Thursday, October 28, 2010

Trading Ranges for Recent Leaders

Corrections are healthy, because they allow you to rotate out of laggards and into leaders. Many leaders have been correcting here and are now sitting in trading ranges that will offer pretty defined entry points, if they trigger.

Silver (SLV) and Gold (GLD) have sold off since breaking their uptrend a 8-day trading ranges. I am assuming that the trading range will be resolved as a result of what the Fed will say next Wednesday. This is either a pause on the way higher or a retest of the highs before a meaningful correction.

Silver and Gold are not the only leaders that are pausing after recent gains. Apple (AAPL) is also in an 8-day trading rnage that follows the selling accompanying its earnings release. You can see that AAPL is falling below the trading range. I have also included the 120-minute chart to show support levels - $303.02 and $301.15 need to hold.

China (FXI) is looking like it topped. You can see that FXI traded sideways for 14 days and then sold off hard on Tuesday as the Dollar finally rallied. This trading range is now resistance. Watch FXI closely for failure from here.

China National Oil (CEO) has been a recent leader and been consolidating for much of October. A breakout will be obvious. The way CEO trades, if it is to extend this rally and not correct, it will most likely gap up to $214 -216 range the day it is broken out of this consolidation.

The US Dollar Carry Trade has been the key to the recent rally – where you borrow cheap US Treasuries and leverage the proceeds to buy risky assets. I think the Japanese Yen Carry Trade leading into 2008 amounted to over $800 billion in leverage. The Euro (EURUSD) has been a key beneficiary of this trade. You can see that the Euro has been in a 17-day trading range. It will either break out or break down and probably pretty soon. This will probably be the key driver for how recent consolidations of these leaders reconcile themselves.

Daily Support Holding Leadership Rotating

Daily support continues to hold. S&P 500 ($SPX) is clearing holding -

The Russell 2000 (TF Z0-240-min) has been sitting in a 2-week trading range. I like setups like this, because they offer close stop losses to help me manage risk. Resistance must be cleared to get me interested.

The NASDAQ 100 (NQ Z0-240 min) will gap up this morning and open in the resistance area.

US Treasuries (ZB Z0-D) are now in a trading range and near support with timing coming in next week. This will be worth watching as the Fed announces some version of QE2 on Wednesday.

Many leaders have been pulling back the past 10 days. The money continues to rotate and that is very bullish. You can see that enough money flowed into Semiconductors to break them out above a 6-month trading range.

The Gold Stock ETF (GDX) has pulled back the old breakout level and has been holding the 50-day for the past few trading days. There are some pretty obvious stop loss levels here.

Wednesday, October 27, 2010

Fed Moderating QE2 Expectations

Jon Hilsenrath at the Wall Street Journal has been the Fed’s leaker of trial balloon statements. This morning wrote the following –

“The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers.

The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.”

That can’t be good. This entire rally has been on the back of an imploding Dollar, which has crashed because investors don’t want to hold the currency with the 2nd lowest Interest Rate on the planet and a Central Bank intent on printing enough money to drive the entire yield curve to zero if it is required.

If you read what Brian Sack of the NY Fed said about how the Fed buying bonds has had the benefit of propping up asset prices, then you know that the whole Quantitative Easing game has nothing to do with getting credit to the consumer and everything to do with making their mutual fund statements and housing price values look better.

Any way you slice it, there seems to be significant risk for Interest Rates right now. I say this because Interest Rates rallied sharply during the first part of QE1, as expectations for economic expansion drove people out of Bonds (see yesterday’s post). They have now rallied on expectations that the Fed will buy $100 billion of them a month until Inflation gets to 3-4% per year.

So if the Fed announces massive QE2, then expectations of growth impact Interest Rates and if QE2 is small then the lack of expected Fed demand for buying Treasuries hits bond prices, driving rates higher. Rising rates help currencies appreciate and a rising Dollar is not good for markets levered up on the Dollar Carry Trade.

Gold, Silver, The Euro, The Brazilian Real and US Treasuries have all been telegraphing a potential pause or reversal in the vertical move for risky assets. Maybe we simply see extended prices revert back to their 50-day averages or maybe we get the hedge fund crowd to all run to the other side of the boat at the same time and take us back down as quickly as we just shot up.

