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Quick Take: The Dollar Problem

Over the last two weeks, the U.S. dollar index has risen by 6%. That may not seem like much to investors who are watching stocks rise and fall by that amount, and even more daily or bond yields falling in half and then doubling, but trust us; it is.

The dollar is unlike any other asset because it is the world’s reserve currency. When a Canadian tire company buys rubber from a Philippine rubber company, the payment occurs in U.S. dollars. Both countries have their own currencies, but neither currency has the liquidity, deep credit markets, and quite frankly, the world’s largest economy and military power backing it.

Because so many foreign countries and companies transact with dollars, they need to borrow in dollars, despite the fact their revenue is often not in dollars. This creates a mismatch between revenues and expenses as currency values fluctuate. If the mismatch is not hedged, as is frequently the case, foreign borrowers of U.S. dollars are subject to higher borrowing costs if the dollar rises versus their local currency. Simply the local currency depreciates versus the dollar; therefore, they need more of the local currency to make good on their debt. Because of this construct, a stronger dollar is effectively a tightening of financial conditions on the rest of the world.

This is what is occurring today as the virus is severely impacting the global economy. Revenues are deteriorating and the cost of dollar-denominated foreign debt is rising rapidly. As borrowers scramble to raise more dollars to meet their obligations, the situation worsens as the demand for dollars forces the dollar higher. In layman’s terms, there is a global run on the dollar and, in circular fashion, the run is pushing the dollar higher. Either the global economy will break or the dollar. Right now it seems that despite massive liquidity from the Fed the dollar does not want to back down.  

 

 

 

The Prospects of a Weaker Dollar Policy- RIA Pro

This version, for RIA Pro subscribers, contains a correlation table at the end of the article to help better quantify short and longer term relationships between the dollar and other financial assets.

“Let me be clear, what I said was, it’s not the beginning of a long series of rate cuts.”- Fed Chairman Jerome Powell -7/31/2019

“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world….” – President Donald Trump – Twitter 7/31/2019

With the July 31, 2019 Fed meeting in the books, President Trump is up in arms that the Fed is not on a “lengthy and aggressive rate-cutting” path. Given his disappointment, we need to ask what else the President can do to stimulate economic growth and keep stock investors happy. History conveys that is the winning combination to win a reelection bid.

Traditionally, a President’s most effective tool to spur economic activity and boost stock prices is fiscal policy. With a hotly contested election in a little more than a year and the House firmly in Democratic control, the odds of meaningful fiscal stimulus before the election is low.

Without fiscal support, a weak dollar policy might be where Donald Trump goes next. A weaker dollar could stimulate export growth as goods and services produced in the U.S. become cheaper abroad. Further, a weaker dollar makes imports more expensive, which would increase prices and in turn push nominal GDP higher, giving the appearance, albeit false, of stronger economic growth.

In this article, we explore a few different ways that President Trump may try to weaken the dollar. 

Weaker Dollar Policy

The impetus to write this article came from the following Wall Street Journal article: Trump Rejected Proposal to Weaken Dollar through Market Intervention. In particular, the following two paragraphs contradict one another and lead us to believe that a weaker dollar policy is a possibility. 

On Friday, Mr. Kudlow said Mr. Trump “ruled out any currency intervention” after meeting with his economic team earlier this week. The comments led the dollar to rise slightly against other currencies, the WSJ Dollar index showed.

But on Friday afternoon, Mr. Trump held out the possibility that he could take action in the future by saying he hadn’t ruled anything out. “I could do that in two seconds if I wanted to,” he said when asked about a proposal to intervene. “I didn’t say I’m not going to do something.”

Based on the article, Trump’s advisers are against manipulating the dollar lower as they don’t believe they can succeed. That said, on numerous occasions, Trump has shared his anger over other countries that are “using exchange rates to seek short-term advantages.”

As shown below, two measures of the U.S. dollar highlight the substance of frustrations being expressed by Trump. The DXY dollar index has appreciated considerably from the early 2018 lows but is still well below levels at the beginning of the century. This index is inordinately influenced by the euro and therefore not 100% representative of the true effect that the dollar has on trade. The Trade-weighted dollar which is weighted by the amount of trade that actually takes place between the U.S. and other countries. That index has also bounced from early 2018 lows and, unlike DXY, has reached the highs of 2002.

