A Final Bottom for the Dollar?

Jun 13, 2008: 1:37 PM CST

Is the US Dollar Index in the process of bottoming?  Has it formed one already?  What does this mean for the overall market and for commodities?  Let’s look briefly at the charts.

First, the ’structure’ of the Daily US Dollar Index:

Notice the price making lows at $71 but always failing to exceed those lows.  Now, look at the structure of a higher high, and three higher lows.

There is clear congestion at the $74 level, but should dollar bulls break through this level, odds are that price will continue in the upside and the birth of a new uptrend on the daily chart will be officially confirmed.

Here’s a look with some indicators overlaid on the price:

Price is above the key (flat) 20 and 50 period moving averages, and a lengthy positive momentum divergence precedes the current action.  Also, a clear up-trend line can be drawn under the three rising lows in price, forming a potential ‘ascending triangle’ pattern which usually resolves to the upside.

Let’s look at the structure of the weekly chart to glean any clues:

While we observe here a textbook example of a perfect (or ideal) downtrend, price is now forming positive momentum divergences and breaking above its 20 period weekly moving average, which has served as significant resistance all throughout the downtrend.  Also, the MACD line (black) is crossing above zero while the trend (red) line has clearly turned up.

All this signals the potential for good things yet to come for the US Dollar index if it can capitalize on the environment and continue rising, which looks likely.

A stronger dollar would likely put pressure on some commodities, including gold and oil.  That would be good news, in that oil prices coming down (off their stratospheric, possibly ‘blow-off’ rise) would be good news not only for average drivers, but possibly for the stock market as a whole.

Adam Hewison of Market Club just released a video entitled “Gold, Crude, and The Dollar – These Three Markets Could Change Everything” in which he discusses what possible trend reversals in these interrelated markets would mean.  The video requests a free sign-up, but no obligation beyond that.  Also, a reminder that starting Monday, I will be posting a link to sign up for a two-week free Trial to the Market Club services which will be interesting and exciting.

Let’s keep our eyes on these markets and what possibly lies ahead!

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Yields and the Curve – A Quick Look

Jun 13, 2008: 10:56 AM CST

Short-Term treasury yields have been rising lately, driving bond prices down and potentially confusing investors who escaped the stock market in the recent past to escape the downward volatility.  It is time to switch?

Many investors and financial adviser instructed their clients to buy bonds to ride out the upcoming market volatility, some doing so as early as August of last year.  That was a factor in driving bond prices up and yields down (along with the Federal Reserve slashing interest rates), and indeed the US Stock Market experienced some downside volatility into 2008.  Many advisers purchased short-term notes (2 years or so), expecting this would be market correction lasting about that duration, and then rotate clients back into the stock market.

But with that portion of the bond world being potentially ‘overcrowded,’ are these same advisers now at risk and shifting out of the short-end of the bond market, helping push yields higher?  Remember, the Federal Reserve has not yet hiked interest rates, but are signaling a “wait and see” environment.  While there are certainly many more reasons why yields may be headed higher, let’s take a look at the charts:

Two-Year Treasury Note Yields have risen from a low beneath 1.5% in March now to a 2008 high at 3.00%, with the yield doubling in four months.  Bond prices (not shown) have seen a corresponding fall as well.

Investors who locked in rates last year are still collecting their interest payments, but if you just now entered say a bond ETF, chances are you’re down a little bit on the position in terms of price movement while the US Stock Market recovered (at least since March).

One thing to note about yields (and bond prices) is that they tend to trend much stronger and solidly than the Equity Markets.  According to the chart shown below, which dates back to 2000, you can see that yields have much smoother action, and when a change in direction is signaled (especially on the monthly chart), that direction tends to persist.

There was really only one aberation in the smooth trend – that being in late 2001 around the time of the September 11th attacks, when investors perhaps overshot the ‘flight to quality.’  Nevertheless, at all other times in the chart, there really have been few retracements – only pure trend.

One thing to note is that yields often don’t ‘change direction on a dime,’ but instead flatten out and form rounded patterns before changing direction.  The most recent change (with the doji) represents a ‘change on a dime’ pattern, but nevertheless, the monthly trend appears to be changing.

Yields found a bottom at the lowest levels of the decade, which also occurred just below 1.50% and now appear to be headed higher (bond prices appear to be headed lower).

Remember that if you purchased an actual 2-Year Treasury Note, you should not be concerned by daily or weekly price losses that your Note (bond) is showing.  At redemption, you will receive the full value plus interest.  If you’re in a bond ETF however, the situation is different, and you’re at greater risk of price fluctuations.

We’ll continue to watch these developments and what they might mean for the overall Stock Market.


What’s Happening to AAPL?!

Jun 12, 2008: 2:18 PM CST

With one hour left until the close, Apple Inc (AAPL) is down 4.5% for the day and just over 7% for the week.  Let’s look at the chart to see if we can get any clues to where the selling might stop.

First, the intraday 5-minute chart to see what is going on with the price action and accelerating selling pressure:

Price is exhibiting a “trend day down” where price begins at one extreme and – so far – is ending at the other extreme.  The definition is confirmed by the fact that price found continual resistance at its falling 20 period EMA (which also gave you clean, low-risk entries into the prevailing and fast moving downtrend).

What did this selling pressure and momentum do the daily chart?  Is there a target there?

