Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Major Commodities Top? (by Springheel Jack)

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I've been mentioning for a while that we're in an area where we could see a very major commodities top, and I'm aware that my view is at best a minority view, but I'd like to put the case anyway, and to stress that I'm seeing this from the perspective of an chartist who mainly calls reversals on the basis of trendlines, and to show how impressive some of the trendlines are that commodities have recently reached and, so far, reversed at. I can only show a few of the commodities here so I've chosen copper, silver, oil as three of the most influential individual commodities and CRB to represent the commodities complex as a whole.

First the CRB, where the index has reached the lower trendline of the rising wedge that broke down in February 2010. It has also hit the upper trendline of the more recent rising wedge and is showing strong negative divergence on the daily RSI. At this level I would expect to see at least a retracement to the lower trendline of the rising wedge, and if that should break, considerably more. It's also worth noting that in 2010, CRB peaked almost four months ahead of equities:

The next three charts are much longer term charts. The first is the copper chart, where a major long term rising trendline has been reached. The trendline could be hit again short term, but unless we are to see a massive resistance break then that trendline represents the likely high for this move up, and I'd expect to see a move at least to the lower trendline of the shorter term rising channel soon:

The resistance level reached on silver is even more impressive, and the shorter term charts are indicating a retracement back to the 25 level here, and if that level turns out to be an H&S neckline, which it might, then perhaps much further after a bounce there:

The trendline hit is less definitive on oil, but it has hit two significant looking trendlines in recent days, and we may well see a reversal on oil too. It might break up through back into bubble territory of course, but the low stocks and tight production capacity over demand that fed the 2007/8 spike simply isn't there any more, and on that basis, this is a natural reversal level for a substantial retracement:

Commodities are also a currency story as well of course, and on the commodity currencies we saw a major trendline support break on AUDUSD this week. At that break it has formed a very characteristic reversal H&S with negative divergence on RSI, and I'm looking for a retracement to test the important support level at 94 if this continues to play out. It would make sense if that took place within a sharp correction on commodities generally, as the prospects for USD aren't looking promising generally at the moment, in which case any such decline would be likely to be commodity related:

Quantitative easing has fed this boom in commodities, and commodities peaked months before the end of QE1 in late March 2010. QE2 isn't finishing until June 2010, but it may well be that commodities are peaking further before this time. On the longer term charts the real question is whether there will be a QE3, and that is open to doubt.

The Republicans won't be keen, and there would most likely in any case be a gap of several months between the end of QE2 and the announcement of QE3 during which, if 2010 is any guide, we would expect to see equities and commodities tank while bonds soar. If commodities have peaked now, that means that we could well see a ten or twelve month period now where commodities retrace some of their gains in the last two years. In the event that there is no QE3, it might last considerably longer.

Sky-High Copper

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I don't trade futures, but I thought I'd share a couple of copper charts just to drive home the notion (which apparently no one believes) that this market is overbought. There are two flavors of these charts – one of them adjusted (that is, the price is adjusted for gaps that take place during rollovers), and the other not. Here they are, in that order:

0118hgADJUSTED-

 

0118hgUNADJUSTED-

For whatever reason, copper has a very strong correlation to equity markets, and it's pretty evident that the huge run-up in prices over the past two years in awfully long in the tooth.

Pattern Festival (by Springheel Jack)

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I'm posting six charts again today, so I'll have broken my usual limit of five for the third consecutive day. However after what might be best described as a major channel and pattern drought in December, we now have decent tradeable short term patterns seemingly everywhere, and even with six charts daily I've been excluding a lot of the very interesting charts outside ES, NQ, oil, copper, EURUSD & GBPUSD. I'll try to post some of those in a holiday post on Monday.

