I update the USDJPY charts every day, but it’s been a while since we last took a look at the pair from 30,000 feet.  In our May 17 Update, we noted it had rejoined its well-formed falling white channel and was headed for a tag of the rising white channel bottom — though there were important interim Fib levels with which to contend.

Otherwise, the downside targets originally contemplated are all in play: the red .618 at 107.86, the purple .618 at 106.50 and the red .786 at 104.92.

It turned out that breaking out of the falling white channel was a pretty healthy development for stocks — so much so that it did so again, and again, and again.  Not that there is such a thing, but it probably set a record for backtesting a channel.

The net effect was that the rising white channel tag was delayed, coming in at a much higher price than if the falling channel were allowed to play out. The original intersection of the two was mid-late July.Thus, even though USDJPY registered new lows, stocks were supported in setting new all-time highs.

USDJPY came within 0.81 of our 106.50 target last week, and has since rebounded sharply.  Is the worst behind us, or is there more downside ahead?

continued for members…
(more…)

I’m sure you get almost as tired reading it as I do writing it.  SPX will make new highs today on yet another crash in VIX.  The latest came courtesy of a rising channel (below, in purple) which has ever-so-conveniently broken down.  The algos are feasting on its remains.

When the channel broke down the first time on the 31st, SPX was able to break out of its falling channel.  When it broke down again (16.6% off Friday’s highs) yesterday, SPX was able to come within pennies of its former highs.

Today’s 2-3% additional decline in VIX should be enough to establish new highs. While hardly a new development, one has to wonder: just how long can this go on?

continued for members… (more…)

For most investors, there’s nothing wrong with passive investing.  Most of the time, it works just fine: minimizes expenses, avoids “underperformance” and saves taxes.  And, it’s becoming increasingly popular.  JPMorgan estimates that fundamental discretionary traders account for only 10% of daily trading volume.

But, we all remember 2007-2009, when a little market timing would have come in real handy.  Of course, that period was followed by a pretty strong meltup which erased all those nasty losses (and, then some) if one was able to avoid (or, better yet, capitalize on) the volatility during 2015-2016.

Whether active trading is right for you depends on more than market conditions.  What are your cash flow needs?  How much volatility can you stomach?  How aggressive or risk averse are you?  What tax bracket are you in?  And, most importantly, what are the alternatives?

There’s no doubt that active trading is hard.  And, it’s getting harder.  Both fundamentals and technicals seem out of touch with reality half the time.  The rest of the time, they suggest diametrically opposed outcomes.

Recently, a client congratulated me on some decent calls in oil over the past year.  This happened at about the same time that Andy Hall — such a successful oil trader that his nickname was “God” — announced he was closing his fund after sustaining large losses in 2016 and 2017.

How could someone that experienced and savvy do so poorly?  Maybe it was time to go back and see exactly how we had done.  Note: I haven’t tracked performance in anything other than equities, and I’m months behind on tallying that.

Sure, it works in practice.  But, will it work in theory?

I started making active calls in oil (West Texas Intermediate or WTI, symbol CL) futures on October 14, 2014 when CL was 82.27 and falling.  I expected it to continue falling to at least 74 or 64, a target that was lowered many times over the following 16 months (along with many bounces involving higher target prices.)

Had we simply shorted it there and covered yesterday, we’d be sitting on a nice gain of 39.6%.  That would easily rank us in the top 10% of all energy-related hedge funds in terms of performance over the past three years.If we had used the 200-day moving average to signal long/short trades, our return would have improved to about 79% — doubling our outcome with minimal additional effort.

If we used both the 200-day (red) and 20-day (white) moving averages to guide us, the return would have been even better: about 1,772%.Last, utilizing basic Fibonacci patterns, trend lines, moving averages, chart patterns, and (the secret sauce) considering the effect that oil prices have on algorithms, we posted the following buy and sell signals over the past three years.  The buy signals are marked with yellow arrows and the sell signals with red.The net effect was significantly better than either of the moving average approaches and insanely better than the “set and forget” approach.

Again, the point isn’t that active trading will always be more effective than passive or some derivation thereof.  And, I’m certainly not claiming to have found a foolproof way to earn 22,000% over the next three years.

Rather, the point is that active trading can be much more rewarding than passive investing — when incorporating the proper signals.

What are the proper signals?

continued for members… (more…)

USDJPY and VIX have driven futures 13 points higher this morning, even as gasoline prices continue to plunge.continued for members… (more…)

DXY continues tumbling toward our downside target [see: Capitulation, Aug 21] taking USDJPY with it.  Although VIX is still in the basement, CL hasn’t broken out.  So, stocks don’t have much upside impetus.

continued for members… (more…)

I started writing this post two weeks ago, after oil nailed our latest downside target (from Jul 31: 46.46) and was rallying nicely.   Of course, a lot has happened since then.

I had been taken aback by the news that Andy Hall, such a prolific oil trader that he earned the moniker “God,” was shuttering his main hedge fund after sustaining a 30% loss trading oil so far this year.

I know nothing about Andy’s investment strategy or trading style [though he had a “colorful” reputation]  But, this was a stark reminder of how fundamental analysis has utterly failed oil traders. We have only to look at the recent post-Harvey fluctuations to see the disconnect.

