fxRoy

Better Late - USO Analysis for My Brother

2011-12-08T22:35:00.005-05:00

Exactly one month ago (on Nov. 9), I had a quick Skype chat with my brother. Back then, Oil seemed to be going one way - UP. Tensions with Iran and some signs of life from the US economy sent oil prices soaring.
On our chat, my brother told me he was looking to take advantage of rising oil prices and invest in the USO ETF. I agreed that in the long run, oil prices will continue to climb higher. But my advice to my brother on our chat was:

[11/9/2011 10:55:24 AM] Roy : I think this is a very bad time to buy oil right now
[11/9/2011 10:55:32 AM] Roy : I can tell you that much
[11/9/2011 10:56:19 AM] Roy : I think at least some of the rise in oil prices is due to news from Iran
[11/9/2011 10:56:59 AM] Roy : but technically, this is a very RISKY place to buy oil
[11/9/2011 10:57:11 AM] Roy : and very little potential reward

I was in the middle of work, so our chat was cut short. I promised my brother I will give him a better explanation to support my view. Well.....I've been kind of busy so I'm just getting around to it today. Better late....so here's the explanation:
On November 9th, USO was on a thirty-seven day rally. During that time it went up over 27%. Despite the seemingly unstoppable climb there was a big problem on the chart. The risk/reward ratio was all skewed.
The closing price on Nov. 9 was exactly $37.00 but it was heading straight into a supply (resistance) zone at $39.22. This meant that the potential reward was two dollars and twenty two cents or 6%. But what was the risk? The way I saw it then, the real support for the price was way back at $29.10 or more than 21% below the Nov 9 closing price. So the risk/reward ratio in dollars was about 8 to 2 - which means you would have been risking $8 to gain $2 - terrible odds.
In the month since I chatted with my brother, USO has hit the supply area and pulled back somewhat. That's not to say that it cannot or will not break above $39 - it may very well do that. But if it does, a much lower risk entry would be on a pullback to the $39 area with a tight stop right below to contain risk.

Here's what it looks like on the chart (Click to see bigger image):

Can You Feel the (volatility) Squeeze?

2011-08-16T22:46:00.002-04:00

Over the past five days, USD/JPY has been trading in a very narrow range - setting up a nice volatility squeeze. The Bollinger Bands on the 4HR and 1HR are getting increasingly tighter as the stalemate between the two currencies lingers, waiting to be resolved one way or another.

It's hard to tell which way the tie will break. On the one hand, the Yen is strong and seems to somehow keep getting stronger. On the other hand, the pair is deep within intervention territory and the BOJ keeps signaling more intervention, despite previous failed attempts, is on the table.

From a trade perspective, the plan is simple - set the risk of going long at around 76.30 where current support (and latest intervention level) still holds and go long. Or, if the price breaks below this level, wait for a pullback to what should now act as resistance, and short with a very well defined risk

Commitment of Traders (COT) Reports - 08/02/2011

2011-08-07T16:32:00.000-04:00

Here are the COT net positions as of Aug. 02. You can see that even pre-S&P rating cut which happened on Friday, the USD is seriously losing steam. This means that the likely scenario in the chaos that we'll be facing in the next few weeks, will see the greenback losing more grounds to the CHF, and JPY.

Commitment of Traders (COT) Reports - 07/12/2011

2011-07-16T13:19:00.000-04:00

It's actually been months since my last post. Although I update my own charts every week, I haven't found the energy or the time needed to upload them. However since I can see that people still visit this blog, and I hope they do because they find the data useful, I feel more motivated to keep it up to date.

So, here are the COT reports released yesterday, July 15th, containing data as of July 12th.

Ashraf Laidi

2011-07-16T12:58:00.001-04:00

A couple of weeks ago I was walking back to my office after having lunch. Right on the corner of Wall St and Broad (across the street from the NYSE) I saw a man I immediately recognized. It was no other than Ashraf Laidi, Forex Guru per excellence. I have been following Ashraf's blog and countless tweets and TV/Web appearances for a couple of years now and I always find them insightful and educational. So as you can imagine I was quite happy to run into him on (quite literally) "The Street".

I rudely interrupted him in the middle of a phone conversation to shake his hand and say hello. Mr. Laidi was kind enough to invite me to sit for a coffee at a Starbucks near by and I, of course, said yes. During the next 30 minutes we talked about so many different topics and he told me about his new venture and ideas about the market.