Data Courtesy Bloomberg

Trump’s Dollar War Chest

The following section provides details on how the President can weaken the dollar and how effective such actions might be.

Currency Market Intervention

Intervening in the currency markets by actively selling US dollars would likely push the dollar lower. The problem, as Trump’s advisers note, is that any weakness achieved via direct intervention is likely to be short-lived.

The US economy is stronger than most other developed countries and has higher interest rates. Both are reasons that foreign investors are flocking to the dollar and adding to its recent appreciation. Assuming economic activity does not decline rapidly and interest rates do not plummet, a weaker dollar would further incentivize foreign flows into the dollar and partially or fully offset any intervention.

More importantly, there is a global dollar shortage to consider. It has been estimated by the Bank of International Settlements (BIS) that there is $12.8 trillion in dollar-denominated liabilities owed by foreign entities. A stronger dollar causes interest and principal payments on this debt to become more onerous for the borrowers. Dollar weakness would be an opportunity for some of these borrowers to buy dollars, pay down their debts and reduce dollar risk. Again, such buying would offset the Treasury’s actions to depress the dollar.  

Instead of direct intervention in the currency markets, Trump and Treasury Secretary Steve Mnuchin can use speeches and tweets to jawbone the dollar lower. Like direct intervention, we also think that indirect intervention via words would have a limited effect at best.

The economic and interest rate fundamentals driving the stronger dollar may be too much for direct or indirect intervention to overcome.

From a legal perspective intervening in the currency markets is allowed and does not require approval from Congress. Per the Wall Street Journal article, “The 1934 Gold Reserve Act gives the White House broad powers to intervene, and the Treasury maintains a fund, currently of around $95 billion, to carry out such operations.” The author states that the Treasury has not conducted any interventions since 2000. That is not entirely true as they conducted a massive amount of currency swaps with other nations during and after the financial crisis. By keeping these large market-moving trades off the currency markets, they very effectively manipulated the dollar and other currencies.

Hounding the Fed

The President aggressively chastised Fed Chairman Powell for not cutting interest rates or ending QT as quickly as he prefers. Lowering interest rates to levels that are closer to those of other large nations would potentially weaken the dollar. The only problem is that the Fed does not appear willing to move at the President’s pace as they deem such action is not warranted. We believe the Fed is very aware that taking unjustifiable actions at the behest of the President would damage the perception of their independence and, therefore, their integrity.

To solve this problem, Trump could take the controversial and unprecedented step of firing or demoting Fed Chairman Powell.  In Powell’s place he could put someone willing to lower rates aggressively and possibly reintroduce QE. These steps might push financial asset prices higher, weaken the dollar, and provide the economic pickup Trump seeks but it is also fraught with risks. We have written two articles on the topic of the President firing the Fed Chairman as follows: Chairman Powell You’re Fired and Market Implications for Removing Fed Chair Powell.

It is not clear whether the President can get away with firing or even demoting Chairman Powell. We guess that he understands this which may explain why he has not done it already. If he cannot change Fed leadership, he can continue to pressure the Fed with Tweets, speeches, and direct meetings. We do not think this strategy can be effective unless the Fed has ample reason to cut rates. Thus far, the Fed’s mandates of “maximum employment, stable prices, and moderate long-term interest rates” do not provide the Fed such justification.

Getting Help Abroad

One of the core topics in the U.S. – China trade talks has been the Chinese Yuan. In particular, Trump is negotiating to stop the Chinese from using their currency to promote their economic self-interests at our expense. As of writing this, the U.S. Treasury deemed China a currency manipulator. Per the Treasury: “As a result of this determination (currency manipulator), Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.” Said differently, the U.S. and other nations can now manipulate their currency versus the Chinese Yuan.

It is plausible that Trump might pressure other countries, including our allies in Europe and Japan as well as Mexico and Canada, to strengthen their respective currencies against the dollar. Trump can threaten nations with trade restrictions and tariffs if they do not comply. If tariffs are enacted, however, all bets are off due to the economic inefficiencies of tariffs or trade restrictions. To the President’s dismay, such action weaken the economy and scare investors as we are seeing with China. 