In the past three years, our periodic, directional calls on WTI have averaged over 500% annually.  Our success has rested almost entirely on ignoring fundamentals and focusing on the things which have mattered: inflation, interest rates and stock prices.

continued for members… (more…)

I’m focusing on oil this morning, so the regular array of charts will be somewhat delayed.  Not to worry, as our targets remain unchanged from yesterday.

The only updates relate to the EURUSD, which found no reason to reverse following Draghi’s comments.  The USD continues to drop toward our downside target.

continued for members… (more…)

Aside from the troubling headlines, yesterday’s price action was driven by continuing weakness in the USD (especially USDJPY) and oil’s inability to push through important overhead resistance.

This morning, oil is pushing above that resistance.  We won’t see EIA inventory data until tomorrow, due to the holiday.  So, it remains to be seen whether traders will jump on board this move, or it’ll reverse intraday.

If it does, we still have no shortage of lower price targets.  ES had no trouble reaching yesterday’s initial downside target, with a drop through 2450 before VIX was wrestled back under control.

After the overnight ramp, it’s again threatening a breakout.  We saw how that went yesterday.  Is this yet another 1% V-shaped recovery, or a potential head fake?

continued for members...

Just a quick housekeeping note…I will post until 10:30 this morning, then have to hit the road for some meetings.  With any luck, I hope to get an updated oil forecast posted as well.  But, there’s a pretty good thunderstorm brewing here in Boston, and I’m wondering how long the power will remain on…

First, a quick look at WTI shows it’s running into resistance at the red TL and SMA200.  Time for a reversal.

The big picture for SPX and ES, just in case things get out of hand.

The initial bump should get SPX up to a backtest of the red channel, with the SMA5 200 just above at 2468.95.  My gut tells me we’ll get another leg down.  But, we’ll have to see what happens with CL, VIX and USDJPY.  USDJPY continues to limp along, with yesterday’s dovish Fed comments not helping much.   It’s the .618 Fib that intersects with the white channel bottom that has me thinking this could be more than the usual 1% V-shaped dip.Also, we’ve been keeping an eye on COMP, which just missed tagging its SMA10 yesterday.  Might it take another swipe at it today?

And, last, VIX — which has two clearly defined upside targets if allowed to go in that direction.

UPDATE:  10:06 AM

VIX has dropped down to test the SMA200, and USDJPY is rallying for no particular reason.  Otherwise, the initial pop would have fizzled by now.  But, it’s still early… I think it’s as simple as whether or not VIX bounces at the SMA200.  If it does, we’re looking at another leg down to 2438 or lower.  If it plunges through it, then 2482.I’m going to focus on CL and try to get that posted before I have to take off.

UPDATE:  3:30 PM

SPX is sitting just above the SMA5 200, exactly where it’s either going to reverse lower or break out.  The implication is that it’s going higher to the .886.  But, the fact that VIX hasn’t collapsed or CL broken out or USDJPY made new highs argues otherwise.

Note that VIX is below the SMA200, but not below the yellow channel bottom.  It’s either a pretty good tell or a pretty good head fake.

As to CL, I think this is the top.  But, I have more calculations to do before providing a target.  I’m in transit, but should have a chance to post those charts around 5:30-6:00 EST.

UPDATE:  6:20 PM

For CL, the two charts below support my expectation that prices are headed lower.  Whether you’re talking about CL or RBOB, the August YoY comps spell higher inflation than the Fed would like (higher inflation = pressure to raise rates…not desirable in this environment with slowing economy and high “hidden” inflation.)

I don’t have my oil price database with me on this trip.  But, the EIA is showing a very healthy monthly increase in average gas prices for August (3.9% MoM and 8.4% YoY.)   I believe this is understated, but  my back of the envelope calculations indicate CPI should come in at 1.9% or higher.

Given that August’s YoY increase will be wildly higher, we should expect CPI to easily exceed 2% and potentially 2.5%.  I think the Fed will have no choice but to try to tamp down inflation and, therefore, oil/gas prices.  The fact that API reported a 2.8 million barrel build versus last weeks 5.78 million barrel draw is icing on the cake.  But, we’ll find out for sure tomorrow morning when EIA data is released.

More tomorrow morning.

 

As the great philosopher would say, that escalated quickly.  Yesterday, gold reached our purple target detailed in our last update [see: Gold, Ready to Shine?]

As we pointed out in June, 1348.60 is a key price level, as it represents 2 channel lines and the .886 retracement of the plunge from 1377 in July 2016…If GC is able to remain atop its SMA10/20 for the ride up to 1348.60, by all means ride along.

We’ll take a quick look at what to expect next.

continued for members… (more…)

Stocks were well on their way to a breakout over the holiday weekend, a common enough occurrence — when reality demanded a pit stop (hydrogen bombs and impending ICBM launches can have that effect.)

S&P futures dropped 20 points from Friday’s highs by the time they reopened Sunday.  Even after a concerted ramp job, things still looked dicey for today’s open as of a couple of hours ago.  The rising red channel had broken down and hinted at a corrective C-wave down to 2450ish.But, that was before the algos got busy.  Now, with 20 minutes till the open, a breakout is solidly back on the table.  As one reader pointed out the other day, what’s it going to take for stocks to sell off?Glad you asked.

continued for members… (more…)