I began building short positions on Friday afternoon.  I will continue to build shorts up to the declining 50 day moving average.  I believe we test 1040 SPX at least one more time.  If we cut through it hard we could see a quick capitulation move.  If we bounce hard, consolidate for a week or two at higher levels, and see some institutional participation, this market could rip.  For now I will play the short side as we still have all of the trend indicators pointing negative.

Look for the US Dollar to move higher next week as it is very oversold on many of the important oscillators I watch.  The long bond will also be interest, it continues to trend on the intermediate term time frame to the upside, and has pulled back to an important breakout level.  The doji top put in a few weeks ago was quite obvious, and I said as much here.  Now we will find out if it was a real intermediate term top, or just a short term break in the momentum.  Honestly, I’ve got no edge either way, we will wait and see.  Watch this asset for clues as to whether risk has come back into the equity market along with European bonds.

The big money is not made by coming and going, but by sitting.  Right now, it’s not possible to sit, so stay small or be out.

The new quarter started at the bottom of this market, and thus I’ve seen pretty poor relative performance.  I trail the SPX by 460 basis points after about a week and a half of trading.  I’m flat in terms of absolute return.

New positions this week include longs in PWER and DPS.  The PWER chart could not look any more beautiful.  Long term this stock could be a big winner and is doing every it needs to right now to set up that scenario.  In bear markets though these types of setups often fail.  I like it as a great hedge for my shorts, if this market rips this stock is going to fly.  I added to my short in USO along with building a short position in UCO, the double long ETF.  The only reason I’m fooling with the double long is because I couldn’t get a borrow on any more USO.  Other short positions added this week are URBN, STD, SNDK, DLTR, and MSFT.  Remember, I don’t trade on the short side like I trade on the long side.  Get in, get out, move on, these are shorter term trades, a few days to a week or two at most.

I took some profits this week in PWER, and a loss on a short in AMZN.

Overall, I’m 20% short, and will probably build that to around 30% over the next few days.  There is an underlying drift to the upside in this market the last week or so, but it is coming on lighter and lighter volume.  Rising wedges are dangerous patterns which often produce big breakdowns.  I think we see one next week at some point.

Look down on the right hand side of the performance sheet to find the short positions.

Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security.  The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.

]]> http://www.leighdrogen.com/momentum-book-update-27/feed/ 0 http://www.leighdrogen.com/making-a-call-on-the-us-dollar/ http://www.leighdrogen.com/making-a-call-on-the-us-dollar/#comments Sun, 28 Feb 2010 16:28:23 +0000 Leigh Drogen http://leighdrogen.com/?p=1747 This week I began to explore the idea that the US Dollar $USDX may be topping out on a short term basis.  After surging to new highs last Friday, the dollar gave it all back and proceeded to chop around this past week.  Remember, we are still trading above rising 20, 50, and 200 day moving averages, so the trend is up and short positions should only be taken on small time frames and gains booked quickly.  But…there are reasons to believe that the ascent of the $USDX off the bottom may be coming to an end, for now.

This is a chart posted last night by on of my favorite technical analysts, @theEquilibrium.  There are major momentum indicators on the chart giving warning signals to those who are long the dollar.  RSI, Stochastics, MACD and WM %R  all shout sell.

I’m making a call here that you should begin to position your trading in a way which assumes if not a move lower in the dollar, at least a halt in its uptrend for a time.  I’m taking other fundamental factors into consideration, including the record short position in the Euro $EURUSD.  I can see a quick squeeze coming in the Euro and believe that Greece will be rescued.  Keep your eye on crude $CL_F and the smaller oil service and driller names.  Keep your eye on gold $GC_F here as well, the action last week was quite bullish.  The miners are a difficult trade, but if you’re willing to give your position some wiggle room now may be the time to dip in.

Short term target $USDX, 79.50.

Thanks again to @theEquilibrium for the excellent chart.

I’m not cutting the tech exposure though until Thursday afternoon, at the earliest, before Intel $INTC reports.  I highly doubt they are going to let this sell off get rolling at least until that point.  In fact, I think you can step into some positions right here, while the $QQQQ is holding above that 20 day moving average, with tight stops and small position sizes.

I’m scared of the $MTL chart, I don’t like that failed breakout, and the steel industry components have run too far too fast.  I see more downside there.

The $XLB chart that I posted the other day was prescient.  It was rejected right at the area of long term resistance I pointed out.  That level won’t be taken out easily, it’s going to take at least a few weeks, if not a few months.