Despite being 100% technical trader, as he himself told me, Mr. Laidi's is probably most known for his unique Inter Market analysis in which he uses intricate market relations to predict price trends in specific markets.

If you haven't checked out his site or tweeter page you certainly should.
Thanks Ashraf for being generous with your time and entertaining my questions!
Roy

Commitment of Traders (COT) Reports - 03/22/2011

2011-03-27T18:34:00.000-04:00

After missing a couple of reports due to traveling, it's time to catch up. A lot has happened over the last 3-4 weeks, most notably the persistent unrest in the middle east and North Africa -particularly in Libya - and, of course, earth quake in Japan and the nuclear crisis that ensued. Through this bumpy ride, markets remained in favor of risk and the US stock market was able to maintain its multi-month highs as yields on US treasuries began to creep up again. However, the most recent COT reports signal a mood swing may already be in play.

Of the nine reports we look at, the S&P 500 E-minis report provides the most ominous reading of all. After a sharp spike in net positive position last week, we now can see a huge swing in non-commercial positions to the negative side. Combined with a smaller net-short position in Ten Year Notes and a higher net-positive position in JPY, these reports suggest a risk aversion mood is setting in.

Click on the images below to view the full size image....

Commitment of Traders (COT) Reports - 03/08/2011

2011-03-15T22:04:00.000-04:00

COT reports (net positions) for March 08, 2011

Commitment of Traders (COT) Reports - 02/22/2011

2011-02-27T20:31:00.000-05:00

Against the odds, speculative (non-commercial) positions in the S&P 500 e-minis are on the rise for the second week in a row, brushing off unrest in the Middle East and northern Africa. Speaking of unrest, it should come as no surprise to see the spike in Crude positions. But what is surprising, are the new lows in net short positions for ten year Notes and the JPY - both often considered safe havens, albeit for different reasons.

As always, click on the images to enlarge, and enjoy!

Commitment of Traders (COT) Reports - 02/15/2011

2011-02-19T12:13:00.000-05:00

For now, just the graphs. Commentary to follow later in the weekend....

Commitment of Traders (COT) Reports - 02/08/2011

2011-02-13T14:49:00.000-05:00

Perhaps the only sharp and interesting change from last week is in the S&P e-mini COT report. Non-commercials shifted to a net short position. This move, together with a smaller net short position in the Ten Year Note is signaling that a correction at the 1300 level may not be out of the question after all.....

Commitment of Traders (COT) Reports - 02/01/2011

2011-02-05T16:06:00.000-05:00

I love looking at the COT reports despite their obvious limitations; although they contain data three days old, they do provide an excellent window into market sentiment. Take for example the E-Mini COT report. For the past couple of weeks we have been noticing an increase in net-positive positions of the non-commercials - just as the S&P500 has been steadily moving closer to a major resistance level: 1300. As I mentioned in a post from two weeks ago, the shift in net-positive positions indicated that the S&P had some room to stretch. This week, the S&P not only managed to break above the 1300 level but also managed a Friday close above this level.

Commitment of Traders reports are far from being a magic crystal ball to predict the future. But taken in the right context, they can help us frame a short term bias.

Highlights of this week's COT reports:

S&P E-Mini's report showing yet another increase in net-positive positions.
EUR net positive positions increase, while DXY positions are now negative (for non-commercials)
Ten Year Notes register another increase in net-short positions - suggesting further rate increase in the 10YR benchmark (bye, bye, cheap mortgage rates?)
Crude net-positive positions stay elevated - not expecting to see any decline in oil prices in the near future.

Click on images below to enlarge:

Commitment of Traders (COT) Reports - 01/25/2011

2011-01-30T23:28:00.000-05:00

Commitment of Traders (COT) Reports - 01/18/2011

2011-01-23T17:08:00.001-05:00

This week's COT reports show a mixed signal for the S&P E-minis. The euro, however, seems undeniably stronger: non-commercials have switched from a considerable net short position to a net long position. The same, albeit on a smaller scale, can be seen on the GBP report. This suggests more USD weakness is on the cards this week.

