Dollar and Gold ‘To the Barricades’

This week it is the U.S. dollar and Gold taking their turns testing critical inflection points.

U.S. Dollar

As you can see in Figure 1, on a seasonal basis the dollar is moving into a traditionally weaker time of year.1Figure 1 – U.S. Dollar seasonality (Courtesy Sentimentrader.com)

In Figure 2 you can see that traders have been and remain pretty optimistic.  This is traditionally a bearish contrarian sign.2Figure 2 – U.S. Dollar trade sentiment (Courtesy Sentimentrader.com)

In Figure 3 we see the “line in the sand” for ticker UUP – an ETF that tracks the U.S. Dollar.  Unless and until UUP punches through to the upside there is significant potential downside risk.3Figure 3 – U.S. Dollar w/resistance (Courtesy TradingExpert)

Gold

As you can see in Figure 4, on a seasonal basis the dollar is moving into a traditionally stronger time of year.4Figure 4 – Gold seasonality (Courtesy Sentimentrader.com)

In Figure 5 you can see that traders have been and remain pretty pessimistic.  This is traditionally a bullish contrarian sign.5Figure 5 – Gold trader sentiment (Courtesy Sentimentrader.com)

In Figure 6 we see the “line(s) in the sand” for ticker GLD – an ETF that tracks gold bullion.

6Figure 6 – Gold w/support (Courtesy  TradingExpert)

I would be hesitant about trying to “pick a bottom” as gold still looks pretty week.  But if:

a) GLD does hold above the support area in Figure 6 and begins to perk up,

AND

b) Ticker UUP fails to break out to the upside

Things could look a lot better for gold very quickly.

Summary

As usual I am not actually making any “predictions” here or calling for any particular action.  I mainly just want to encourage gold and/or dollar traders to be paying close attention in the days and weeks ahead, as the potential for a major reversal in both markets appears possible.

Likewise, if no reversal does take place – and if the dollar breaks out to the upside and gold breaks down, both markets may be “off to the races.”

So dollar and gold traders – take a deep breath; focus your attention; and prepare for action…one way or the other.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

World, Interrupted

I suppose a more accurate title would be, “A Bunch of Single Country ETFs, Interrupted”, but, well, that just doesn’t have quite the same succinct simplicity.

 

I always (always, always) try to make an effort to focus on “the current trend” and to avoid focusing on things that “maybe might prove to be ominous signs in retrospect” or to imply that a certain tidbit of information is predictive when in reality it is mostly just anecdotal.  Still, human nature is – unfortunately, in this case – a powerful force.  Which reminds me to invoke:

 

Jay’s Trading Maxim #17: Human nature is a detriment to trading and investment success, and should be avoided as much as, well, humanly possible.

 

The bottom line is that despite my very own warnings and admonitions, sometimes that pesky human nature gets the best of me.

 

What Has My Attention

 

OK, rather than me telling you what I think, please simply peruse the charts in Figures 1, 2 and 3 and see if anything jumps out at you.

 

(click to enlarge)1

 

Figure 1 – India, Sweden, Japan, Germany (clockwise); (Courtesy TradingExpert)

 

(click to enlarge)2

 

Figure 2 – Switzerland, Netherlands, South Korea, Austria (clockwise); (Courtesy TradingExpert)

 

(click to enlarge)3a

 

Figure 3 – South Africa, China, Taiwan, Thailand (clockwise); (Courtesy TradingExpert)

 

Perhaps you noticed the same thing I did, i.e., a whole bunch of single country ETF’s hitting new highs or testing old resistance and getting rejected. In a number of cases, after appearing to break out to new highs for a period of weeks or month only to fall back below the “line in the sand.”

 

It’s sort of like the World Cup of Failed Breakouts.

 

Summary

 

Now here’s the thing.  I have displayed a bunch of charts that anecdotally seem to imply something bearish.  To spell it out, failed breakouts are often – though definitely not always – followed by something much worse.

 

So the line of reasoning goes like this, “If the stock market in umpteen countries is failing to advance then this must be a bad thing.”

 

But the reality is that all these markets have to do is rally and this whole sort of made up area of concern goes away.

 

Still, until that actually happens I think I will:

 

a) Enjoy the rally here in the U.S.

b) Remain vigilant

It seems like a reasonable plan.

 

Jay Kaeppel

 

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Buy Low(?)

