Market Overview

It's nearly Christmas and the markets have taken a slight pause today (some are up a little and others are down or flat). I thought it would be a good time to look over the markets in general and see where we stand. There's a lot of chatter about the annual santa claus rally, lets see what the markets say.

To kick it off, lets look at the S&P via SPY. As you can see from the chart below, the S&P has been stuck in a trading range since early November. The top of the channel has been tested several times in December but we still have not seen a meaningful break. I want to see it break and hold before getting too bullish on the market.

The recent break out in tech (qqqq) is good news for the bulls. Tech is looking incredibly strong and it will help move all the markets higher if it remains strong. I will be looking to enter a long position in either the nasdaq etf or the semi conductors (smh) if the S&P breaks out. Here's the chart for the Q's, note the break out:Okay, S&P is range bound, Q's are breaking out, what else should we be following for an indication...the small caps (IWM). The small caps have been the laggards lately but now they seem to be playing catch up. The Russell 2000 (IWM) is sitting (barely) at fresh highs which is another good indication for bulls. Here' s the chart:We'll go ahead and file the small caps under bullish for now, but this will change if it falls back into its prior range. Next lets take a glance at the VIX. The VIX has just fallen to some fresh lows and it actually closed below the 20 level yesterday...something that it hasn't done for some time. What does this mean? It means that worries are easing, at least for now. This is also a bullish sign for the short term outlook of the stock market.

So far, we have a neutral S&P that might break out (neutral), a breaking Nasdaq (bullish), a breaking Russell (bullish) and a falling VIX (bullish). That's 1 neutral and 3 bullish signs. Where's the case for the bears? Here it is, the financials.

Financials (XLF) have been a huge laggard and they will weigh down the S&P and the market in general if they don't perk up. Here' s the chart:There's the obstacle for bulls and fuel for bears. I don't know which way it will go and I'm certainly not smart enough to figure out how big of a mess the banks are (or are not) in. Furthermore, I can't even try to figure out the effects of the stimulus plan and whether that will provide enough cheap money to raise the market in general and make banks profitable, but there are lots of people out there that think the stimulus is merely going to provide profits to banks. I just watch the charts and try to determine which direction "order flow" is moving and then ride along.

One indication that can provide insight into whether banks will do well (and the economy in general) is the yield curve. The yield curve is currently steep, meaning short term rates are much lower than longer term rates. This is good for banks which in turn is good for the economy and markets in general. This is why the feds want the rates to remain low. Here are the current treasury rates and yield curve that are pulled straight off of Yahoo Finance's Bond Center. As you can see, longer term rates are much higher than short terms rates. This should help banks quite a bit and is indicative of good times ahead. However, there's always the concern that this time is different, especially considering that enormous stimulus plan and the worries of future inflation. We'll see how it plays out but for now I'm counting it as bullish.

So what else is there? The Dollar. The dollar has been in the headlines and has been talked about quite a bit lately. Most of the chatter has been about how bad the dollar is and that it's falling and going to lose half its value...blah, blah, blah. The dollar has actually been strong as of December and it appears that a reversal of some kind is under way. Here's the chart of UUP:Until recently, the dollar had shown an inverse correlation to the stock market, but that relationship seems to have changed as the dollar has been climbing with the market. I particularly like the long play in the dollar and I'm currently in it. One reason that I like it is that the dollar has been rising with stocks, but, the dollar also serves as a good flight to safety instrument that the world buys it when things start looking bad. Therefore, the dollar will likely keep rising in its current trend, and then if things get bad in the equities markets, the dollar will rally even harder. That's my current theory and like I said, I'm in this one.

Last but not least, Gold (gld). Gold has been on a bullish tear for quite some time, but now it seems to be falling back to earth. Why is gold a good short right now? Here's 3 reasons: 1) gold is likely in a bubble and bubbles break hard when they pop, 2) historically, gold has sharp climactic tops and long rounded bottoms and Dec. 3 sure looks like a climactic top to me, 3) the strong dollar will put pressure on gold prices. All of these things tell me that gold is a good (note not a sure thing) short right now and I'm currently in it. Here's the chart:Alright, here's a quick recap. The S&P is still range bound (neutral) and needs to break out, the Nasdaq is trending higher (bullish), the Russell is perking up and printing new highs (bullish), financials are lagging (bearish) but the yield curve is steep which makes it easier for banks to make money (bullish). The dollar is showing strength and gold is weak. These are neither bullish nor bearish (IMO) but they are very tradeable and I'm in both.