Click on images to enlarge:

Commitment of Traders (COT) Reports - 01/13/2011

2011-01-16T23:53:00.001-05:00

Two noteworthy COT charts this week:

S&P 500 E Mini - For the first time since August is displaying net positive position for non-commercials, signaling that the S&P has a little more room to stretch upwards as it begins to flirt with a major resistance level of 1300
USDX - Sharp increase in net positive positions for non-commercials indicate the dollar will have the upper hand in the coming days, at least against the Euro

Click on the images below to enlarge.

PS - The data in the chart is as of 1/11/2011 (latest COT data) and not 1/13/2011

AUDCAD Head and Shoulders Completed

2010-11-25T21:50:00.000-05:00

Just a textbook Head and Shoulders pattern: (target of measured move is somewhere near 0.9600)

AUDCAD Forming a Head and Shoulder on the 4HR Chart

2010-11-24T16:44:00.001-05:00

After a relentless run up in favor of AUD, AUDCAD is showing some signs of slow down and looking like it's forming a head and shoulders pattern on the 4hr chart:

The 15 Year Swing

2010-10-24T08:25:00.002-04:00

Swing traders are probably the most patient breed of Market players. Rather than taking part in a short, medium, or long term trend, they wait with extreme discipline for price to reach a level that previously proved to be a substantial turning point. Commonly referred to as Support and Resistance or Demand and Supply levels, these price levels mark the origin of a past sharp and sustained move in price.Price may drift above or below such levels for hours, days, weeks or months before returning to test them. Once they identify a quality turning point in price, swing traders will wait for the price to re-test that level, using it to define risk and potential reward.

Taking a look at the USDJPY pair, we can see a swing trade that, like a good Single Malt, is 15 years in the making. The Japanese yen has recently reached levels against the USD not seen in more than a decade and a half. On its last visit to this multi-year low, USD turned around and pushed higher against the yen for more than 3 years. This can be clearly observed in following monthly chart:

Zooming in on a 4 hour chart we can see that price is indeed finding some support at this important and broadly watched level:

This current level is an appealing long entry with a clearly defined risk (80.85) and an excellent chance for price to move up at least far enough for us to move a trailing stop comfortably above the entry level (80.12).

Commitment of Traders (COT) Reports - 04/20/10

2010-04-25T16:58:00.001-04:00

Here are the latest COT reports from 4/23/2010. The data is as of Tuesday 4/20. The graphs show the net positions for Commercials (hedgers) Non-Commercials (large speculators), and Non-Reportables (smalls speculators).

Perhaps the most interesting report is for the S&P 500 e-mini COT. Notice how the non-reportables are at odds (net long) with the non-commercials (net short). This is may be an indication of "dumb" money vs. "smart" money situation where astute players are distributing and not-so-smart, small players buy. I know I have already commented about the dangers of being bearish in the face of such a relentless uptrend but, as we learned in 2008, better safe and sorry than burned and full of regret.

Also interesting to note, continued bearish sentiment for the Euro but slightly less bearish sentiment for the British Pound.JPY sentiment is still net-short.

So, without further ado, here are the graphs:

Commitment of Traders (COT) Reports - 04/13/10

2010-04-17T22:28:00.001-04:00

Here are the latest COT reports posted on Friday, April 16th and containing information as of Tuesday, April 13th:

Away for the weekend

2010-04-11T12:24:00.002-04:00

Next update on Wednesday morning!

Strong Economic Data and the Fed

2010-04-05T11:14:00.000-04:00

The ISM and Pending Home sales came in stronger than expected. The strong reports come on the heels of the strongest employment report in months. In addition, the US has averted a head-on confrontation with China with respect to its currency policies. The confluence of these events contributed to the already evident risk appetite in currencies and equities. Treasuries continued to suffer and the yield on the 10yr note is approaching a nine month high.

The question on everyone's mind is: how will the Fed react to the positive stream of economic data? We already noted the much anticipated discount rate hike that is expected to take place later today. But for Fed watchers, the big one is, the Fed's "extended period" language. The yield on the 10yr note approaches a major resistance level. We can make the argument that the high probability event is for the yield to hit its resistance level and pull back. There are a couple of scenarios which may lead to lower yields. the more likely scenario is a change in the Fed's language or some other hawkish gesture. It would seem like the market has already made up its mind about the trajectory of the recovery and the Fed will be careful not to fall behind the curve. Only when the Fed's training wheels come off will we know whether the recovery has legs to stand on.