Action in the US Dollar $USDX will have a lot of say in how the $XLB components act.  I’m looking for a dollar rally now off the 50 day and bull flag put in.  I think everyone else is looking for the same thing, which is why there needs to be a shakeout.  Or maybe it just rolls over to new lows, that rejection from the 200 day may have been a major event.  Either way, listen to what the chart tells you, I have a view, but I won’t allow myself to have a bias, trade what you see.

I’m loving the healthcare sector right now, there are so many good names to dip into, but I won’t stash more money in those trends until I see tech really roll over.  I don’t think this is going to happen, but that’s my plan if it does.  I own $VRX, $CERN, and MHS in that sector, and stupidly sold out of $ESRX a few days ago.

I like $APWR and $URBN here, along with $CYH, $MOS is also giving you a good long entry if you don’t have cow shit exposure

You can find the post here.

As the financials go so will go this market, and just as they have been for the last three quarters, they will get bid up into earnings.  Take a look at the sector leaders from the past week.

Look for this trend to continue for the next week or two.  Stick to the emerging market banks, they are on fire right now, Brazil and India are where you want to be, and if you can find some solid financials in China play those.  Materials driving the Russian train.

Trading is never easy, but the $GS call felt like a layup, and it just keeps running.

my stop on the last 1/4 position now under today's low

The break of that downtrend line was very obvious

Meredith Whitney keeps lowering estimates and price targets on the financials, she’s been wrong now for two solid weeks.  I hate to play against her because she is the axe, but I think even she is about to get run over by this market, which may signal that there are in fact, NO BEARS LEFT!

If the trade had not been a system trade, and just a swing trade, I would have exited on 12/7 as $GLD broke through the 20 day moving average after putting in a major reversal candle on huge volume the day before.

Anyway, let’s take a look at where gold $GC_F stands tonight.

I’ve placed on this chart the major support levels where we may see a bounce in gold.  Remember that the gold trade must be viewed through the prism of the inverse head and shoulders pattern which was fulfilled when gold broke through the all time high of 1029 back in October.  We topped out a few weeks ago at 1227, shy of the 1300 target measured move off the inverse head and shoulders pattern.  I’ve pounded the table going back a few months now that we need to see a retest of the breakout level at 1029.  This retest will be where the real investors reload.  We could see a move all the way down to 988 as the market attempts to shake out the weak hands.  If this level fails to hold, oh boy, watch out for a complete unwind of the gold trade put on by Paulson and friends.  The 200 day moving average shown on the chart will also be an important level of support.

Strength in the $USDX was the obvious catalyst for the sell off in gold.  It will continue to be an important asset to watch in the gold trade.  I feel we’ve seen an end to the turn off the bottom in the US Dollar as it now find resistance at the 200 day moving average and major overhead levels show on the chart.  The dollar needs to consolidate and test the 50 day moving average.  This should provide a short term respite for gold.

Volume By Price

I want to give a big thank you to @VPgradient who posted this chart on Chart.ly for me this afternoon.  It shows the significant levels of support in $GLD by measuring the volume traded at each price.  As you can see, the 104 level will be a major test for gold, below that and we are looking at 98.

For short term traders, you can buy the bounce by legging into a long position between here and 104.  For longer term investors, I still believe we need to either test the breakout level at 1029, or the 200 day moving average.  Be patient, more investors will lose money playing gold next year than will make money, it’s now a battleground asset, gone are the days of the boring yellow metal.  I still love the gold miners $GDX as an investment.  Names like $EGO, $RGLD, IAG, and $GOLD should be in your investment portfolio for both diversification and growth.

Investors obviously placed their bets for renewed economic growth in emerging economies such as the BRIC nations, along with Taiwan, Turkey, and a host of other leaders.  Back in March, the emerging market index, along with many of its components, failed to make new lows as the S&P 500 was violating its from the panic of fall 08′.  The divergence was clear, there were no more sellers of emerging market equities left, although there was more pain to be felt through the winter in US equities.  The last stocks to give up the ghost in the $SPX were those which hadn’t been materially damaged by the economic downturn.  At the end of every bear market this takes place, the best, most sacred large cap dividend paying stocks finally succumb.