So what now? I'll be looking for a break out in the S&P with confirmation from small caps, financials and bonds (lower bonds). If this happens, I'll be looking to go long tech (QQQQ, XLK) and semi conductors (SMH) and short bonds (TBT). I'll also be adding to the long dollar position and the short gold position if they continue in my favor.

If the S&P doesn't break higher, watch out because we might see a substantial drop in the markets. For the bearish scenario, I'll be looking to short financials and emerging markets and look to go long utilities (xlu) and bonds (tlt). There's the game plan for the rest of the year and the beginning of 2010. We'll see how it plays out.

Have a merry Christmas and a happy new year!

TLT

Market Carpet for Today

Often, I like to look at the Market Carpet over at Stockcharts.com to get a quick view of what asset classes and sectors are performing well and poorly. Here's the Market Carpet of what has been the best and worst performers of the past 2 days.
Notice that the number one performing asset over the past 2 days has been the US dollar. This is somewhat comforting, being that I am very long the dollar right now. I think that the Yen had a little rally but it was likely just a small bear rally, and given that the dollar has been crushing the yen lately, it was probably due. We'll see what happens, but for now, my money is where my mouth is and that is in the Dollar...I think it will rise sharply against the Euro in the very near future. Only time will tell.

Good luck out there.

TLT

Rally in Gold

My short position in Gold was stopped out early this morning...apparently the boys in London think that the economy is going to get worse and that gold will be more desirable, at least that's the story. All I know is that it looked like it was ready to tank and then it rallied.
Fortunately my Eur/Usd short went as planned and the dollar is continuing to rally against both the Euro and the Pound. For now, I will stay out of Gold until it calms down. As a rule of thumb, I get out of a position when I am confused by the instruments price action (like the rally in gold). If traders fade this breakout, which is tempting but very risky, and gold falls back to the 840's, I will probably put my short back on.

Good luck out there.

TLT

A Look at Gold and the Dollar

It's no secret, lately I've been shorting gold and going long the dollar. Here's an update to my analysis of both of these instruments.

Below are two daily charts...one is the Eur/Usd and the other is Gold. I trade these two in conjunction with each other because their moves tend move counter to each other, and this action also can be conformational in nature.

Here is the daily gold chart.
(*I meant that the stoch is over bought)
The above daily chart of Gold shows that there are multiple sell signals--those being the Trender lines, the Fisher Transform, the Bull/Bear indicator and even the stochastics (I added this indicator so that there would be a common indicator that people can relate to) gives a sell. Boy this is very bearhish chart for Gold. Now we have to confirm the downward move. A rising dollar (or falling Eur/Usd pair) would indicate that this precious metal is likely to head lower. Here's the daily Eur/Usd chart.
Notice that all the same signals from the Gold chart above are also giving sell signals in the Eur/Usd pair. This tells me that I should definitely hold onto my short gold position, as well as my long dollar position. Although there is some doubt as to wheter the Israel/Hamas war will end, the price action tells me that gold is heading lower, indicating that there will be peace in the middle east...for now. Like I always admit, I could be wrong and that would not be anything unusual. That being said, the technicals on the dollar seem to be getting stronger while the technicals on gold seem to be getting weaker...i.e. short gold and buy the buck. At least that's been, and will still be, my trading strategy until the market tells me otherwise.

Good luck out there.

TLT

Dollar Update

The dollar has been trading in a range bound congestion pattern lately, which is frustrating because that type of action sends out a bunch false signals on my trend following system (like this post). That's just the name of the game when you're attempting to catch and ride trends...a bunch of small losses while waiting for the big gain. Here's an updated 4-hour chart of the Eur/Usd pair.As you can see from the chart, the pair is still approaching the upper regression line. I will be paying close attention over the next couple of days to see how it reacts to that level. There's a little bit of bearish chatter out there about how the dollar is heading lower and it might be completing a head and shoulders pattern and blah, blah, blah. I say that we have to take a wait and see approach and try to hold off on getting too bearish. Remember, the trend has been down and we don't want to go against the prevailing trend until a new trend is established.