The current environment is favorable for the USD against the euro, British pound, and mainly the JPY. But commodity currencies, CAD in particular, can be expected to get stronger across the board.

Welcome to Q2!

2010-04-04T21:20:00.000-04:00

For the past couple of weeks I have been a little cautious, expecting to see a pullback in risk appetite and for the past couple of weeks I have been proven wrong. Last week I noted the danger of entrenching myself in a bearish outlook. The uptrend in stocks is strong, and the rising bond yields appear to be a result of confidence in the recovery rather than loss of confidence in US credit worthiness. While we can't predict the future, we can try to make the best decisions based on the information we have (I think that's a line from Wedding Crashers). So, here's what we know:

Fed will continue to normalize - the Fed has ended its $1.25 trillion mortgage backed securities (MBS) program. A recent Bloomberg article suggested that industry buyers such as banks and pension funds stand ready to step into the MBS market and will be able to fill in the void left by the Fed. In such a scenario, mortgage rates increases may be negligible.
The Fed is also widely expected to raise the discount-rate tomorrow (Mon, April 5th). This will be the second increase this year. The first hike on Feb 18 (+0.25% to 0.75%) was had a muted impact on the stock market but boosted the USD.
The FOMC will release its meeting minutes this coming Tuesday at which point we will have a better idea on how the latest job figures and rising bond yields affected the Fed's outlook.
Economy continues to improve - Non-farm payroll, ISM manufacturing index, Case/Shiller index, declining 10yr notes, and improving prices of mortgage backed bonds, in particular the infamous 2006 vintage (see ABX.HE.AAA.06-2 chart below), all point to the continuation of positive momentum. These incremental improvements supply the Fed with the ammunition it needs to continue and implement its exit strategy.

Inflation is still in check - PPI and CPI figures for March tempered some of the expectations out there for impending inflation. One has to keep in mind that while the Fed did "print" vast amounts of money during the crisis, equally vast (and probably greater) amounts of dollars were literally evaporated from the world economy. Thus, the supply of money is likely still contracted compared to what it was pre-2007.

Now that we've covered some of the information available to us, let's try to frame our bias for the week.

US Dollar - conditions are still favorable for the US dollar. As noted above, improving economic conditions will guide the Fed further down its exit path which is bullish for the dollar, especially since the BoE, ECB, and BoJ are still sounding dovish. Technically, the USD index (DXY) is cruising confidently within an upward channel (see image below). In fact, as of Sunday night, the DXY is seen bouncing off its lower channel line. I will stay bullish on the USD as long as it stays above 80.50 and does not breach its 50 MA (black line in the chart below)

Euro - The "anti-dollar" experienced a moderate relief advancing against the greenback for most of the week. Interestingly enough, Greek/German spread also rose at the same time, suggesting the euro's gains were mostly related to short covering rather than any fundamental improvements. As I write this, the euro is pushing against a weekly trend line. If it manages to break the trend, we may see it advance to 1.3660 or as far as 1.3800. But the bearish sentiment (as evident by the COT reports) suggest that euro rallies will be met with renewed selling pressure.
GBP - the British pound performed better against the USD than the euro. UK manufacturing data and a somewhat clearer political outlook pushed the pound higher against the dollar and euro. We can expect sustained strength against the euro but not necessarily against the dollar. The GBP/USD failed to break above the 1.5360 level. Until this resistance is taken out, we will remain negative on GBPUSD.
Japanese Yen - perhaps the most attractive opportunities this week/month will be shorting JPY pairs. As I noted several times in the past couple of weeks, JPY was expected to weaken as of the end of March. The COT report exposes a major shift in sentiment from net-long to net-short positions for Non-Commercials. The bet is on and its against the Yen. CADJPY has been one of the best performing pairs and we should expect to see it rally further.
Commodity Currencies - I still prefer the loonie over the aussie. The differential will be more pronounced if we experience a breakout in oil prices above $85/barrel.

S&P 500 - as for the S&P, the road up seems clear but the closer we get to 1200, the more likely we are to experience a meaningful correction. By this point, we can assume that all the good news is already baked into the cake, so cheerful economic data may not suffice to lift the stock market higher.

I will try to post updates tomorrow after the ISM and Home sales figures (10am EST) and another one after the FOMC release on Tuesday to adjust my views. In addition, I plan to add a new section to the site, something like "chart of the day" where I will try to identify specific trading opportunities based on some simple rules.