Threats of trade actions, trade-related actions, or trade agreements might work to weaken the dollar, but such tactics would require time and pinpoint diplomacy. Of all the options, this one requires longer-term patience in awaiting their effect and may not satisfy the President’s desire for short-term results.

Summary

Before summarizing we leave you with one important thought and certainly a topic for future writings. Globally coordinated monetary policy is morphing into globally competitive monetary policy. This may be the most significant Macro development since the Plaza Accord in 1985 when the Reagan administration, along with other developed nations (West Germany, France, Japan, the UK), coordinated to weaken the U.S. dollar.

With the Presidential election in about 15 months, we have no doubt that President Trump will do everything in his power to keep financial markets and the economy humming along. The problem facing the President is a Democrat-controlled House, a Fed that is dragging their feet in terms of rate cuts, weakening global growth, and a stronger U.S. dollar.

We believe the odds that the President tries to weaken the dollar will rise quickly if signs of further economic weakness emerge. Given the situation, investors need to understand what the President can and cannot do to spike economic growth and further how it might affect the prices of financial assets.

On the equity front, a weaker dollar bodes well for companies that are more global in nature. Most of the companies that have driven the equity indices higher are indeed multi-national. Conversely, it harms domestic companies that rely on imported goods and commodities to manufacture their products. The price of commodities and precious metals are likely to rise with a weaker dollar. A weaker dollar and any price pressures that result would likely push bond yields higher.

The relationships between the dollar and various asset classes are important to monitoring how intentional changes in the value of the dollar may impact all varieties of asset classes. The addendum below quantifies short and longer-term correlations.

Addendum – Short & Long-term Asset Correlations

The following tables present short term daily correlations and longer-term weekly correlations between the dollar and several asset classes and sub-asset classes. The correlation data for each asset quantifies how much the price of the asset is affected by the price of the dollar. A positive correlation means the dollar and the asset tend to move in similar directions. Conversely, a negative relationship means they move in opposite directions. We highlighted all relationships that are +/- .30. The closer the number is to 1 or -1, the stronger the relationship. CLICK TO ENLARGE

The Prospects of a Weaker Dollar Policy

“Let me be clear, what I said was, it’s not the beginning of a long series of rate cuts.”- Fed Chairman Jerome Powell -7/31/2019

“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world….” – President Donald Trump – Twitter 7/31/2019

With the July 31, 2019, Fed meeting in the books, President Trump is up in arms that the Fed is not on a “lengthy and aggressive rate-cutting” path. Given his disappointment, we need to ask what else the President can do to stimulate economic growth and keep stock investors happy. History conveys that is the winning combination to win a reelection bid.

Traditionally, a President’s most effective tool to spur economic activity and boost stock prices is fiscal policy. With a hotly contested election in a little more than a year and the House firmly in Democratic control, the odds of meaningful fiscal stimulus before the election is low.

Without fiscal support, a weak dollar policy might be where Donald Trump goes next. A weaker dollar could stimulate export growth as goods and services produced in the U.S. become cheaper abroad. Further, a weaker dollar makes imports more expensive, which would increase prices and in turn push nominal GDP higher, giving the appearance, albeit false, of stronger economic growth.

In this article, we explore a few different ways that President Trump may try to weaken the dollar. 

Weaker Dollar Policy

The impetus to write this article came from the following Wall Street Journal article: Trump Rejected Proposal to Weaken Dollar through Market Intervention. In particular, the following two paragraphs contradict one another and lead us to believe that a weaker dollar policy is a possibility. 

On Friday, Mr. Kudlow said Mr. Trump “ruled out any currency intervention” after meeting with his economic team earlier this week. The comments led the dollar to rise slightly against other currencies, the WSJ Dollar index showed.

But on Friday afternoon, Mr. Trump held out the possibility that he could take action in the future by saying he hadn’t ruled anything out. “I could do that in two seconds if I wanted to,” he said when asked about a proposal to intervene. “I didn’t say I’m not going to do something.”

Based on the article, Trump’s advisers are against manipulating the dollar lower as they don’t believe they can succeed. That said, on numerous occasions, Trump has shared his anger over other countries that are “using exchange rates to seek short-term advantages.”