One interesting thing that I've noticed is that the dollar has not reacted very negatively to some bearish readings on a couple of indicators. The article that I linked to above states that the Dollar Index looks "sickly" and the author points out a couple of indicator readings to back up the opinion. Here is my own chart of the Dollar Index:As you can see, both the RSI and the MACD are very bearish right now...the RSI is sloping down and the signal line on the MACD is below the red line, which indicates a sell. While these are bearish, the price action has not confirmed the readings...at least not confirming that a new trend is developing. In my experience, it is generally a bullish (or at least neutral) signal when the MACD is falling after a bearish cross (the blue circle) but the price stays bound in a range like it has over the last month. I believe that it's jumping the gun a little to proclaim that the dollar down trend is beginning...it might just be some healthy consolidation and possibly a good opportunity to buy the pullback. Of course, I could be wrong and if the price action signals a new trend by breaking out of the range to the downside, then I'll be looking to short. Like always, only time will tell.

Good luck out there.

TLT

Almost time to buy the dollar again?

Although the dollar has been very strong over the last several months, it has taken a slide recently. A pullback is generally expected when an instrument has run up as much as the dollar has and the inevitable pullback can present an excellent opportunity for a longer time frame trade (like holding a trade for several days and maybe even a week as opposed to several minutes to hours). The trick is finding a good point to start fading the move and to have your "uncle point" designated before the trade. Entering a trade on a big pullback can be nerve racking...that's why you really need to have a detailed game plan that you can follow to the T.

I like to use a linear regression channel when I attempt to enter a trade like this. Below is a good 4-hour chart (as in each bar is 4 hours) of the Eur/Usd pair. The light blue lines are the linear regression lines. Linear regression is a concept that says that prices will eventually revert back to an average (reversion to the mean). I've found that this tends to especially work in a trending market with a trending average. Here's the chart:
The yellow circle is the area that I'll be looking to sell the pair, preferably close to the top line. I'll probably take half the position on the initial touch and then wait for the trend following indicators to confirm the sell for the other half.

One other thing that I like to look at to get a feel for how the dollar is doing is the broad dollar index. This index portrays the dollar against a broad selection of currencies to give you a more complete picture. I like that the index is going down and that there seems to be some potential support at the 50 day moving average. I would not be surprised if the dollar index finds support at about the same time that the Eur/Usd pair hits the top of the linear regression channel. The index provides some insight into the breadth of the dollar, which will help to determine if the move is potentially sustainable. It is always nice to see the dollar rallying against several currencies as opposed to the one currency that you're trading it against.

We'll see how the dollar plays out and I'll be sure to post and update soon.

Good luck out there.

TLT

*****Update*****

Several hours after I made this post I was doing my nightly scan through various blogs and I pulled up Moaxian's site. He could not be more bearish on the dollar and he thinks that it will give up all of its gains and fall below 70 on the dollar index. This view obviously goes against my plan to fade the move or "buy the dip" in the dollar but his reasoning is for fundamental reasons.

I'm not saying that he's right or that I'm right, I just think that our different perceptions are interesting. I will still take the trade because fundamental views tend to work against my bottom line, but it is good to note potential macro shifts of this nature and be alert to new trends that may develop.

Dollar Update

The dollar has continued to rally lately and it's even set some new highs (or lows on the Eur/Usd pair--it is bullish when the price goes down on the pair because it takes less dollars to buy a euro) So why is the dollar rallying when the economic outlook of our nation looks really bad right now? There are some good theories out there (e.g. flight to safety, interest rate cycle...). In my opinion, one person who is really on top of the fundamental picture with the dollar is Warren Mosler. Our Federal Reserve has entered into agreements with the European Central Bank to essentially guaranty their entire financial system by loaning them an unlimited amount of dollars. One of the problems with this arrangement is that the euro and the ECB is not guarantied by the individual countries that make up the European Union, unlike the dollar which is completely guarantied by America.