Commitment of Traders (COT) Reports - 03/30/10

2010-04-04T13:54:00.001-04:00

These are the April 2nd 2010 COT reports, containing data as of March 30th 2010. Graph show net positions for Commercials (hedgers), Non-Commercials (large speculators), and Non-Reportables (small speculators).

Highlights for this weeks reports:
1. S&P 500 e-mini - still seeing divergence between non-reportables (increased net long position) and non-commercials (still net short). As indicated last week, this divergence is a warning sign that large speculators are trimming long positions as small traders pile in on the long side.
2. USDX COT report - shows an increase in non-commercial positions.
3. EUR and GBP - COT reports for both show increase in non-commercial short positions, reflecting the sustained bearish sentiment.
4. Commodity currencies and Crude Oil - Bullish net-long positions persist for the Loonie, Aussie, and Crude oil.
5. Japanese Yen and 10 Yr Notes - perhaps the most telling COT reports this week are the Yen and 10yr Notes reports. Both show a dramatic increase in net-short positions.

Looking Ahead

2010-03-28T23:34:00.001-04:00

Last week was a busy one for financial markets in general and FX markets in particular. The dollar staged another advance across the board and the DXY notched a new high. The euro broke to new lows and the British pound remained under pressure. Yen lost ground across the board as stocks continued to rise alongside yield differentials.

One of the most important and most interesting developments is the rise in Treasury yields, esp. the 10 Yr notes. There are at least two relevant questions to be asked: What is driving the yields? and what are the possible effects. One possible explanation for the yield rise is that the market is pricing in a continued recovery which will, eventually, contribute to rising interest rates. Another possible explanation is that buyers of treasuries are simply bloated. With growing deficits (trade and budget) a huge supply of notes, and concerns over the future of US credit rating, the market may simply be asking for a higher risk premium to hold US debt. In either scenario, the short term expectation is bullish for the dollar.

Greece is expected to issue new bonds this week. The result of this auction will be telling and we will get a better idea as to whether or not the market puts any stock in the recently announce rescue deal for Greece.Either way, we should still expect euro rallies to serve traders as opportunities to reload their shorts rather than a trend reversal. Same goes for the British pound.

Yen was weaker across the board and this is expected to continue as long as we don't get into risk aversion mode. I have been using the S&P 500 as one measure of risk appetite and for the time being, it seems due for a pullback. I know I have been cautious since the middle of March and I also realize the danger in adopting a bearish bias - the more time passes, the more liable I am to become entrenched in my position, waiting for a correction which may only come much, much later. Having said that, I still maintain my view that a short term pullback in the stock market is immanent and may have already started last week. The market climbed a wall of worry and it will descend a wall of reassurance. This is how the game is played. The S&P COT report also shows large speculators being net short for the first time in month - another red flag. The only positive for stocks at this time are the rising yields in bonds. If bonds loose their luster because the marker is pricing in a sustained recovery, we may witness a major capital reallocation from bonds to higher yielding assets like stocks and commodities.

Traveling today so no charts with this post.

Commitment of Traders (COT) Reports - 03/23/10

2010-03-27T13:02:00.002-04:00

These are the March 26 reports containing data as of 03/26/10. COT graphs below show net positions for Commercials (hedgers), Non-Commercials (large speculators), and Non Reportables (small speculators).

Highlights of this week's COT reports:
1. S&P (e-mini) COT Report - For the first time since October 2008, large speculators are net short. Interestingly, small speculator turned net positive this week for the first time in months. This divergence shows that smart money (non-commercials) and dumb money (non-reportables) are at odds. Isn't that the oldest story on Wall st? If what we are seeing is indeed real distribution -the process in which large players trim down profitable positions- the question must be asked: can the retail investor prop the market's momentum? At any rate, this is definitely a red flag!
2. USD COT Report - Extreme net long positions persist. This week's reading slightly higher than last week.
3. Euro COT Report - New selling pressure is evident in the increased net short positions.
4. GBP COT Report - Extreme bearishness persists and net short positions are at new highs.
5. Commodity Currencies - Both the Aussie and Loonie's COT reports show extreme net long positions are still sustained.
6. JPY COT Report - Net long speculative positions continue to decline.
7. As of this week, I am adding two new reports: Crude Oil and 10 Yr Notes.

CLICK TO VIEW LARGER IMAGE