First ES today. I was leaning short near the close yesterday but the INTC earnings shortly afterwards changed the picture considerably. We now have a rectangle that has formed on ES with an upside target of 1292.5 and a 68% probability of breaking up. Together with the still unmet IHS target at 1292 on ES the picture is looking fairly bullish and I'm leaning long. Within the rectangle ES is a buy at 1276.5 and a sell at 1284, though for obvious reasons it is a safer long than short:

The picture on NQ is more complex. The rising wedge had broken down when the INTC earning's were released yesterday and then NQ broke back up into the wedge. Since then it has broken down again and we may see NQ retreat to strong trendline support currently slightly under 2290. I've marked in a shorter term megaphone that may well confine price moves today until it breaks up or down. An hourly close above the upper green trendline would be very bullish:

I posted some ambitious upside targets on EURUSD and GBPUSD yesterday morning and they both delivered the expected big rises to my target areas. The move on EURUSD particularly looks very impulsive and I am now working on the assumption that EURUSD has made a major interim low, though we'll have to see EURUSD break above 1.35 to confirm that. Short term I'm expecting some retracement that I'd expect to see bottom in the 1.31 to 1.33 area. An odd pattern has formed on EURUSD that I and others have seen before and could be an previously unidentified bottoming pattern. I'm provisionally christening this pattern the 'resting bat' reversal pattern as it looks somewhat like a bat's head with two long ears. Credit to my friend Bloodwine for coming up with the bat's head description:

GBPUSD rose to just under 1.59 to the potential big IHS neckline and has since pulled back. This is an obvious area to see some retracement as well so I'm looking for some retracement into the 1.55 to 1.57 area to make the right shoulder and then, if USD has really made a major top, a move to the IHS target at 1.644:

I posted a speculative IHS on copper yesterday morning and sketched out a potential path to make a right shoulder on that potential pattern. Since then copper has been forming that RS within a decent quality declining channel, and I'm looking for an hourly close above that channel to signal when the RS has bottomed. The IHS target is an ambitious 460 and that would be a very nice move to catch if this plays out:

Oil made a perfect channel touch and bounce when and where I predicted yesterday, and bounced to make a double top with negative divergence on the hourly RSI. It then retreated to form an H&S pattern with a target at 89.2 and has broken downwards. I'm expecting that target to be made unless oil can break back above the pattern neckline at 90.8:

While I've been writing ES is showing signs that it may break down from the rectangle, which is unexpected, though these rectangles do break down 32% of the time. The downside target is 1268.25 though the probability of making the downward breakout target would only be 63%. I'd be inclined to watch the support levels on NQ for a decent level to buy the dip if we see an hourly close below the ES rectangle. I currently have NQ megaphone (declining) support at 2295.5 and (rising) trendline support at 2286.

Group Think (by Runedge)

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The problem with group think is that thinking is not allowed.  It should really be called group acceptance. The larger the group the harder the tendency for someone to disagree.  Right now the group is massive. The group think I am referring to is with the Fed, the Bernanke put and how the Fed will "just print more money and bail out the banks."

I have yet to read the Art Of War (have owned it for about 15 years now) but somewhere in there I am sure it talks about giving your enemy more credit and not simply labeling them as stupid or inferior.  The Fed is a smart group of people, albeit lacking in practical real world business sense.  The banks are benefitting for sure from playing the role of broker as the Fed expands its balance sheet.  How else can the Fed buy treasuries though?  We know they are monetizing the debt but at least by working through the primary dealers they can say they are not monetizing the debt.

There are three ways to grow nominal GDP

M (money supply)  x  V (velocity) = Q (output)  x  P (price inflation)

1 – Increase the money supply

2 – Increase the velocity of money

3 – Increase inflation

Let's use an example of a place called Fantasy Land (fitting for our current situation).

A farmer sells $50 in corn to a neighbor.  The farmer then spends $30 to get their tractor fixed from another neighbor and spends $20 on a bottle of moonshine at the local "packy." 

The GDP of this fine community is $100 assuming their is no inflation (hence the name Fantasy Land). Using the above formula we have:

Money Supply ($50) X Velocity (2, how many times the money was turned) = Inflation (0%) X Output ($100)

Getting back to Fantasy Land, excuse me the US economy, banks are not lending and people are not spending.  There is NO demand, so there is no velocity.  Money is not turning over.  Small business surveys continually state that their top concern is not lack of credit, but rather lack of customers.

So the Fed must grow the monetary base (even though Banana Ben has said they are not creating money). Look at the two charts below of money supply and velocity.  They have offset one another causing no real GDP growth, only nominal.

 

Screen shot 2011-01-09 at 3.14.24 PM

 

Screen shot 2011-01-13 at 7.58.05 PM

 

The Fed through QE is trying to make money so cheap it creates demand through inflation expectations (that car will be more expensive next month so I'll buy it today) and overall demand (I'll remodel that basement because Home Depot has zero interest rates for 18 months).  

