Monday, 28 July 2014

What If I Told You


Regular readers know my current thesis: 
  • Bullish on: treasury bonds, commodities, foreign currencies and emerging market equities
  • Bearish on: US equities and USD
However, the big question is: Are we starting a new multi-year trend in these asset classes? or is this just a short-term, counter-trend move?

This may surprise you, but what if I told you I believe it's the latter and that:
  • Commodities began a secular bear market in 2011
  • US Treasury bonds began a secular bear market in 2012
  • US Equities began a secular bull market in 2013
  • US Dollar is nearing the end of a 10-year base before starting a new secular bull market
Before I explain why, I want to say that the charts below are just a possibility. We will constantly evaluate the markets as they unfold to make our trading decisions.

Now for the chart tour. 

US EQUITIES

The S&P 500 broke out of a decade+ sideways consolidation in 2013, starting a new secular bull market. 

My short-term bearish outlook for US equities can take us to dual (14 & 27-year) price support on the S&P 500 at 1650. This would give us a normal, healthy 15% pullback (similar to the 2011 correction) and would be a buying opportunity for the long-term in my opinion.  


I know many people are using valuation metrics like the Shiller P/E ratio to argue for a major crash. However, sentiment is a far more superior predictor of future stock market prices than valuation. Here is an excellent article that crunches the numbers to show you why.

The chart below shows Average Investor's Equity Allocation and how accurately it has predicted future stock returns. Currently this metric is saying that the S&P 500 will return 6% annually for the next 10-years. This return should increase to 8% annualized if the S&P corrects by 15% first.



TREASURY BONDS

$USB (30-year Treasury BOND) monthly chart shows a 30+year uptrend channel. However, bonds look to be forming a multi-year topping formation that peaked in 2012 and has 6-years of bearish RSI divergence. 

My short-term bullish outlook on bonds can take us to the indicated price & RSI resistance before the long-term decline occurs.  


Similar (but inverted) picture can be seen on the 20-year Treasury YIELD:


COMMODITIES

Let's start with this long-term commodity price chart that was published in March 2011. We all know what happened to commodities after they hit this 200 year resistance 



As the above chart shows, each of the four previous times that the resistance line was hit, a decade+ commodity bear market ensued. We therefore view the current bullish setup in commodities to be just a relief rally. Let's take a look at charts for individual commodities and miners to see where resistance lies.

CDNX and KOL can retest the broken neckline of the H&S top before resuming lower




GDX (Monthly) shows a clear 12-year topping formation with bearish RSI divergence. We can rally to dual price resistance + RSI resistance before resuming lower.



The same picture can be seen on the weekly charts for GDX, GDXJ and XAU:






And here are the charts for Copper and Silver






CURRENCIES

USD if forming a 10-year base with bullish RSI divergence. It can rally quickly to the mega resistance at 82, then stall there for couple months (letting commodities rally) before the big wedge breakout. 



Like commodities, commodity currencies such as the CAD and AUD look like they will rally to retest broken multi-year neckline before their downtrend resumes. 




RATIOS

Let's see if the ratio charts confirm what we're seeing in individual asset classes.

SPX:GOLD ratio looks to have put in a major base. We can retest the base breakout in the short-term, before moving higher in the long-term.


Similarly, the SPX:EEM ratio also looks to be putting in a major base. We can pullback in the short term before moving higher in the long-term. Note: This ratio has a strong inverse correlation with GDX!


Inter-market work done by Martin Pring shows us that US equities and commodities have moved in opposite directions for over 200 years. Therefore, if we are long-term bullish on US equities, we automatically are long-term bearish commodities (which the charts above are confirming).

Source: Pring Turner

Hope you found this analysis thought provoking and I'd love to hear your thoughts

Saturday, 26 July 2014

Market Analysis Jul 26th

It's been 2 weeks since we updated our analysis. Our thesis (BULLISH = bonds, commodities, foreign currencies and emerging markets; BEARISH = US equities and US dollar) remains intact. Let's take a tour of where all asset classes stand

EQUITIES

The S&P 500 and Nasdaq are still sitting at long-term resistance, while the VIX is at long-term support. Refer to the charts from my previous post.

BONDS

TNX (10-year note YIELD) continues to form a topping formation with bearish RSI divergence. Watch for the blue neckline to break down (a positive for gold and the yen)


UST (10-year note BOND) is basing above 14-year support. Watch for a breakout above the green downtrend line.