There are a lot of ways to play this game.
For the record, I am a big believer in trend-following.  Picking tops and bottoms with any consistency is essentially impossible (at least in my opinion and/or experience).  So from that perspective going with the trend makes a lot of sense.  I am also a big believer in relative strength.  Much evidence over the years suggests that buying what is “already moving” is a very viable approach to investing.  Other studies have demonstrated pretty clearly that you are generally much more likely to succeed by buying stocks making new highs than by buying stocks making new lows.
These approaches make good sense and they work very well over time.  Despite this many (most?) investors still feel those pangs to “buy low” in hopes of getting in early and riding a major trend.  And the truth (I think) is that this can work too, if done correctly.
Like I said, there are a lot of ways to play this game.  But there is a definite “right” way and “wrong” way when it comes to “buying low.”
Buying Low (The Wrong Way): Buy things are plummeting or that have recently plummeted.
The Right Way (The Right Way): Buy things that have, a) plummeted, b) stopped plummeting and, c) have since been moving sideways for some period of time.
Last year I wrote about a “Buy Low” portfolio that I had concocted at the time.  Unfortunately, several of the ETFs involved have since ceased trading.  So in this piece I will introduce my updated “Buy Low” portfolio.  For the record – and as always – I am not “recommending” this portfolio.  It is essentially an experiment in one alternative approach to investing.
The “Buy Low” Portfolio
The Buy Low Portfolio consists of the following ETF’s and ETN’s:
CANE – Tecrium Sugar
JJOFF – Coffee Subindex Total Return
DBA – PowerShares Agricultural
WEAT – Tecrium Wheat
GLD – StreetTracks Gold Trust
PPLT – ETFS Physical Platinum Shares
SLV – iShares Silver Trust
GDX – Market Vectors Gold Miners
UNG – United States Natural Gas
URA – Global X Uranium
Monthly charts for these tickers appear in Figures 1 through 3.  A chart of the composite index I created by combining all of these appears in Figure 4 (Click any chart to enlarge).
1a
Figure 1 – CANE/DBA/GDX/GLD (courtesy TradingExpert Pro)
2
Figure 2 – JJOFF/PPLT/SLV/UNG (courtesy TradingExpert Pro)
3
Figure 3 – URA/UNG (courtesy TradingExpert Pro)
4
Figure 4 – Buy Low Composite Index (courtesy TradingExpert Pro)
Editors note: To create an index like Jay’s Trending Low, follow the instructions at the end of this article ‘Creating an index for a group of tickers in Data Manager’
Summary
Securities that have plummeted in price and then moved sideways for a period of time can (unfortunately) continue to move sideways for quite a while longer before (hopefully) breaking out to the upside.  Even worst, they can also fail and breakdown through the previous low. But extended consolidation patterns are often followed by something good.
As you can see all of the tickers in the list above are commodity related.  As I’ve written about here and here there is reason to believe that commodities will outperform in the years ahead.  That being said, with the stock market rallying in the near-term and with the U.S. Dollar strong there is no compelling reason to think that this “Buy Low Portfolio” is going to make a lot of  headway anytime soon.
The Index in Figure 4 is presently 8.2% above its January 2016 low.  As long as that low holds I’ll give this experiment more time to work out.
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
Creating an index for a group of tickers in Data Manager


NOTE: tickers with X in list need to be added to the Data Manager as new tickers and downloaded from your data service

When you create an index for a group of tickers, you can display a chart of the index as well as the underlying tickers. A group index can be analyzed on charts using technical indicators, and Expert Ratings are generated for the group index (except for mutual fund
groups).

The procedure for creating an index for a group of tickers is as follows:

  • First, create a group ticker for the index.
  • Then create a list to insert the group ticker into.
  • Add tickers to the group.
  • Finally, create the index by executing the Compute Group/Sector Indices function.


To create an index for a group of tickers, follow the steps below.

First, create a group ticker:

1. First, add a new group ticker to your Master Ticker List. Select the
Ticker command on the menu bar. Then select New to display the
New Ticker dialog box.
2. Enter a ticker for the new group, then be sure to enter the proper
Type designation (group or mutual fund group).
3. Click OK, and the second dialog box for entering a new ticker
appears.
4. Type in a name (Description) and the First Date for data. The
remaining default settings on this second dialog box can remain the
same.
5. Click OK and the group ticker is added to your Master Ticker List.

Then, create a list to insert the group ticker into:

1. Select the List command on the menu bar.
2. Select New on the drop-down menu and a dialog box appears.
3. Type in a name (8 characters maximum) in the text box.
4. Click OK and the list name appears in the Selected List text box
located on the toolbar.
5. The list name is also displayed in the List window. Insert the group
ticker from your Master Ticker List under the list name. To insert a ticker directly under a list, do the following:

  • Highlight (by clicking) the group ticker in the Master Ticker List.
  • Click the list name in the List window.
  • Click the Insert to List button on the toolbar (or select the Insert Ticker command from the List sub-menu).
  • The group ticker will appear in the List window under the list name.

