I apologize for the late post as I was celebrating a birthday today with family. While the developments in the market were not ideal, they still fit completely within our current framework. As always, proper risk management is the most important thing, and despite some divergences today, if the dollar continues to show strength relative to other currencies…
…we will have to step to the side and wait for a new entry. Our long positions in metals and miners are back to square one, and we knew that going against the momentum was bound to be choppy. The retest today was on much lighter volume than Feb. 20th, but that is no guarantee that the move down is over. Miners actually dipped slightly below their lows but managed to end the day above them. Any further weakness tomorrow and they will be removed from our portfolio until another high risk/reward setup is presented. GLD was not as weak, but still could not stay above its 9 EMA over the last two days.
The SPY gave us our desired short entry today as it approached the previous highs and faded into the close. A short position with a stop above the 153.28 high is a great risk/reward entry as we watch for momentum to roll over. A swing high tomorrow would be further confirmation of a move down into a cycle low, but we have to be prepared for one more attempt at the highs if we are still in the previous aging daily cycle.
Here are the charts from today:
To summarize, our gameplan for tomorrow is:
- Stop out of GDX upon further weakness
- Stop out of GLD if price moves under the Feb. 20th lows
- Watch our SPY short for a swing high as further confirmation of a move into the daily cycle low
- Watch XIV for confirmation of a move down in equities
One thing to keep an eye out for are the beautiful pullbacks and MACD crosses in the $VIX, FXY, and TLT after their big pops Monday. With the sequester in play tomorrow, this would be a great time for the $SPX to move down into a daily cycle low:
I apologize for the shorter than usual post tonight, but my family has made a delightful dinner and I have some angel food cake and strawberries to make disappear.
Good trading all.
Steve Chapman, TRI
While we wait patiently for the market to make its next move according to our framework, I want to step back a little bit and zoom out on the big picture. A lot of times we get so caught up in the daily wiggles that we forget about what is happening on the weekly, monthly, and yearly time frames. Here is an outlook for the $SPX that I published in July of 2012, and while it was just a guess based on past cycles, it is remarkable how the pattern continues to repeat in a logical way…
Because of central bank intervention and zero interest rate policies, the typical 4-year market cycle has been stretched significantly as big businesses are no longer allowed to fail. To understand a typical market cycle, it begins with healthy banks lending money to businesses. These businesses take the money and build things and hire people. As more orders come in, the businesses expand and hire more people and borrow more money to meet demand. After a certain point, the businesses that have made a good product and managed their balance sheets intelligently have a healthy, profitable company, while their competitors that either have an inferior product, bad leadership, or too much debt are struggling to survive. At this point, a cleansing process happens, and some companies file for bankruptcy protection, some are forced to sell assets at a discount, and many people are laid off.
This cleansing process also happens in nature, and despite the temporary pain, it is healthy and allows more growth to eventually occur. For example, a forest begins with young healthy trees, and after enough time the trees grow and mature. At a certain point, some of the weaker trees begin to die, their branches litter the ground, and the forest no longer provides a hospitable environment for the smaller plants and animals. However, nature has a solution. When lightning strikes the trees a forest fire is started, and as the old trees and branches are swept away in flames, an ideal environment for new growth is created. This is supposed to happen in the financial markets as well.
With politicians fearful of suffering a market decline during their terms, the printing presses are working overtime and we no longer have our “lightning strike” moment in the economy. Only the strongest trees are allowed to survive, and all of the time and money is spent on sustaining them. The environment for the rest of the plants and animals continues to worsen, and new growth is never allowed to occur. The longer that this approach is taken, the larger and more dangerous the forest fire will be when lightning eventually does strike because of the massive amounts of dead, dry wood piled up beneath the big trees.
Overly-detailed metaphor aside, we are at a similar inflection point in the market. The $SPX is within a few percentage points of decade-long highs, and I am a firm believer that the algos are salivating (condensating?) at the opportunity to run price up to new highs and hand the bag to retail investors that will be seeing “new highs” proclaimed from every media outlet in the world. The stubborn shorts at that point will be completely decimated and finally capitulate to the long side. Markets make cyclical highs on complete euphoria, not cowering in fear. However, to accomplish this task I think they are first going to need the energy from a new yearly cycle:
We know that after a right-translated cycle, the next cycle typically forms a new high, even if it is left-translated. This current yearly cycle in the $SPX is extremely right-translated, and therefore the upcoming yearly cycle low should be very mild. For the cyclical bull move out of 2009 to finally end, it has to form a left-translated yearly cycle and eventually move into its 4-year cycle low (which has been stretched to +/- 6.5 years). What we want to see happen eventually is a lower high formed, similar to the right shoulder of a head and shoulders pattern, with the longer term weekly and monthly moving averages rolling over. It is after that point that we should be short the market, but until then it is very dangerous because of the printing press:
It should be at this short entry point in equities that precious metals are breaking to new highs and well into their final parabolic move. A partial collapse of the current worldwide financial structure and a return to the Dow:Gold ratio of 1:1 (that peaked at 44:1 in 1999) should be the target as lightning finally strikes the bond and derivative markets and the cleansing process begins. A healthy position in both trades will be ideal as we don’t know how they will change the rules at that point to protect the system.
Although that scenario sounds extremely gloomy, this will not be the first time in history that it has happened, and it will not be the end of the world. Lightning struck in 1979 and it spawned one of the greatest secular bull markets in recent history, ending with the Dot-Com mania in 1999:
So as we wait patiently this week for the market to make its move, let’s keep the big picture in the back of our minds and not get too caught up in the daily wiggles. There is abundant opportunity ahead for the Refined Investors.
Good trading all.
Steve Chapman, TRI
Our game plan for the week was to continue to wait for the market to reveal its hand. We knew the trading was going to be choppy because of the existing momentum conflicting with the current cycle counts, so we have to be patient while price works its way through these levels…
…we have a huge POMO injection from the Fed today, and that has consistently been $SPX positive and GLD negative. However, our ideal framework continues to unfold nicely. The dollar formed a swing high today and is possibly moving into its brief cycle low. The $SPX is making another attempt at recent highs, but it should come up short and provide us instead with a nice short entry. XIV is along for the $SPX ride as usual, but could face some nasty days over the next few weeks as traders panic for the first time in 2013. GLD and GDX are experiencing weakness on the $SPX strength, but volume is much lighter and so far it is just part of the chop that comes with going against the short-term momentum:
Be patient, and don’t get shaken out of your positions or try to overtrade the chop. Our stops are in place under the Feb. 20th lows if the market throws us a curveball.
Good trading all.
Steve Chapman, TRI
Tonight will be an assortment of charts as we continue to wait patiently for the currency and equity markets to make some decisions after their violent moves yesterday. Precious metals have continued on their path of mean-reversion back to the 50 MA, but commodities in general are extremely weak with only natural gas, cotton, and soybeans above their respective 50 MA’s…
…the $SPX is slowly losing momentum, and just as the Titanic took 3 hours to sink this index will not go down easily, especially with the Fed juicing it. The longer-term MACD is getting ready to roll over, and the ideal short entry is on a bounce once the MACD has crossed over with a stop at the previous daily cycle high. We could potentially fill the gap left over from the Fiscal Cliff resolution as a target area for a cycle low. The last two cycles bottomed at the 250 MA, so that is also a potential target. Be patient when hunting an elephant as momentum does not die quickly:
Even though currencies are hopelessly broken from Central Bank intervention right now, we have to respect the move in the dollar. Traditional risk correlations are not working at the moment, but the dollar did just form a new yearly cycle by besting its previous intermediate cycle high. There is a lot of upward momentum, and a daily cycle low will probably be minimal at best because this one is becoming very right-translated. A bounce from the oversold Euro (at 57.6% of the dollar index) could be the catalyst for the cycle low. Looking ahead, we have an overhead gap and the MA Envelopes as likely targets during the next daily cycle, and if this intermediate cycle is to be left-translated then that would be a good spot for the cycle to roll over. That could also be a significant inflection point for awaking commodities once again. Do not over think currencies right now because they can flip directions in an instant, but respect them because momentum is momentum:
After the $VIX’s massive spike yesterday, we saw the VIX futures form a hammer today on the XIV chart. XIV is likely to follow the $SPX with a weak bounce up here before joining in its decline to a cycle low. Once again, the Fiscal Cliff gap is a likely price target, although it can overshoot it as traders get emotional on the final decline. However, the XIV low might coincide with the completion of the precious metals mean-reversion trade to their 50 MA, and has the possibility of being the best trade of the 2nd quarter if the $SPX makes it to new highs:
GLD had its biggest day of 2013 today, and the MA Envelopes mean-reversion trade continues to work. The move was big enough today to curl the 9 EMA upwards, and that is a small positive as it works its way back to the 50 MA. Don’t expect the shorts to give up easily at the downward 20 MA, and we also have to be aware of the bears trying to force a retest of the recent lows. We have a stop at the low of Feb. 20th, and we will regroup if new price lows are made. Open interest in the futures continues to decline, and that is a positive as price moves upwards instead of downwards as it likely means that shorts are being forced to cover:
Miners did not show the same strength that GLD did today, as they failed to break the 9 EMA once again. ABX did not get through its 20 MA, and NEM is still deciding whether it wants to go up or down despite swelling volume over the past week. Some of the index components are as oversold as 2008, and it might just take shell-shocked investors a few days of GLD strength before they are willing to jump in. The massive head and shoulders pattern is also nerve wracking, but could potentially create a nice short squeeze if price can move above the 20 MA. Just like GLD, our stop is under the huge volume of the Feb. 20th low. We will regroup if the bears manage to push price under there once more:
Continue to wait patiently for these moves to develop. The SPX does not top quickly and precious metals tend to crawl out of lows and explode into tops. Patience is the name of the game for the week.
Good trading all.
Steve Chapman, TRI