With all the recent seemingly bullish news for the stock, the technicals (chart patterns) did not confirm the news.  In fact, large funds may actually be using the good news as an excuse to liquidate – only their methods are either being exposed or exacerbated by other selling.

Notice that, no matter how bullish you got on this stock, an obvious momentum divergence preceded today’s ‘massive’ (if it can be called that) sell-off.  This absolutely did not come as a surprise.  A double-top formation complete with negative momentum divergence was a clear warning sign that ‘things just weren’t right’ with this stock in the short-term.

I’ve placed a target of $160 which is the 200 period moving average and the zone of the April retracement top.  That could be the next logical chart area of support, but we will always watch day to day to see what happens to the stock.

As for the weekly chart?  It also showed some signs of advanced weakness going into today that, perhaps now, have become more obvious.

The biggest ‘red flag’ from this longer-term chart was the non-confirmation from volume flow as price continued to trek its way higher.  As prices increased, volume decreased, meaning the higher prices were likely supported by fewer and fewer buyers.  What happens when the last buyer is satisfied?  Or at least the aggregate buying pressure is satiated?  Price has much higher odds of falling.

The $160 target seems just beyond the rising 20 period EMA here, so the $165 level could hold on this chart.  A word of warning to the bulls – if the $160 level fails, the next logical support zone would be the rising 50 period moving average, which currently stands around $150.

Has Apple’s moment in the sun truly fallen?  Or is this just a temporary pause in a broader up trend?  The odds seem to be shifting to the bears in the short-term but we’ll continue to watch any new developments in Apple with great interest, as I’m sure you will as well.


Transports Driving off a Cliff

Jun 12, 2008: 10:59 AM CST

The Transportation Index plunged beneath key support, after making a large run-up in price that was quite impressive.  Let’s look at $TRAN, railroad stock CSX, and the XAL Airline Index.

Transportation Index:

We see the powerful and strong uptrend that has developed throughout the year coming into doubt recently, thanks to a ‘three-swing’ or ‘three-push up’ pattern complete with a negative momentum divergence (and two new momentum lows).

In fact, our momentum oscillator just registered its lowest reading of the year, as price broke through trendline support (not drawn), and the 20 and 50 period moving averages.  Today, price is rallying back, but let’s see if we can overcome these hurdles and close strongly above the 50.  My guess is that we’re poised to test the flat 200 period average soon.

Next, railroad stock CSX has held up strong in this environment, but it too has the potential of being ‘derailed’:

Notice the mighty and powerful uptrend that has sustained itself throughout 2008.

Price made an almost continual rise from mid-March until late May, but now a few key momentum divergences are starting to catch up with the stock as the buyers have temporarily dropped the ball.

Although price broke the strongly rising 20 period moving average, the 50 period seems to have contained the downward swing so far.  The question is – will it hold or not?

Finally, let’s look at the horrific spiral of the Airline Index (XAL):

While the broader Transportation Index is the picture of a powerful uptrend, ironically its component the Airline Index is the perfect picture of a downtrend.

Notice how the 20 period EMA has contained the price all the way down.  The 50 period has comfortably rested above the price, and has not come into play since early February.  With the potential for soaring gas prices, expect this index to be under further pressure.

One may ask, “How much further can an index go, if it’s already at 18?”  The answer is of course unknown, but if trading in these stocks, it’s probably best to wait for some sort of bottoming pattern or true trend reversal (higher high + higher low) before committing hard earned capital in an accumulation process.  That may be fine for investors, but traders need to rotate capital into stocks and sectors that are outperforming.

We’ll continue to watch these developments closely.


Trading Today’s Trend Day Down

Jun 11, 2008: 9:43 PM CST

As I indicated earlier this morning, due to the double-doji pattern, odds favored price expansion today, with the bias being to the downside.  How could you have turned that bias into profits and traded the trend day?

Let’s take the S&P 500 as a proxy (you would use the SPY or the DIA … or perhaps the futures for trade execution):

The main point of a trend day is to “get the trade on early” and play for a larger target than normal.  Because the bias was to expect a trend day, you should have been looking for early entry.  During a true trend day, price opens at one extreme and closes at the other, so theoretically, any trade execution should yield a profit if held until the close.  I like to manage intraday positions more aggressively (or conservatively, depending on your definition).

Nevertheless, a core trade is established when you feel the weight of the evidence is sufficient to establish the day as a trend day.  I exit core trades when the price breaches the falling 50 day moving average on the 5-minute chart, or at the close of the day.

In this case, the core exit was taken around 2:30, which wound up being nothing more than a ’shake-out’ trade.  The positive momentum divergence that formed for the duration of the day led me to believe that buyers may be stepping in intraday.  This was not the case, but having the market close lower didn’t bother me because my rules dictate entry and exit.

There were a few key opportunities to ’scalp’ the price, or play for smaller targets with limited losses, being when price retraced back to its falling 20 period moving average.  The stop goes above the falling 50 with the target being the most recent swing low.  The market gave us at least three of these opportunities today. These give an opportunity to use limited leverage to play for a relatively high probability small target.

The positive momentum divergence built, but alas it turned out to be a false signal, as traders rushed for the exit into the close, unwilling to hold positions overnight.

Trading a trend day successfully can add quick profits with minimal effort to your trading account.

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