Bill Cara’s Blog for Mar 22, 2011 [See Post-Close report]
CTA Trading Desk Morning Report
[7:00am ET] Good morning.
Here are the 7:00am ET snapshots of the latest equity market trading results for Europe, and futures prices plus 5-minute charts of the futures for S&P 500, 30-year US Treasury Bond, US Dollar index, Gold and Crude Oil.
[9:29am ET] Good morning. Geoff here.
Global stocks experienced some small gains overnight helped by the Nikkei which rallied 4.4% on the good news regarding the nuclear issue.
The US futures markets are slightly higher as I write this.
As the nuclear issue seems to have peaked, eyes move to Libya. In Europe, questions arise on whether or not the military should be under NATO control. In the US, politicians of both parties are rising against the president regarding the constitutionality of the US involvement. It sounds like the coalition is already in disarray. Regardless, oil prices will remain volatile until the Middle East calms down which may not happen soon – we also have to watch Yemen now.
The issues that have been roiling the global markets seem to have calmed and market volatility has dropped but those issues remain. As traders, we need to be aware of various scenarios and have a plan to take advantage of those possible scenarios if they play out.
One of those scenarios involves the US Dollar.
Weeks ago, we mentioned the negative correlation between equities and the US Dollar. As the US Dollar falls, the stock market trends higher. This relationship is due in part to inflation, in the form of money, sloshing around in the system. That money is put to work in the stock market.
What that excess money also does is rally commodities like gold and oil. As the US Dollar falls, commodity prices rise in terms of the USD because the dollar isn’t worth as much as it was before, so it takes more US Dollars to purchase the same amount of a commodity. As the dollar falls you want to be long commodities – most of the time.
We were also watching for the massive money printing that has occurred over the last few years to eventually push the dollar to new lows. If the stock market fails to rally as the US Dollar declines, that would be a really bad sign for the stock market. The negative correlation between the US Dollar and US equities would be ending because traders would be nervous about the US Dollar. If the US Dollar was not able to find support, risk would rise in the equity markets.
Cliff Notes: Bernanke’s printing press weakens the US Dollar to the point that traders are nervous and sell stocks breaking the negative correlation between the US Dollar and US stocks.
So, what is our trading plan IF that particular scenario plays out over the coming weeks and months? Remember, this is a BIG IF;
• News may come out that the USD has “cracked”
• Traders will sell the broad equity market as the US Dollar declines
• If the stock market falls too fast, leveraged traders will need to raise cash and babies will be thrown out with the bathwater, including gold and other commodities
• Many emotional gold longs will be shocked that gold isn’t rallying due to the USD decline (“because it should, it just should dammit!”)
• CNBC will trot out a number of gold bears to push more fear into the gold market panicking gold longs into selling gold at even lower prices
• We wait to see some climax selling in various gold securities because that will be a sign that the weak hands are out of the gold market. When the downtrend ends and a price chart shows a downtrend line break to the upside, we step in and start using the capital that we have on the sidelines to purchase gold and quality gold stocks. We will be looking at trend lines and Fibonacci levels. The attractive gold stocks will be the prior leaders.
Ok, like I said; that is a big IF, but this type of scenario (with different catalysts) has played out many times since 2003 and probably will again. As a trader, you WANT volatility in order to make money and you need to have a list of a number of possible scenarios, then if one begins to play out, you will be ready to ACT. It just happens that I see the above scenario as one with the most bang for your buck.
Have a great trading day!
|Symbol||Name||Last Trade||Change||Related Info|
||19.16 (0.68%)||Components, Chart, More|
||11.49 (0.44%)||Components, Chart, More|
||3.03 (0.08%)||Components, Chart, More|
||8.92 (0.13%)||Components, Chart, More|
||0.42 (0.12%)||Components, Chart, More|
|^OSEAX||OSE All Share||492.79
||2.41 (0.49%)||Components, Chart, More|
|^SMSI||Madrid General||N/A||0.00 (0.00%)||Chart, More|
||1.69 (0.48%)||Components, Chart, More|
||16.17 (0.26%)||Components, Chart, More|
||4.58 (0.08%)||Components, Chart, More|
The team will check in during the day, reporting in the Discourse when there is a new entry.
Enjoy your day.
Cara on Trends & Cycles
Vad’s Catch of the Day
Kaimu’s Sound Money
CTA Trading Desk Mid-Day Report
CTA Trading Desk Post-Close Report
Good evening. Patrick here.
I have been battling computer problems since early this morning; from the looks of it I didn’t miss a whole heck of a lot. After the big initial push upward yesterday morning equities have been flat lining for the better part of two days. Usually this sort of tight consolidation occurs directly before an impulsive move.
The S&P has respected the 1330 area thus far pausing as it tests its 20- and 50-day moving averages, and the 50% retracement of the latest decline. Volume has been anemic the past few days – traders are indecisive right now, electing to watch the action from the sidelines.
The market is building energy – look for vertical development (trend day) soon; if the S&P starts punching through 1310 shorts are going to feel the heat. Bears will be looking to fill the gap from yesterday (roughly 1279-1281) with lower targets of 1250-1260 and 1220-1230.
The “fear” index (VIX-1.94%) has plummeted -35% in less than a week indicating most of the players are unconcerned about Libya, Algeria, Bahrain, Iran, Japan, Portugal, Spain…
While everyone may be breathing a sigh of relief now things could quickly change, especially if a geopolitical “event” happened, the greenback (DXY+0.11%) decline intensified, or interest rates (TLT+0.28%) suddenly began spiking upward.
Stay vigilant my friends.
Have a great evening.