If the EU goes under, it will obviously hurt our country in many ways, especially if they're defaulting on their debts to us...but is that likely? Now let's look at the situation and ask ourselves how it will likely play out if the EU doesn't go under; I know, the less "doom and gloom" view is not as exciting, but it's practical. Although I can't predict the future, I can look at what must happen in order for them to pay us back. The ECB will have to convert euros to dollars. In forex terms, that means sell the euro and buy dollars. This is very bullish for the dollar...central banks tend to have an impact when they make hundreds of billions of transactions in the currency markets.

That's one of the fundamental reasons for the dollar to appreciate, but as some of you know, I tend to trade off of the technicals. That's why I've provided my thoughts on where the dollar currently stands by using a multi-time frame trend analysis. Below are the monthly, weekly, daily, and hourly charts for the Eur/Usd pair with some of my comments for each time frame. Remember, the price going down on the chart is bullish for the dollar because the strength of the dollar is inverse to the price move on the Eur/Usd pair.

The monthly chart paints a pretty bearish picture for the Eur/Usd pair...which is bullish for the greenback. It's significant that the price has broken the 50 period moving average (the red line). Not to mention the MACD is bearishly pointing down and the 10 period ema (aqua blue line) is pointing down. Next is the weekly chart. I like to look at the longer-term trends and pair up my shorter-term trades to be in line with the longer time frame. The trend channel (brown shaded area) is pointing lower. The 10 period Ema is below the 50 period ma. These things tell me that I want to be looking to go short the currency pair.
The daily chart confirms that going short is the right direction go. You can see that the Eur/Usd broke to new lows and started the down trend back in August and it has recently made new lows...indicating that the trend is still intact. This makes me really want to be on the short side. Now it's just a matter of waiting for a good entry point for the trade. There are a couple of things that I'll do in this situation. First, I'll wait the for pair to rally on the daily chart and sell when it gets up to the top of the trend channel. Second, I'll pull up the hourly chart to look for favorable entry signals. Another thing that I'll consider is taking on a small position here (very small) and setting my stop loss out quite a bit (maybe above the center line in the trend channel) while also considering adding to my position if it starts making money. Let's look at the hourly chart to see where we're at right now.
The hourly chart shows that the dollar has gained quite a bit in short amount of time. It gained 100 pips during Henry Paulson's speech tonight, which was quite a move. The bottom line is that the risk to reward is a little high for entering a position right now. My signal to go short flashed at the second to last pink down arrow, which was alomst simultaneous to the 10 ema crossing below the 50 sma. That was also the time that the pair broke out of it's range that it had been trading in from October 10th to 15th. The point is that my trading system says to be going short the pair (long the dollar) and that I need to wait for a rally or a new trading range to form before I establish a position, unless I take a very small position now to see if the strong down trend continues.

There are plenty of fundamental reasons to go long and short the dollar, put personally, I could really care less what they are because the trends on the charts paint the picture for me. Everyone has to develop a system that works for their own personality and this seems to be what works for me...at least for now. Just thought I'd share my perspective when I'm looking to enter a trade.

Good luck out there.

TLT

Dollar Analysis

There has been a lot of talk about the dollar's upcoming collapse due to the bail out. I wanted to get to the bottom of what's really going on in the short-term with the old green back because commentators tend to exaggerate or just be flat wrong when they talk about the dollar.

As you can see in the EUR/USD daily chart below, the dollar has broken through its recent intermediate trend channel. This tells me that I don't want to be long the dollar but, I'm not ready to go against it either. With all the chaos of late, its very hard to tell if these types of pullbacks are full blown trend reversals or just emotional reactions. My gut says that it's the latter.
One thing that I'll keep my eye on is the 50 and 200 day moving averages. So far, the dollar has fallen back to its 50 day moving average and stalled. One indicator I like to use for trading in forex is the 10 day ma along with the 50 day ma. Once the 10 crosses the 50, it will confirm an intermediate trend reversal and I'll look for a nice pull back to sell the dollar into.

Interestingly, there are some out there that see this recent pullback as a bullish opportunity for the dollar.