Sunday, March 17, 2013

CTS Spotlight Blog for March 15th, 2013

Hello and welcome back to CRI's CTS Spotlight Blog.

03/15/13: The US Dollar index itself is at a very interesting cross roads here. As pointed out in this week's WCTS Blog, we are either at the end of a bearish Bat harmonic pattern (which would imply lower levels from here) or we push up through the 2012 summer peaks (suggesting much higher levels to come). Regardless, the area between 83 to 84 is a very important one and I for one will be keeping a close on how it resolves. While the bond market has yet to be convinced the North American economy has indeed turned, equities are enjoying what appears to be a flight back-into-risk. The fact that all world indices tracked are now pointing higher suggests we are closer to the end of this run then the beginning. Considering seasonality, I wouldn't be surprised if the spring/summer of 2013 marks an important peak. Interestingly, the rally itself is coming from unexpected sectors as our ABG trade (AAPL, Bonds & Gold) takes a break. Indeed, out-performance from sectors like pharmaceuticals shouldn't come as too big a surprise given CRI's 1st 2wks of Q1'13 study suggested that would be the case. Have the metals been beaten up a little too much? Recent WDB Options Model screen results would suggest so as several 'get paid to take a position' trades have emerged of late.

US Dollar Index (Weekly)



British Pound vs. The US Dollar (Weekly & Monthly)

 
As highlighted in recent weekly commodity trend summary posts, there are some interesting wranglings going on with the currency space of late and I thought we ought to take some time this weekend to look at the US Dollar Index in general and one of its trading pairs (The British Pound) in particular.

The US Dollar index
The greenback itself has been under relentless cyclical pressure since the day George Bush Jr. took office some 12 years ago. The coupling of the generational cycle turn ('greed' cycle peak into 2000) and absolutely horrible domestic policy culminated in the United States of America being pushed to the literal brink of bankruptcy by 2009. Once it was revealed how bad the situation really was and the US Fed established itself as a dependable 'lender of last resort' (and at considerable risk I might add) both a floor in the US Dollar was established and 'fear' proxies (like gold) calmed appreciably. 

So the question at this point seems to be, ok, what's next? The underlying fundamentals within the US economy have been supportive of both a stronger US dollar itself (interest rate spreads are attractive relative to the rest of the world) and a stronger US domestic economy (US corporate earnings are good and the yield curve remains expansionary). Until either the Fed signals an end to its current 'low interest rate' policy or international demand for US paper wains I see no change in that backdrop. Which brings us to the charts. The first chart above is the US Dollar index and it is in my opinion that the index is at a very significant cross roads. Should this be a 'Bearish Bat' harmonic pattern (where point d. would represent the end of our counter trend rally) we should see prices fall appreciably from current levels. Should this be a bullish AB=CD harmonic pattern (where point B would represent the beginning of a whole new longer term leg higher) we should see prices rally appreciably from current levels. While the jury is still out on the broader world economy, I myself will be looking to see how the index acts in and around this 83 to 84 level over the coming weeks. This is what I would consider the battle zone. If the bulls win we blast through 84, if the bears win we fail at 83. 

So are there any ques for investors that might help guide expectations going forward? In the short term we do still have seasonality on the 'commodity bulls' side. Once that window closes (Sell in May and walk away) my bullish enthusiasm for commodity ownership (and respective US Dollar bearishness) shall be tempered. It has been my general belief that the public is 'too long' commodities in general. Given my recent comments on the risks of owning such assets (WCTS Blog posts on Gold and F. Cattle of late for example) my general feeling is for lower commodity prices and a stronger US dollar over the medium term. Consider too, Democrat US Presidents are historically US Dollar bullish (as their constituents are typically urban rather than rural) a strong US Dollar policy in general shouldn't be a surprise through Mr. Obama's second term. While these two arguments are fundamentally US Dollar bullish, I myself am going to wait for the break of 84.245 to confirm it technically and I wouldn't be surprised if it takes us getting through the seasonal 'peak' to do it.

So lets take a look at what is going on internationally to see if there might be any hints there. The second chart included in this week's blog is on the British Pound vs. The US Dollar and I think it has some interesting 'tells' to it.  There is no doubt about it - this is a bear market! The question for me is, how bearish is it? In exact opposite fashion to the US Dollar index (as expected) the British Pound is literally on the brink of a significant collapse. Indeed, I remember reading stories of traders getting their 'big break' on the devaluation of the British Pound back in the late 1970's and early 1980's - is history repeating itself here? Believe it or not, the Monthly B. Pound chart is painting a target below parity with the US Dollar - or about $.50 lower from current levels! If this chart isn't a wake up call for US Dollar bears, I honestly don't know what could be. While the monthly chart does look ominous, the weekly chart does look a little washed out. Selling below 1.50 seems a little late to the trade but any counter trend rallies back into the 1.60 area would be considered an attractive shorting area (looking to buy Jan, 2014 or beyond Put options) and I shall be keeping an especially 'peeled eye' on this potential trade going forward.

That's all for this issue of the CTS Spotlight,


Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com 

http://www.therationalinvestor.ca/RI_Tradents.php#wctsspotlight http://www.therationalinvestor.ca

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