Many of the emerging market indices show beautiful double bottoms while the $SPX shows a very ugly lower low with no retest.  Of all the reasons I can think that the US rally has been so under subscribed by traders, it is the fact that there was no retest of the March lows.  Technically, the March bottom was about as ugly as it gets, there was no reason at the time to believe, based on the chart, that the action in March was nothing more than an oversold bounce.  It feels as if traders have been fighting the tape all year for this reason.  Funny to think, had we gone back down to 700, held, and then rallied, there would be more believers.

Maybe it was the rebound in emerging market currencies that fueled the emerging market equity push.  The Brazilian Real has surged off the bottom as investors fled the US Dollar for higher yields.  Three month Brazilian treasuries yield 8.8+%, you get NOTHING  in the US.  In order to make up for a falling $USDX, investors poured money into higher beta emerging market stocks looking to make up for what they were losing in dollars.

And finally, after the bet on growth in emerging markets out pacing the United States, the more palatable technical picture, and the plunging US Dollar, it was hard to ignore the opportunity in commodities as the Chinese economic monster returned.  In fact it was China which sent the $USDX flying in order to crush the commodity index in the first place.  I won’t rehash what happened in 2008, I wrote a blog post earlier this year describing it in detail, but the gist is that the commodity index topped out within a week of China putting the breaks on appreciation in the Yuan.  They did this in order to send the dollar higher and crush the commodity index, in order to buy commodities at a cheaper price to fuel their growth, without doing this inflation would have spiraled out of control.

So China’s plan worked, commodities collapsed, and they were able to buy a boatload of copper and other materials at rock bottom prices.  Commodities rebounded faster than I believe even China would have liked.  That rebound fueled runs in many commodity linked emerging market equities.  Exhibit A is $VALE which bottom out at 8.80 in November, and hit 30 a few weeks ago.

So where are we now after this dizzying run?  Which of these reasons for the rally are still intact, and what can we expect moving forward over the next few months?

Weekly View

We find ourselves at an important area of resistance.  Both the MACD and stochastic indicators are giving sell signals.  But, the primary trend is up, all major moving averages on the weekly time frame are bullish, and when we put things in context, the market isn’t overly extended.  Yes, we’ve moved in quite a parabolic fashion and are due for some consolidation, but a move through the major level of resistance shown on the chart above should take place in 2010.

The US Dollar found a significant bottom at the end of November.  We are now testing the 200 day moving average and major overhead resistance levels.  It also seems that we’ve made a higher low on the longer time frame chart.  Throughout the rally in emerging market equities we’ve seen the dollar move down in a slow and steady manner.  The past month though has seen an end to this trend.

As the $USDX has moved up, emerging markets have lagged the US indices.  An unwind in the carry trade with the US Dollar bounce has had a great effect on emerging market equities than US Equities.  I feel we will continue to see this take place as strength in the $USDX will less effect US equities in a negative fashion.

Brazil and China in purple and yellow respectively have pulled back the most whole Russia and the Nasdaq have remained strong.

The Russian index $RSX is showing great strength in an ascending triangle formation.  A break of the yearly highs should lead to the next leg up.  Buy the breakout, but be very cautious if the uptrend line is broken, we could see a longer term consolidation which tests the 200 day moving average, action here will be very dependent on what happens to crude oil $CL_F over the next month.

I love the growth story behind Turkey.  The chart here looks extremely bullish and can be bought right here.  The test of the 200 day moving average is already out of the way and all major moving averages are positively aligned in the upward direction.  This consolidation which has lasted almost 4 months will provide a strong launching pad for the next leg of the Turkish equity rally.

India has found support at the 50 day moving average and is showing some very oversold readings on the stochastic indicator.  This is your buying opportunity into the new year.  I continue to believe in the India growth story.

Brazil has broken an important trend line and looks the worst of all the emerging market indices.  We may be entering a longer period of consolidation before the next leg up in this market, a test of the 200 day moving average is likely if weakness continues over the next week.  The stochastics are very oversold, but I feel money is better placed elsewhere for the time being.  Longer term, Brazil is the major emerging market winner, they’ve done everything right, and expectations are far lower than those in China, a positive for investors here.  Of all the indices though, this may have the largest negative correlation to the $USDX, so beware if we continue to see a strong dollar.

China is approaching the 200 day moving average at a quick pace.  A major uptrend line has been broken which signals that a longer term consolidation is taking place.  Stochastics are very oversold, a bounce is likely over the next few weeks, but it will take quite a bit of time for China to gear up for another run.  Be patient.