CURRENCIES

USD: There's a ton of chatter out there about how the US Dollar is breaking to the upside. The weekly chart shows this clearly. However, the monthly chart shows that there's mega resistance at the 82 level. This is just ~1% above current levels.


EFA:SPY ratio has a strong inverse relationship with US dollar. It is currently on price & RSI support. A breakout above the blue downtrend line would be bad news for the dollar (especially now that the dollar is nearing strong resistance).


YEN is the other key chart I'm watching in the currency space. We should get wedge resolution soon.


COMMODITIES

Many commodity charts are simultaneously retesting their multi-year breakouts as new support. This can be seen on:
  • GNX and CCI commodity indices
  • GOLD and the SILVER:GOLD Ratio
  • COPPER
  • GAS and OIL





MINERS

Similar to the underlying commodities, the miners are also retesting multi-year breakouts as new support. This can be seen on:
  • XME (Mining & Metals ETF)
  • GDX, GDXJ, GLDX, SIL (Gold Miners)



KOL is breaking out of a 1-year base after its 3-year wedge breakout


REMX is forming a base after a 3-year wedge breakout. 


URA is retesting a 1-year base breakout after making a 3-year wedge breakout.


EMERGING MARKETS

EEM:SPY ratio is highly correlated with GDX. This ratio is breaking out of a wedge consolidation (daily chart) after a multi-year wedge breakout (weekly chart).


SSEC Shanghai Index has finally made the breakout from an 8-year wedge!


Hope you enjoyed this analysis and have a great weekend

Monday, 14 July 2014

Market Analysis Jul 14th

Most of the charts I post are weekly charts that are slow to change. If you've been a regular reader, I know these charts are starting to look repetitive. Just keep in mind that weekly charts remove the daily noise and show us the big trend. This big picture and ample patience is ultimately what makes us the real profit.

"The big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend…The market does not beat [traders]. They beat themselves, because though they have brains they cannot sit tight… After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting." - Jesse Livermore


US EQUITIES

SPX and COMPQ (Weekly) are facing major long-term resistance with bearish RSI divergence...



... while TZA (3x Small-Caps Bear ETF) and VIX (Weekly) are at key support with bullish RSI divergences. 


CURRENCIES

EUR (Weekly) is currently on 2yr price support, 4-yr RSI support and 6-year MACD support. I'm watching for these levels to hold.


YEN (Daily) has been coiling up all year and is now nearing wedge resolution. Looking for an upside breakout due to the bullish RSI divergence. This would have a very positive impact on gold & bonds; negative impact on USD & US stocks


EFA:SPY (Our good friend and arch-nemesis of the US dollar) is on RSI support. A breakout from its 5-year downtrend will be a huge positive for commodities and negative for the dollar.


USD (Weekly) is still stuck in a wedge. A weekly close below 79.50 (less than a 1% price drop) would decisively break 2-year support. Strength in either the EUR, YEN, EFA:SPY can cause this to happen.  


COMMODITIES

After bottoming on 14-year support in early June, Gold rallied through a 2-yr downtrend. Today's big $30 drop in gold has it retesting that former downtrend as new support.


Gold Miners (GDXGDXJGLDXSIL) have all broken out of a 1-year base, which is now being tested as new support. Watch for the red lines to hold.


CDNX (Weekly) has broken out of 10-year resistance and is now testing it as new support. Watch for it to hold


XME (Weekly) broke out of a 2-year inverse H&S base and is now testing it as new support. 


REMX is rallying after retesting a 3yr downtrend breakout last week


Nat. Gas and USO (Weekly) are both retesting major support. Watch for these levels to hold


JJC (Copper) and JJU (Aluminum) continue to hold their 3-year wedge breakout that I posted previously. 

DBA (Weekly) has now retraced 61.8% of the +25% gain it made earlier this year. Not only is it on an important Fibonacci level, its also on RSI support.  


CCI:SPX (Weekly) ratio is retesting 3yr falling wedge breakout


EMERGING MARKETS

EEM:SPY (Daily) has been coiling inside a 4-month wedge that's nearing completion. Recall that this ratio has a strong positive correlation with GDX


SSEC (Weekly): Don't lose sight of this massive 8-year wedge that is nearing completion!


SUMMARY
  • US Equities are at key long-term resistance
  • Euro, Commodities and the VIX are all sitting on key support levels
  • Important wedge resolutions coming up in the Yen and Emerging Markets
That's all for now. Take care