As shown below, two measures of the U.S. dollar highlight the substance of frustrations being expressed by Trump. The DXY dollar index has appreciated considerably from the early 2018 lows but is still well below levels at the beginning of the century. This index is inordinately influenced by the euro and therefore not 100% representative of the true effect that the dollar has on trade. The Trade-weighted dollar which is weighted by the amount of trade that actually takes place between the U.S. and other countries. That index has also bounced from early 2018 lows and, unlike DXY, has reached the highs of 2002.

Data Courtesy Bloomberg

Trump’s Dollar War Chest

The following section provides details on how the President can weaken the dollar and how effective such actions might be.

Currency Market Intervention

Intervening in the currency markets by actively selling US dollars would likely push the dollar lower. The problem, as Trump’s advisers note, is that any weakness achieved via direct intervention is likely to be short-lived.

The US economy is stronger than most other developed countries and has higher interest rates. Both are reasons that foreign investors are flocking to the dollar and adding to its recent appreciation. Assuming economic activity does not decline rapidly and interest rates do not plummet, a weaker dollar would further incentivize foreign flows into the dollar and partially or fully offset any intervention.

More importantly, there is a global dollar shortage to consider. It has been estimated by the Bank of International Settlements (BIS) that there is $12.8 trillion in dollar-denominated liabilities owed by foreign entities. A stronger dollar causes interest and principal payments on this debt to become more onerous for the borrowers. Dollar weakness would be an opportunity for some of these borrowers to buy dollars, pay down their debts and reduce dollar risk. Again, such buying would offset the Treasury’s actions to depress the dollar.  

Instead of direct intervention in the currency markets, Trump and Treasury Secretary Steve Mnuchin can use speeches and tweets to jawbone the dollar lower. Like direct intervention, we also think that indirect intervention via words would have a limited effect at best.

The economic and interest rate fundamentals driving the stronger dollar may be too much for direct or indirect intervention to overcome.

From a legal perspective intervening in the currency markets is allowed and does not require approval from Congress. Per the Wall Street Journal article, “The 1934 Gold Reserve Act gives the White House broad powers to intervene, and the Treasury maintains a fund, currently of around $95 billion, to carry out such operations.” The author states that the Treasury has not conducted any interventions since 2000. That is not entirely true as they conducted a massive amount of currency swaps with other nations during and after the financial crisis. By keeping these large market-moving trades off the currency markets, they very effectively manipulated the dollar and other currencies.

Hounding the Fed

The President aggressively chastised Fed Chairman Powell for not cutting interest rates or ending QT as quickly as he prefers. Lowering interest rates to levels that are closer to those of other large nations would potentially weaken the dollar. The only problem is that the Fed does not appear willing to move at the President’s pace as they deem such action is not warranted. We believe the Fed is very aware that taking unjustifiable actions at the behest of the President would damage the perception of their independence and, therefore, their integrity.

To solve this problem, Trump could take the controversial and unprecedented step of firing or demoting Fed Chairman Powell.  In Powell’s place he could put someone willing to lower rates aggressively and possibly reintroduce QE. These steps might push financial asset prices higher, weaken the dollar, and provide the economic pickup Trump seeks but it is also fraught with risks. We have written two articles on the topic of the President firing the Fed Chairman as follows: Chairman Powell You’re Fired and Market Implications for Removing Fed Chair Powell.

It is not clear whether the President can get away with firing or even demoting Chairman Powell. We guess that he understands this which may explain why he has not done it already. If he cannot change Fed leadership, he can continue to pressure the Fed with Tweets, speeches, and direct meetings. We do not think this strategy can be effective unless the Fed has ample reason to cut rates. Thus far, the Fed’s mandates of “maximum employment, stable prices, and moderate long-term interest rates” do not provide the Fed such justification.

Getting Help Abroad

One of the core topics in the U.S. – China trade talks has been the Chinese Yuan. In particular, Trump is negotiating to stop the Chinese from using their currency to promote their economic self-interests at our expense. As of writing this, the U.S. Treasury deemed China a currency manipulator. Per the Treasury: “As a result of this determination (currency manipulator), Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.” Said differently, the U.S. and other nations can now manipulate their currency versus the Chinese Yuan.

It is plausible that Trump might pressure other countries, including our allies in Europe and Japan as well as Mexico and Canada, to strengthen their respective currencies against the dollar. Trump can threaten nations with trade restrictions and tariffs if they do not comply. If tariffs are enacted, however, all bets are off due to the economic inefficiencies of tariffs or trade restrictions. To the President’s dismay, such action weaken the economy and scare investors as we are seeing with China. 

Threats of trade actions, trade-related actions, or trade agreements might work to weaken the dollar, but such tactics would require time and pinpoint diplomacy. Of all the options, this one requires longer-term patience in awaiting their effect and may not satisfy the President’s desire for short-term results.

Summary

Before summarizing we leave you with one important thought and certainly a topic for future writings. Globally coordinated monetary policy is morphing into globally competitive monetary policy. This may be the most significant Macro development since the Plaza Accord in 1985 when the Reagan administration, along with other developed nations (West Germany, France, Japan, the UK), coordinated to weaken the U.S. dollar.

With the Presidential election in about 15 months, we have no doubt that President Trump will do everything in his power to keep financial markets and the economy humming along. The problem facing the President is a Democrat-controlled House, a Fed that is dragging their feet in terms of rate cuts, weakening global growth, and a stronger U.S. dollar.

We believe the odds that the President tries to weaken the dollar will rise quickly if signs of further economic weakness emerge. Given the situation, investors need to understand what the President can and cannot do to spike economic growth and further how it might affect the prices of financial assets.

On the equity front, a weaker dollar bodes well for companies that are more global in nature. Most of the companies that have driven the equity indices higher are indeed multi-national. Conversely, it harms domestic companies that rely on imported goods and commodities to manufacture their products. The price of commodities and precious metals are likely to rise with a weaker dollar. A weaker dollar and any price pressures that result would likely push bond yields higher.

The statistical relationships between the dollar and other asset classes are important to quantify if in fact the dollar may become an economic tool for the President. A full spectrum of those relationships over various timeframes may be found in an addendum to this article for RIA Pro subscribers. Give us a try. All new subscribers receive a 30 day free trial to explore what we have to offer and view the addendum.   

Cartography Corner – July 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of June

U.S. Dollar Index Futures  

We begin with a review of U.S. Dollar Index Futures during June 2019. In our June 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for June are:

  • M4         100.155
  • M1         98.435
  • PMH        98.260
  • M3           98.131
  • Close        97.666
  • M2            97.255           
  • MTrend  97.119
  • PML          96.810                        
  • M5            95.535

Active traders can use 98.260 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 97.119 as the downside pivot, whereby they maintain a flat or short position below it.

Figure 1 below displays the daily price action for June 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first four trading sessions were spent with U.S. Dollar Index Futures breaching our isolated downside pivot levels at M2: 97.255 and the downside pivot (MTrend): 97.119.  On the fifth trading session, the market price closed below May’s low price at PML: 96.810 and sustained below that level for the following four trading sessions.

On June 14th the market price rotated back above May’s low price and, over the next two trading sessions, tested our isolated support levels at MTrend: 97.119 and M2: 97.255, now acting as resistanceThat test failed.

Over the following four trading sessions, U.S. Dollar Index Futures achieved our downside exhaustion level at M5: 95.535.  The final four trading sessions in June were spent with the market price trading slightly above our downside exhaustion level.

The realized error between our isolated downside exhaustion level at M5: 95.535 and June’s low price equaled 0.18%.    

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during June 2019.  In our June 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for June are:

  • M4                3078.00
  • M1                2966.00
  • PMH             2961.25
  • MTrend        2849.28
  • Close             2752.50     
  • PML               2750.00
  • M2                2655.50     
  • M3                 2556.50    
  • M5                 2543.50

Active traders can use 2750.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for June 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first trading session of June saw the market price test our isolated pivot level at PML: 2750.00 intrasession, with the low price for June being realized at 2728.75.  Early weakness was overcome by strength and E-Mini S&P 500 Futures closed higher for the session.  The price action for that day is a good reminder of why market participants should judgmentally emphasize closing levels, relative to upside and downside pivots when initiating positions.  The market price closed within 0.50 points of our isolated pivot, with mechanical shorts suffering a fifty-point loss the following day while those respecting daily closing levels were spared.  

The following four trading sessions were spent with the market price ascending to, and closing above, our first isolated resistance level at MTrend: 2849.28.  The following ten trading sessions saw the market price continue its ascent, with our clustered resistance levels at PMH: 2961.25 and M1: 2966.00 being achieved and slightly exceeded intrasession on June 21stHowever, the market price did not close above those levels.

The final five trading sessions saw the market price pull back from (three sessions) and re-approach (two sessions) our clustered resistance levels.

Figure 2:


July 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle         2944.25       
  • Daily Trend             2931.61
  • Weekly Trend         2923.12       
  • Monthly Trend        2872.83       
  • Quarterly Trend      2727.50

In our June 2019 edition of The Cartography Corner, we wrote the following:

We would like to bring your attention to two important points with respect to the Trend Levels.  First, the relative positioning of the trend levels is beginning to align in a very bearish manner.  Daily is below Weekly.  Weekly is below Monthly.  The final alignment that would increase our concern further is to have Quarterly at the top of the order.  The second point is that June Monthly Trend rose relative to May Monthly Trend.  The significance of this is that it informs us that there remain many “trapped” longs at prices 3.5% higher than the current settlement price.  May’s weakness introduced significant pressure on them.

What a difference a month’s price action can make.  The relative positioning of the Trend Levels, as shown above, is aligned in the most bullish posture possible.

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for four weeks.

Within the context of the market price relative to the trend levels and the relative positioning of the trend levels to one another, technical analysis of E-Mini S&P 500 Futures is bullish.  The need for a two-month high that we highlighted in last month’s commentary was realized in June.

Facts are facts… and the fact is that the market is not sustaining weakness.  It is a trader’s market, prone to swift and violent price swings.  We are not abandoning our idea of being in the time window for a sustained reversal to occur.  However, we are increasing our respect for the possibility of continued strength.

There are two facets of this market that we are certain of:

  1. Energy is building and a large and sustained move is imminent.
  2. Our analysis will accurately identify the landmarks along the way.

Support/Resistance:

In isolation, monthly support and resistance levels for July are:

  • M4                3188.50
  • M3                3136.00
  • M1                2977.25
  • PMH              2969.25
  • Close             2944.25     
  • MTrend        2872.83
  • PML               2728.75     
  • M2                 2707.50    
  • M5                 2496.25

Active traders can use 2977.25 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Investment Grade Corporate Bond ETF

For the month of July, we focus on the Investment Corporate Bond ETF.  We provide a monthly time-period analysis of LQD.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle        124.37          
  • Daily Trend            123.90
  • Weekly Trend        122.90          
  • Monthly Trend       120.69          
  • Quarterly Trend     117.42

As can be seen in the quarterly chart below, LQD is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that LQD has been “Trend Up” for six months.  Stepping down to the weekly time-period, the chart shows that LQD has been “Trend Up” for seven weeks.

Support/Resistance:

In isolation, monthly support and resistance levels for July are:

  • M4         130.59
  • M1         128.04
  • M3           127.91
  • PMH       124.44
  • Close        124.37
  • M2           122.54
  • MTrend   120.69             
  • PML          120.41                        
  • M5            119.99

Active traders can use 124.44 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 122.54 as the downside pivot, whereby they maintain a flat or short position below it.

Technical analysis of LQD is bullish.  Having said that, there are bearish technical factors to be cognizant of.  The condition was met on a quarterly basis in 1Q2019 that makes us anticipate a two-quarter low within the next three to five quarters.  That can be achieved this quarter with a trade below 112.78.  The condition was also met on a monthly basis in January 2019 that makes us anticipate a two-month low in July.  That can be achieved this month with a trade below 118.29.  Lastly, the condition was met on a weekly basis, the week of May 27th that makes us anticipate a two-week low within the next two weeks.  That can be achieved this week with a trade below 121.62.

Figure 3:

Figure 3 above displays an LQD monthly candlestick chart for the period of January 2005 through June 2019.  Inversely overlaid is the spread between Moody’s Seasoned Baa Corporate Bond Yields and the Bank Prime Rate, measured in basis points.  As Charles Gave explains:

“Artificially depressed prime rates below the natural rate of corporate credit have allowed banks to generate ‘artificial’ money, kept zombie companies alive, but most of all permitted most viable corporations to engage in ‘financial engineering’ such as issuing debt to repurchase stocks, all of which are predicated on cheap borrowing costs continuing indefinitely, the risk, of course, is that the credit-funded party ends once the curve inverts… When the private sector curve inverts, the zombie companies will fail, capital spending will be cut, workers will be laid off, and the economy will move into recession.”

In 2006, the spread reached a trough of -205 basis points.  We believe that the spread today, currently at -103 basis points will not be able to reach the 2006 level.  We also believe the pending market repricing in LQD could be much more exaggerated than the thirty-three-point decline experienced during the Great Financial Crisis.  We ask that you reflect upon the following:

  • In 2006, the Bank Prime Rate equaled 8.25% and Moody’s Seasoned Baa Corporate Bonds yielded 6.20%. Today those levels are 5.50% and 4.47%, respectively.  (Our next step is to normalize the spread relative to rate levels.)
  • The size of the corporate bond market in 2006 totaled $4.9 trillion. As of the end of 2018, it totaled $9.2 trillion.
  • As detailed by Michael Lebowitz in The Corporate Maginot Line, “50% of BBB companies, based solely on leverage, are at levels typically associated with lower rated companies. If 50% of BBB-rated bonds were to get downgraded, it would entail a shift of $1.30 trillion bonds to junk status. To put that into perspective, the entire junk market today is less than $1.25 trillion, and the subprime mortgage market that caused so many problems in 2008 peaked at $1.30 trillion.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

Cartography Corner – June 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of May

Euro FX Futures  

We begin with a review of Euro FX Futures during May 2019. In our May 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for May are:

  • M4         1.1587
  • PMH       1.1386
  • MTrend   1.1333
  • Close        1.1267
  • M3            1.1245
  • M1            1.1237           
  • PML        1.1157
  • M2            1.1129                       
  • M5            1.0779

Active traders can use 1.1386 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 1.1237 as the downside pivot, whereby they maintain a flat or short position below it.

Figure 1 below displays the daily price action for May 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first ten trading sessions were spent with Euro FX Futures oscillating below and above our clustered support levels at M3: 1.1245 and M1: 1.1237

On the eleventh trading session, circled in the chart, the market price again closed below our isolated downside pivot at M1: 1.1237.  Euro FX futures proceeded to decline over the following six trading sessions to our isolated support level at M2: 1.1129.  The low price for the month was realized on May 23rd at a price of 1.1127.  Astute observers will notice the decline halted exactly at the “cliff’s edge”, as our analysis suggested a  -3.14% gap down to the Monthly Downside Exhaustion level at M5: 1.0779 existed below.

With market participants not liking what they saw over the “cliff’s edge”, the market price saw a sharp rally over the remainder of the May 23 trading session and the May 24 trading session back to our isolated support levels at M1:1.1237 and M3: 1.1245, now acting as resistance.

Over the following three trading sessions, the market price abruptly declined back to M2: 1.1129.  The low settlement price for the month was realized on May 30th at a price of 1.1150.  The final trading session of May saw Euro FX Futures rally slightly from the low.  In the month of June 2019, the “cliff’s edge” resides at 1.1097, below which our analysis suggests a -2.10% gap lower exists.

Our analysis identified the relevant support and resistance levels, while capturing the entire month’s realized range.    

Figure 1:

 

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during May 2019.  In our May 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for May are:

  • M4              3186.50
  • M3              3059.25
  • M1              3047.00
  • M2             2962.50
  • PMH          2956.50         
  • Close          2948.50
  • PML            2844.50        
  • MTrend      2828.81        
  • M5             2823.00

Active traders can use 2962.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for May 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first trading session of May saw the market price test our isolated pivot level at M2: 2962.50 early in the session, with the high price being realized at 2961.25.  Early strength was overcome by weakness and E-Mini S&P 500 Futures never regained their footing.

The following eight trading sessions were spent with the market price declining to, and through, our isolated Downside Exhaustion level at M5: 2823.00.  On May 14th, 15th, and 16th, the market price rallied back above our isolated support levels at M5: 2823.00, MTrend: 2828.81, and PML: 2844.50, now acting as resistanceThat three-session period was essentially the only opportunity for market participants to “sell strength”.  The following ten trading sessions saw the market price decline again, with our Downside Exhaustion level at M5: 2823.00 being exceeded by 73.00 points.