The story out of Taiwan is amazing, this could be the biggest winner of them all as relations between the mainland and the island improve.  Economic and social ties have grown strong over the past year and the threat of war has all but disappeared in my mind.  What scares me though is that island reversal candle circled in red.  This is an extremely bearish pattern make no mistake.  The uptrend line is still intact, but I’ve thrown a major caution flag here.  If China gets going again, money may be even better spent here.  Be patient.

The general thesis here is this, I believe we are in store for a bit of consolidation in the emerging market indices.  There is no reason to believe the primary uptrend which ban in late 2008 is in danger of reversing.  Be patient and pick your spots, if we can break through yearly highs I believe 2010 will be another very strong year for emerging market equities.  I will highlight some individual emerging market names to watch in a post to come.

I’m off to hockey, have a great evening.

I highly doubt we are going to see rates raised tomorrow.  The congress is struggling with so much right now, Bernanke can’t risk popping the asset bubble he’s created just yet.  He won’t do it until he absolutely has to, and when he does, I’d be willing to bet he does it all at once.  We’re not going to see a slow and steady increase of interest rates that bleeds this market out.  That being said let’s take a look at a few assets at the tipping point going into 2:15 tomorrow.

The broader market rolled over this afternoon and pierced the 5 day moving average, but recovered to close strong.  Still we saw our 4th doji day in a row, signaling severe indecision in the market.  Odds are that we continue trading within the ascending range, but the FOMC announcement tomorrow afternoon could knock us out of that pattern.  Keep your equity positions small here and join the winning team when a high volume break of the range occurs.

The downward momentum in gold $GLD has been waning over the past two weeks.  The 5 day moving average is my bogey, if $GLD can hop over that line we should see a strong intermediate base in gold and a move back towards the highs.  A break of the triangle to the downside and a move through the 50 day moving average should signal an end to the run in gold, for now.  In the weekly time frame,  I still wouldn’t be surprised to see a retest of the breakout level at 1027 where I believe we could see a massive pile into the gold trade.  I’m long $GLD from 95.45 on a system trade and will stop out below 108.70 which is last Friday’s low.

A similar situation in crude $USO as gold.  We saw two tests of the declining 5 day moving average today which were both rejected.  If we move up above that level tomorrow I’ll look to get long for a swing trade up to the declining 20 day moving average.

The US Dollar $USDX has obviously broken its downtrend.  I believe we are headed up to test the June and August lows, also coincident with the declining 200 day moving average.  The dollar is smelling a raise in interest rates and it’s hard to argue with the action, but I still don’t feel Bernanke has the balls to do it.  Stochastics are overbought here.  Interesting that the equities have not been hit with the dollar moving up, we could be seeing the beginning of a break in that correlation.

The market is handling all of the bank equity issuance in stride, but the liquidity punch bowl may be running a bit dry.  Bank of America $BAC is now trading  about 1.50 below where the retail idiots piled into it on the day of the secondary announcement.  Action here will be very important to the outcome of this market, if buyers of that secondary start to feel major pain, we could see quick and dirty selling in the financials.  As well, Citibank $C has been mauled the past few days as they issue equity to cover the TARP.  I have been on record for quite some time saying that Citibank should be treated like the plague, stay as far away from it as possible and don’t associate with anything having to do with it.  Wells Fargo $WFC is having issues as well as it raises cash to pay back TARP through an equity offering.  The banks are still the key to this market, if they can’t get their act together the financial sector will hold this market back.  Meredith Whitney is out with very negative comments on the banks, I believe she has the pulse of the sector, she’s the axe, ignore her at your own peril.  For it was her that caused the short covering rally in July when she put out intermediate term buy ratings on a whole slew of broker dealers and banks.

I’m off to hockey, yes another 11:30 game.  I gave it Wade Redden hard at the Ranger game last night, but alas, he still allowed Kovalchuck to walk around him in the first period, leading to a penalty and the first Atlanta goal.  This guy is probably the biggest waste of 6.5 million dollars in the history of the game.

Have fun tomorrow, it should be a hell of a show either way.