Problem is it's not working.  Demand is not there.  The Fed is hoping QE will raise stock prices, which obviously has worked and give people a sense of wealth, a desire to spend.  It's also caused yield chasing and the use of massive leverage (leverage is now back to LEH levels which is truly astonishing).  

Commodities have been a great trade and people have piled in.  The result is rising input costs which cannot be passed along because there is no demand.  As input costs rise margins are compressed. Expect higher layoffs as firms do all they can to manage the bottom line.   Bernanke's efforts seems to be choking any demand left in the economy. 

Input costs have risen,  treasury yields have risen, gas at the pump has risen and now the USD has begun to catch a bid.  The market looks forward to QE3 but honestly Banana Ben may not have the opportunity to see that happen.  The debt ceiling will be reached in less than 8 weeks and in a recent survey 70% of Americans do not want it raised.  Sure Congress can do what they want, they have done so for years. But, the last election has taught many that if they want to keep their jobs they better listen.  The bond market may be telling them the credit card is stopped.  We see what's happening in the municipal bond market.  

A former Atlanta Fed President has publicly called out the Fed, their QE and their solvency.  Dallas Fed President Fischer has also publicly cast his no vote for further QE beyond June.

Just recently two regional Fed manufacturing surveys were revised downward.  QE is not working other than wealth effect which is not driving demand.  Bernanke is not a dumb man. He lacks business sense for sure but at some point the Bernanke put will expire.  To think the Fed will always be there is a clear sign group think is wrong again.

Submitted by Runedge.  If you would like to follow my blog please visit - Ultra Trading

Mixed Picture (by Springheel Jack)

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There's a mixed bag looking at my charts this morning. Copper and precious metals are looking weak, oil and forex strong, and equities could break either way. I'm looking for a move up to (finally) hit the ever-receding upper trendline of the rising wedge on the ES daily chart, and I might well get it if equities break up today. That target is now at 1293.5 ES. ES has formed what may be a bull flag since the high yesterday, but it is NQ that is looking really interesting this morning. On NQ a strong resistance trendline was broken a couple of days ago, and I've seen that referred to as a rising wedge, though if so, it isn't high quality. Since then however NQ has formed a smaller and much higher quality rising wedge, and it is that wedge that should define the direction of equities today. Rising wedges break up 30% of the time normally, but on the performance of these wedges within this strong uptrend of the last few months I'd put the probability of an upward break at more like 50%:

Silver is looking weak this morning and may be forming a large and rather ugly H&S. Copper failed at the neckline of a possible IHS yesterday and has given back most of yesterday's gains overnight. It was looking a bit stronger when I capped the chart below but I have marked in the possible retracement that we might see to make a right shoulder for the IHS:

Oil is looking very interesting today. as it is in a slightly messy but decent quality rising channel. There's a good chance of a double trendline support hit in the next two or three hours followed by a likely further move up. That would be an attractive long entry:

USD currency pairs are looking pretty strong overnight and I'm expecting some more dollar weakness. The GBPUSD rising wedge broke up yesterday and the obvious next target is the possible IHS neckline at 1.59. If  USD has topped, which is possible, I'd then expect to see a retracement to make the RS and then a move to a new high:

EURUSD is a tougher call here as the short term chart doesn't offer much in the way of usable trendlines. In the absence of those the next obvious serious resistance is just over 1.34. That's still 250 pips away at the time of writing, but it is the obvious target on this move up if equities break up too:

I was looking at the TLT chart this morning and the falling wedge that it has been moving down within since the announcements of QE2 last August. I have some serious doubts about whether it will make the next downside target as it would necessitate treasuries moving through a support level that would in all probability confirm the end of the 30 year old bull market in bonds. I'm expecting that confirmation in the next few months, but it is a big support level and I'd expect at least a pause there. Encouragingly I'm seeing an H&S form from the hit of the falling wedge upper trendline, and these in-pattern H&Ses are solid performers in my experience. If the neckline breaks with confidence I would therefore expect the next downside target in the 87 area to be hit:

Of all of these I'd pick NQ and oil as the most interesting plays today as both have clear support levels that should be hit early on and both have good odds of a strong rise after that support hits. In both cases a break of support would indicate more downside and they would become strong short candidates: