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Thursday Technical Review: Staying Focused

  • Written by Syndicated Publisher 313 Comments313 Comments Comments
    December 16, 2011

    This is a credit event that equity will be forced to acknowledge. Redundant I know but stay on message. Stay focused and do not waiver.

    This trade has been a bear. It has been far longer than I have anticipated and extremely challenging. Yet I find it is now becoming far clearer. More mechanical and less emotional.

    My goal with these posts is not to convince the world this is the right trade. It’s fine if you disagree in fact it is welcomed because crowded trades never work out too well. I write about this trade and this site for that matter to help others put the whole picture together. To tie in credit and the currencies with the equity market. To help people realize that equity does not and cannot trade in a vacuum.

    With that said I get a sense from reading some comments that everyone may not understand the progression of this trade or what I mean by it being “more mechanical, less emotional” so today I want to review the trade. I am not saying this trade is a guaranteed win. I could be completely wrong in my thesis I accept that. For now the data supports the trade and watching it evolve is encouraging.

    With this trade you cannot get caught up in those claiming the USD is overbought and do for a pullback. When there is a supply demand imbalance as their is with the USD overbought conditions as proven in 2008 are meaningless.

    The progression of this trade comes in three steps. Strains within the credit markets lead to strains within the currency markets which lead to strains within the equity markets.

    Step 1, strains within the credit markets have been highlighted. They have not improved even in the face of recent central bank actions. Step 2 has also been discussed where the USD is now clearly breaking out and the EUR clearly breaking down (chart below).

    This leaves step 3 where the equity markets are affected and it begins with commodities. Yesterday we saw a major selloff in commodities ranging from 5-7% across gold, silver, oil and copper.  Today we had to watch for confirmation of the move (as highlighted here Commodity Charts) and we found it. Even in the face of a relatively weak USD commodities in their inverse relationship still closed down on the session.

    When I say this trade has become clearer, more mechanical and less emotional, the chart below explains what I mean. If we are following this trade thesis as outlined above then when the ES (SPX futures) were ramping up at the open you could simply look at the commodities (DBC powershares index below) and see a clear divergence.

    In other words commodities which will cause equities to selloff were in fact weak on the session. They were not supporting the risk on trade. As a result I intraday traded to the short side earlier in the session.

    Did Commodities Confirm Yesterday’s Selloff

    So now we need to look at today’s price action for confirmation of yesterday’s commodity selloff and we certainly found it. Below are three charts (1) DBC, (2) Gold, (3) Oil.

    DBC – notice the failed down trending channel and the lower lows and lower highs.

     

     

    Gold – a second day closing below the 200MA and lower lows which violate any double bottoms traders were studying from yesterday’s price action. A key support line going back to 2008 remains just a few percent lower.

     

    Oil – a second day closing below the 200MA as well and a key resistance line is failing. Also a lower low and lower high was put in today.

     

     

    Currencies Consolidated Today

    The EUR and USD both did nothing but work off short term “oversold and overbought” conditions preparing for another move within their respective trends. The EUR (chart below) has now traded below the 2005 up trend line for three consecutive days.

    Bottom Line

    Ask yourself this simple question. If this market wants to rally as the pundits claim then why did it fail to do so after three days of selling pressure and with good economic data today? This trade is evolving and making more sense. The credit markets, currency and commodities are all following along the expected path. This now leaves equities.

    90% of the investment community will fail to see this trade. They will therefor fail to profit from it appropriately. My goal is not to convince the world I am right. I could certainly be wrong and am not afraid to admit that. The data though is just too overwhelming to do anything but this trade.

    The reality with trading as with life is most people can find an excuse not to take a chance. This trade is no exception. Another reality is that the moons never fully align until after the fact.

    Images: Flickr (licence attribution)

    About the Author

    Macro Story is designed as a one stop source for all of your macro related news and data.  From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion.  Content is presented in a format that allows you to read as little or as much as prefered.  Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.
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