In the news!  Tiger’s score card continues to fill up by the hour, how many current or former porn stars is it now?  Look, here’s my take, it’s never right to cheat, but I blame both him and Elin (what a babe) for getting married in the first place, they brought this on each other.  No major celebrity should ever get married in their prime, and no one should ever marry a major celebrity thinking it’ll actually work.  I don’t doubt Tiger loves her, but it’s just not in our DNA as humans to be monogamous, and given the amount of opportunity he has with his status, fagetaboutit.  She may love him as well, but there’s no doubt in my mind she loves the money more.  These sort of things only work when you have two athletes who marry each other (see Laird Hamilton and Gabrielle Reece).  By the way, I have a hamburger bet with @Stein that Tiger and Elin DON’T show up on Oprah together in the next few months.  Look for a lot of Tiger themed porn though.

Obama tried to justify sending 30,000 more troops into the abyss that is Afghanistan in order not to be the president that lost the war.  The administration has no cohesive regional strategy, just the hope that if we sit on the Afghan egg long enough maybe something will hatch.  As you all know I’m no pacifist, there is a proper place for war, even preemptive war, but it must be waged by weighing the risk of loss against the probability of success.  Is Afghanistan Vietnam, NO.  Please put things into perspective people, we’ve lost less than 1/10 the men in both Afghanistan and Iraq combined than we lost in Vietnam.  Is Afghanistan a complete and utter quagmire, you betcha.

Bank of America $BAC repaid the TARP.  I ran into a guy in the locker room at hockey who did the secondary on the capital markets desk at $BAC.  He said the book was mostly filled with guys who already owned large stakes, didn’t want to be diluted, and wanted to support their positions.  I guess the liquidity punch bowl is still not empty.

Everyone hates the banks, what’s new.  Matt Tiebbi is a smart guy, and a good writer might I add, but he makes his living by riding the coat tails of public outrage.  I think you can successfully use his columns to call tops in public outrage at anything.  My guess, after he’s done with Obama he goes for Congress.  The whole thing is a firggin joke.  Look people, I feel like a broken at this point, they gave the banks the money to buy assets and reflate the market.  If they didn’t give them the money, or nationalize the banking system, we were all going to be living on the street.  Yes, Goldman Sachs has made a shit load of money in the past 9 months because they got a piece.  They only got TARP because they had to take it, the treasury forced it on them because they didn’t want to be seen as picking winners and losers by giving some and not others.  The buffet investment wasn’t “needed” either, they took it to calm fears in the market.  Goldman is just playing by the rules of the game, and they are the best at playing it.  Instead of complaining about how much money their bankers and traders make, or that the government financed their trading (which they did), try and investing in their stock, or their funds.  I don’t care how much the average joe schmoe makes, it doesn’t matter, this country is about getting paid your market rate, and the market rate for a guy who can make his firm 100 million dollars in trading profits obviously deserves a percentage of that.  Let the market decided what the percentage is.  I don’t hear anyone complaining about baseball players making bank when the government finances stadiums to hold all those people who contribute to their salaries.

Here is your weekend reading:

How Obama decided to spend more blood and treasury on the quagmire that is Afghanistan (NYT)

More on why you should quit bashing Goldman Sachs and aspire to be one of them (Aiki14)

The mortgage modification program is a complete failure (The Atlantic)

China is winning the race to supply the world with clean energy parts (WSJ)

Turkey wants to take it’s rightful position as power broker in the region, don’t be surprised to see them go after nukes (Economist)

What companies are leading the push for a smarter grid (excellent investment thesis) (Greentech Media)

First person to figure out how to do super cheap desalinization is gonna be a rich and powerful man (Economist)

God bless China for investing in Pakistan, if they won’t send troops to the region, maybe they will help create an economy there (WSJ)

This UStream thing is gonna be huge, HUGE! (CNET)

Media consumption is changing in a dramatic way, so many cool things to come (The Atlantic)

The EPA finally does what’t necessary, calls a spade a spade and labels greenhouse gases a public health threat (WSJ)

Americans are finally starting to pay off the debt binge they went on this decade, good for them, too bad the government is screwed (Business Insider)

The financial transaction tax bill is a complete joke, there is no way it passes, not a chance in hell (WSJ)

The Apple tablet is going to be huge, and it’s coming (Apple Insider)

Consumer credit is still declining, banks know that Americans have no money and will continue to be monster credit risks (Calculated Risk)

The US Dollar sits at a major cross roads this morning, located right on the 50 day moving average.  In my opinion it will decide which way we move out of this range in equities.  I believe we’ve seen an intermediate term low in the $USDX.

My momentum book is +30% cash and my only trading position is in $GLD which I will hold until it makes a new 20 day low.  Continue to trade small until the market shows its hand.