6. Next, insert tickers into the group. To insert tickers into a group:
Under the new group, insert all of the tickers that will make up the
group by doing the following:

  • Select the group ticker in the List window by clicking on it.
  • Select in your Master Ticker List the tickers that you want to add to the group. If you are inserting multiple tickers, hold down the Ctrl key while clicking each ticker.
  • Click the Insert to List button on the toolbar (or select the Insert Ticker command from the List sub-menu).
  • The tickers will appear in the List window under the group ticker.

7. Finally, compute the index for the new group. To compute a group index:

  • Select Compute Group/Sector Indices from the Utilities sub-menu.
  • In the Compute Group/Sector Indices dialog box, click the Compute List(s) option button.
  • In the text box for Compute List(s), select the name of the list you created above.
  • Under Range, choose Update from Last Date of Data and click OK.

The Fate of the Planet Hangs in the Balance….

Well, OK, maybe not.  But life here in the Good Old US of A may be affected profoundly.  Which of course, would ripple out and affect much of the rest of the world.  So maybe it’s not that outrageous.
In any event, it sure is a catchy title, no?  In truth this piece is not an immediate call to action, but rather one of those short “hey, you might want to keep your eye on this” type pieces.  I am writing about the U.S. Dollar.

There are pro’s and con’s to a strong U.S. Dollar and there are pro’s and con’s to a weak U.S. Dollar.  If you would like to know what they are please see the steps below:

Step 1) Go to your web browser.  Type www.google.com and press Enter
Step 2) Type “pros and cons of strong U.S. dollar” and press Enter.
Step 3) Browse among the approximately 308,000 or so links until you find your answer.
Step 4) Type “pros and cons of weak U.S. dollar” and press Enter.
Step 5) Repeat Step 3.

Since at least the end of the gold standard in 1971 the U.S. dollar has served as the world’s “reserve currency”.  (This basically means that if you could only hold one currency you would want to hold the dollar.)  This has become one of those things that most people take for granted and assume will go on forever.

Still, given that we are now the most indebted “We the People” in the history of the planet, perhaps we shouldn’t be surprised that there has been a lot of talk recently (granted mostly among intentionally frightening and mostly annoying infomercials) about how the days of enjoying “reserve currency” status are numbered, and how this will trigger a panic out of the dollar, which will lead to all kind of bad things like, well, see Step 4 above.

Will the Dollar Collapse?
For me to pretend that I have the slightest idea whether or not the U.S. dollar will someday collapse would be a joke, and not the  funny kind.  But as  a trader and investor my “thing” is not so much “what will happen” as it is “what could happen and what the heck do I plan to do about it if it does?”
Which leads me to the following distractions:

Jay’s Trading Maxim #235: It’s not so much how much you make when things go right, but how much you keep when thing goes wrong.

Jay’s Trading Maxim #236: If you take care of the losing trades, the winning trades will take care of themselves (OK, for the record, this is not mine, I just gave it number 236 so I could use it as a segue into…..)

Jay’s Trading Maxim #237: Successful traders worry less about “Kicked Ass” and more about “Ass Kicked”, if you get my drift.

So why am I bringing all of this up?  Take a look at Figure 1 which displays a monthly chart of continuous U.S. dollar futures.  While the history of U.S. dollar trends is all very interesting and I would love to recap it for you, I am going to opt for the “a picture is worth a thousand (likely incredibly boring) words” mantra and encourage you simply to glance at Figure 1 if you want to know where the dollar has been in the past. 
And when you do – here is the important part – note that the dollar is forming a narrowing triangle (is there another kind?) pattern.  In other words, starting with the high in 2006 the dollar has been fluctuating in an ever smaller range. 

dx

Figure 1 – A large triangle forming (Courtesy: AIQ TradingExpert)

We “market analyst types” refer to this as “coiling” action.  Now if you are like me chances are you just squirmed slightly when you read that last sentence.  Because we all know what happens when something stops coiling – that’s right, it “uncoils”.  And “uncoiling” is typically not a quiet affair.

So here is the bottom line.  At some point – and just for the record it might not be for several years – the U.S. dollar will break out of this triangle one way or the other.  And chances are it will move sharply in price from that point.  And whether it breaks out to the upside or the downside it will have significant implications for the quality of life here in the U.S.  If you don’t believe me, see the 308,000 links referenced in Step #3 above.

So make a note to check in on the dollar once in awhile.  Because one of these days something profoundly significant is going to happen.

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.

Gettin’ Stupid In Gold Stocks(?)

A long time ago I evolved into something of a “go with the flow” kind of guy – at least when it comes to the financial markets.  Sure, in my youth I spent a fair amount of time staring into my crystal ball and trying to “pick tops and bottoms with uncanny accuracy.”  Unfortunately, it took me a long time to figure out that my crystal ball was not actually functioning.

