (On a micro note: In the past few days we have begun to see the JPY undeperformance set in, despite continued Dollar weakness.) On the flip side, a Dollar rally, an event which I think is just around the bend, is likely to cause the overcrowded JPY boat to capsize, sending the JPY down at a faster rate than the other majors. Also, there is the downside risk of more BOJ intervention, which will provide further underpinnings for bullish trades in JPY crosses.


Eurjpy

There does exist an alternate scenario – a bearish rising wedge could take shape. This formation, however, will require another 2-4 weeks of development before becoming a mature pattern. The EURJPY will need to rally up towards a level currently labeled as the neckline (~116) of the before mentioned inverse H&S pattern. At which time price would need to turn lower, eventually undercutting the rising trend-line extending back to the September low.


Eurjpy triangle

*Interesting To Note: During the summer months the EURJPY carved out a smaller but similar chart configuration as the one currently unfolding. The outcome then: A fake-out breakout above the neckline, subsequently leading to a breakdown from a triangle pattern; which carried price down to fresh lows. (As I've noted in prior post, head-and-shoulder patterns and triangles resemble one another during the formation process.) I don't, however, think it is likely we repeat this past summer's events, but it is worth taking into consideration.


Eurjpy summer

How To Play The Set-Up:

At this time, given the current chart-scape, initiating a small long position with a stop below the 111.51 pivot provides a favorable risk/reward profile in the event that a breakout above the neckline occurs. If in fact price does breakout above the neckline, then a full position can be established with a target of 1.25-1.28. This target has been determined by adding the difference between the high and low of the pattern, ~1000 pips, to the neckline, ~116.

Furthermore, Head-and-shoulder patterns and their inverted brethren have a tendency to retrace back to the origination of the price move immediately proceeding the H&S formationor in this case Inverted H&S. In order to get back to the point where the prior move down originated from, a rally up to the 1.25-1.28 area has to take place.

Interestingly, for those fib buffs out there, the 61.8% re-tracement of the October 2009 – August 2010 leg lower is 125.76; right in the thick of the projected target zone.

If the second scenario comes to fruition, the rising wedge, then due to the upward sloping trend-line from the September low ― long positions initiated off the I-H&S set-up can be exited with limited losses, if any at all. After exiting this position, a play on the short-side will be the next move with the target set below the September low of 105.41. Again, similarly to the I-H&S set-up, the triangle's price target is determined by subtracting the height of the pattern (~1000 pips) from the breakdown price, providing a target of ~105, depending on the exact point of the breakdown.

In conclusion, EURJPY is offering an excellent opportunity to enter a trade with positive expectancy and a clear backstop for assessing risk. Furthermore, if the stop is triggered on the long position, there is a high likely-hood that the stop, in of itself, becomes an opportunity to switch gears and profit from the short-side. I will continue to post updates regarding this trade as the action unfolds.

 

Categories: Commodities and Rates

AUDUSD, Emerging Markets – The Correlation Is Striking!

November 2, 2010 Leave a comment

Since the global reflation trade began back in March of 2009, the synergy of 'everything-is-macro' and hedge fund herding has on one hand made analyzing multiple asset classes simpler by creating the –'risk-on','risk-off' trade– but at the same time it has made portfolio diversification, on the Macro level, more difficult. Below, is a great example of this "all-the-same-markets" theme at work. The correlation between the Emerging Markets ETF (EEM) and the Aussie (AUDUSD) is striking.

In the graph below, 20-day correlation, as represented in the lower pane, has ranged between 20-90% since March of 2009. Statistically, this is a pretty sound correlation factor; basically you could express your view about one market in the other, and still have the same outcome. Now only if determining the direction was as simple!

Fxa vs eem

Cotton: Bubblicious

November 1, 2010 Leave a comment

Since July,  Cotton futures have gone from bull market to absurd.  In a little over 3 months the fluffy white stuff has risen an astounding 79%, largely spurred by frenetic buying on behalf of the mills, speculators, and funds.  The fundamental catalyst has been strong demand in China, the No. 1 producer has been squeezed by high demand and declining production. Recently, weather concerns in both China and the U.S. have added more reason for concern.

Over recent years we have learned, with the dramatic increase in hedge fund assets — speculative fuel — any market which catches fire for any reason, justified or not, will have hot money chasing prices higher; creating a strong disconnect between fundamentals and price.

I am no expert in cotton, but it has become pretty clear we are amidst another speculative 'ramp up' that will end as they all do — bust.  I wouldn't run out and get in the way of this train just yet, but the time for this trend to show signs of reversing will come sooner rather than later.

Cotton

Categories: Commodities and Rates

FX Land – A Look At The Technical Landscape

October 31, 2010 Leave a comment

Consensus is growing that the 'risk-on trade' has gotten ahead of itself in anticipation of another round of QE; setting up a "buy the rumor, sell the news" scenario. This looks very possible due to the excessive bullish sentiment across most asset classes reaching thresholds often seen prior to a reversal.

Over the course of the past two weeks the Dollar has showed signs of stabilizing, which could be confirmed if market participants take off risk after the Fed's announcement, however; the pause in downward momentum could be just that – a pause (consolidation). If the result after the pause is another thrust lower, provided how heavily everyone is betting against the Dollar, it would seem likely such a move would be the final leg before finding a meaningful bottom.

EURUSD – There is potential for a 4th-wave triangle, and a breakout of a fully developed pattern could take the Euro up to a very important downtrend line extending back to the peak in 2008. If the 4th-wave triangle comes to fruition, in accordance to Elliot Wave Principle, the thrust higher will represent the fifth, and ultimately, the final leg up since the June low. It would also satisfy an a-b-c corrective pattern. However, before reaching that conclusion, we must remain flexible; allowing for the possiblity that we have already seen the peak of the rally with ther recent high representing the end of a C wave. This week is likely to go a long ways towards validating either scenario.

  Eurusd

GBPUSD – Currently this pair is testing a 16-month trend-line extending back to August of 2009, after bouncing sharply last week off the 50-day SMA/EMA and a 5-month uptrend line.The two trend-lines are quickly converging on one another, and thus put Sterling in a make or break situation. A 3-month triangle is also in the works with the apex falling near the convergence of the two before mentioned trend-lines.

Gbpusd
AUDUSD – The Aussie broke a steep channel back on 10/19 after being rejected at the key psychological level of parity, but since then has become rangebound. At this juncture, it is unclear as to whether this will turn out to be a topping pattern, or a consolidation before making another attempt to blast through parity.

AUDUSD
USDJPY – This has clearly been the weakest link amongst the majors. The close this past week was below the previous all-time low made back in 1995. Looking at the historical picture – the Dollar has been in a downtrend versus the Yen since the end of the Bretton Woods system back in 1971. As the weakest pair on the board  I would like to see selling pressure in the Yen accompany any broad based rally in the Dollar.

Usdjpy

Bottom line: There aren't any distinctive set-ups before Wednesday, but afterwards the muddy waters should clear up, providing solid risk/reward opportunities going forward.