The Fed has been horrible at anticipating and unwinding the bubbles they have caused. It is a matter of when and not if they mess up the unwinding of the Treasury/Commodity bubble they are now blowing.

I will keep a close watch on hourly support levels to see when real weakness finally starts to show up.

You can see that the indexes are right on top of significant support zones in the 240-minute charts –
S&P 500 (ES Z0 240-min), Dow (YM Z0 240-min) and NASDAQ 100 (NQ Z0 240-min)

Tuesday, October 26, 2010

Bonds Sold Off When QE1 Started

I want to take a look at Bonds from a big picture level, because so much of the money flowing into risk has been the result of money being printed by the Fed. Here is a chart of the prices of US Treasuries of varying maturities – 30-year ($USB), 10-year ($UST) and 5-year ($USFV) –

What I want to show on this chart is how Treasuries performed during Quantitative Easing 1 (QE1). QE1 started in March 2009 (Green Line) and ended on April 1, 2010 (Red Line). You can see how Treasuries actually sold off as QE1 began, and then sat in a trading range for 11 months. I think this was the result of expectations of economic growth.

Treasuries literally bottomed on the day that QE1 ended. This tells me that the big boys knew that another round of QE would be needed to stave of economic weakness. You can see that Treasury prices shot straight up from April 1st until the next round of Quantitative Easing was announced (QE2) on September 1st.

So the obvious question is do Treasuries now sell off again on expectations of increasing economic activity?

The inverse of Bond Prices is Bond Yields (30-year ($TYX), 10-year ($TNX), 5-year ($FVX) calculate the yields by dividing these by 10). You can see how Bond yield spiked as QE1 started and then sat in a trading range. Yields then imploded as QE1 ended and now may be reversing back up. Past performance doesn’t guarantee future performance, but I am very would not be surprised to see yields rally on expectations or – a) economic growth or b) QE2 will not be as big as some hope it will be.

The US Treasury held an auction yesterday of the 4 ½ year TIP (Inflation-Adjusted Treasury) and the yield on the new TIP was -0.55%. That is right, it had a negative yield. This tells you that the bond market is anticipating Inflation that far outstrips the yield on the non-TIP Treasury with the same maturity.

It is the first time in history that the TIP has had a negative yield in an auction. With Bernanke now instructing the Fed to target 2% (more like 3-4%) Inflation, people are willing to take a loss to get better long-term yields. I think the negative yield is a bit of an overshoot and may mark a low point for yields.

Here is the daily chart of the US Treasury (ZB Z0-D) with support and resistance levels included. You can see that the Treasury has had a decent pullback. It is in a downtrend and testing support.

Monday, October 25, 2010

Support Levels

Hourly resistance held and now it is time to looks for support levels to hold. This is the hourly S&P 500 chart (ES Z0-60min), showing failure at timing. Support shows up in the 1172-177 range.

Here is the S&P 500 daily chart (ES-Z0-D). Support is in the 1166-1172 range. As long as that support area holds, the rally remains intact. A break below 1155 is potentially a serious problem.

You can see that the Dow (YM Z0-240min) hit the 127% extension almost to the penny and has reversed back down. This occurred as other indexes were also hitting upside targets and had timing for a reversal.

I have listed the support levels for the Dow.

Overnight Bounce Stalling?

There was a big spike higher in the futures that took the S&P 500 into upside targets (1189). This occurred with the daily chart for the S&P 500 (ES Z0) entering a timing zone. We have also entered a zone on the hourly chart (ES Z0-60min). You move to the lower timeframes to anticipate turns on the longer-term charts. So far, these daily timing zones have only led to small pullbacks or short pauses in the advance, but the rallies in risky assets are getting extended and some are starting to falter.

The collapsing Dollar is causing risky assets to go up. The Euro (6E Z0) has been a primary beneficiary. The Euro is stuck at the 1.40 resistance level. The overnight rally in the stalled and now the Euro is in pullback mode. Here are support levels. These need to hold, or they open up the possibility of a pretty nasty decline on the daily chart (levels posted on Friday). The Euro is a key indicator for how risky assets move.

Gold (YG Z0-D) bounced hard overnight and has held daily support in the $1,300 range. It needs to clear the $1,360 level to turn the trend back up and then the 127% extension is $1,407. I included the short term support levels below.