So I have long understood the benefit of simply using some objective method to define the trend is either “up” or “down”, and just kind of seeing where it leads.  This approach came in pretty handy in 2013 when the “news” was essentially uniformly bad from start to finish.  But did the stock market care – oh contraire!

Updating the old adage “Don’t Fight the Fed” into today’s jargon:

“If the Fed is pumpin’, the stock market’s jumpin’. ”

And at the moment, there appears to be no end in sight (at least regarding QE2IB, or “Quantitative Easing to Infinity and Beyond”). So why do I all of a sudden have a foolish hankering to buy gold stocks?  This makes no sense at all.  In Figure 1 you see four different gold stock related investment vehicles.  Can you say “well established downtrend?”  Sure, I knew you could.  Some have broken down to new lows others are still holding out hope of establishing a double bottom.  And for some inexplicable reason, I feel this urge to play the long side.

jotm1128-01Figure 1 – Gold Stock Double Bottom; In the Making or Wishful Thinking? (Courtesy AIQ TradingExpert)

The key hesitation here is the simple fact that on the approximately last 57 times it “looked” like a potential bottom in gold stocks…….it wasn’t.  Will this time around be any different?  Probably not.  Still……….in the immortal words of Glenn Frey, “the lure of easy money, it’s got a very strong appeal.”

 To Give In Or To Fight the Urge?

Investing and trading is a game best played by establishing certain rules (for example, “go with the trend”, “cut your losses”, etc.) and then sticking to them.  But human nature is, well let’s be blunt here, a pain in the butt.  The urge to “pick a bottom” is one of the stronger, more compelling urges that any trader feels. What a coup if you pull it off (which of course you probably won’t)!
So here is the question?  If you feel the urge to “pick a bottom”, should you:

a) Fight the urge in every case?
b) Give into the urge and bet the ranch?
c) Give into the urge and risk a small, acceptable amount of capital?

If you picked answer, b) my frank advice is to let someone else handle your money.
If you picked answer a), more power to you and I greatly respect your discipline.
If you picked answer c) yo, what up dog!?  (Sorry, I inadvertently walked in on some video my kids were watching)

I personally can live with answer c).  For a couple of reasons.  First of let’s establish the fact that choosing answer c will probably lead to your losing money more often than not.  Sorry, that’s just the reality.  However, it can also serve as something of a “release valve”, whereby the occasional small mistake reminds us not to make a big huge mistake (i.e., answer b, somewhere down the line)
So let take a look at one possibility.

Finding a Trade (for better or worse)

I used www.OptionsAnalysis.com to look for long call trades on tickers GDX, GDXJ, XAU, NEM and GG.  Sorting for Bullish percent to double and then among the top trades chose the one with the highest Gamma (long story short, high gamma in my book equals more “bang for the buck”)
The trade I came up with was buying the GDX January14 22 call at $1.06 as shown in Figures 2 and 3.

So is this a good idea?  In all candor, probably not.  But let me just explain what I am looking at.
Let’s say I am a trader with a $25,000 trading account and are willing to risk (throw away?) 2% of our trading capital on a foolhardy attempt to pick a bottom (hey, it’s my account, I can do what I want).

This means I can risk $500 ($25K x .02).  So if the option trades at $1.06, this means I can buy up to 4 contracts and risk $424.

jotm1128-02Figure 2 – GDX Call Trade (Courtesy: www.Optionsanalysis.com)
jotm1128-03Figure 3 – GDX Call Trade Risk Curves (Courtesy: www.Optionsanalysis.com)

So what are the likely (or at least possible) outcomes?

#1) Murphy’s Law being what it is, if I take this trade gold stocks will almost certainly continue to sink.  In this case the worst case scenario is that I hold the calls until January expiration and lose $424.

#2) if somehow, the market gods smile, let’s assume that GDX bounces back up to its early November high near $24.70.  In this case, the trade will generate a profit of $660 to $880 or more, depending on how soon GDX bounces.

Summary

As a rule I would never advocate for someone else to “pick a bottom”.  But let’s face, every once in awhile, the urge strikes.   So if you decide to give into the urge, make sure:

a) You don’t risk very much money.
b) You have enough upside potential to at least make it worth your while to do something that you may well look back upon and say, “Why the heck did I do that?”

As long as you employ a) and b) above, I view it as sort of a win-win situation (depending of course on how you define “win”).

If the underlying security in question does bounce to higher ground, you have the opportunity to generate a nice profit.

On the other hand, if the underlying security continues its current trend, you are served a powerful reminder of why you don’t try very often to “pick tops and bottoms with uncanny accuracy.”

So the bottom line is this: I am NOT telling you that I think gold stocks are about to bounce and that you should buy gold stocks (or options on gold stocks).  What I am telling you is that sometimes the urge to speculate will rise to the surface.

When that urge strikes there is a right way and a wrong way to react.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.