May’s price action is a great example of the benefit of our multi-time frame approach to technical analysis.  The red dashed lines included in Figure 2 are quarterly support levels isolated by our analysis.  Astute readers will notice the market paused its descent at Q1: 2787.25 before approaching Quarterly Trend at QTrend: 2718.86.


June 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Monthly Trend        2849.28       
  • Weekly Trend         2823.72
  • Daily Trend             2779.08       
  • Current Settle         2752.50       
  • Quarterly Trend      2718.86

We would like to bring your attention to two important points with respect to the Trend Levels.  First, the relative positioning of the trend levels are beginning to align in a very bearish manner.  Daily is below Weekly.  Weekly is below Monthly.  The final alignment that would increase our concern further is to have Quarterly at the top of the order.  The second point is that June Monthly Trend rose relative to May Monthly Trend.  The significance of this is that it informs us that there remain many “trapped” longs at prices 3.5% higher than the current settlement price.  May’s weakness introduced significant pressure on them.

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”, after having been “Trend Up” for four months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have also been “Trend Down” for four weeks.

Within the context of the market price relative to the trend levels and the relative positioning of the trend levels to one another, technical analysis of E-Mini S&P 500 Futures is bearish.  Having said that, there is one bullish technical factor to be cognizant of.  The condition was met in May 2019 that makes us anticipate a two-month high within the next four to six months.  That would be achieved this month with any trade above 2961.25.  Our judgment is that it will occur in the latter part of the time window and at lower levels.

We espoused the following in our May 2019 edition and remain convicted of this view today.  “Despite the bullish technical condition mentioned above, we continue to view this time window and price area as the last and best opportunity to sell longs (get short), anticipating an extended decline in both time and price.  Based upon historical occurrences, we are willing to remain patient until late May / early June before re-assessing our anticipation of a reversal.”

The reversal arrived on schedule.      

Support/Resistance:

In isolation, monthly support and resistance levels for June are:

  • M4                3078.00
  • M1                2966.00
  • PMH             2961.25
  • MTrend        2849.28
  • Close             2752.50     
  • PML               2750.00
  • M2                2655.50     
  • M3                 2556.50    
  • M5                 2543.50

Active traders can use 2750.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

U.S. Dollar Index Futures

For the month of June, we focus on U.S. Dollar Index Futures.  We provide a monthly time-period analysis of DXM9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend            97.946          
  • Weekly Trend        97.675
  • Current Settle        97.666          
  • Monthly Trend       97.119          
  • Quarterly Trend     95.784

As can be seen in the quarterly chart above, U.S. Dollar Index Futures have been “Trend Up” for four quarters.  Stepping down one time-period, the monthly chart shows that U.S. Dollar Index Futures have been “Trend Up” for three months.  Stepping down to the weekly time-period, the chart shows that U.S. Dollar Index Futures have been “Trend Up” for three weeks.

Technical analysis of U.S. Dollar Index Futures is unequivocally bullish.  Having said that, there is one bearish technical factor to be cognizant of.  The condition was met in 2Q2018 that makes us anticipate a two-quarter low by the end of 4Q2019.  That would be achieved this quarter with any trade below 94.470.

Support/Resistance:

In isolation, monthly support and resistance levels for June are:

  • M4         100.155
  • M1         98.435
  • PMH        98.260
  • M3           98.131
  • Close        97.666
  • M2            97.255           
  • MTrend  97.119
  • PML          96.810                        
  • M5            95.535

Active traders can use 98.260 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 97.119 as the downside pivot, whereby they maintain a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

Cartography Corner – May 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of April

Ultra-Long Bond Futures  

We will begin with a review of Ultra-Long Bond Futures during April 2019. In our April 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for April are:

  • M4             178-25
  • M3             176-13
  • M1             175-00
  • PMH          168-30
  • Close         168-00
  • MTrend    162-08            
  • PML        158-03
  • M2            157-03                       
  • M5            153-10

Active traders can use 168-30 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for April 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  During the first three trading sessions of April, the market price declined 3 points and 9/32nds on a settlement basis.  The price action in early April is a stark reminder of the importance of waiting for the Previous Month High or Previous Month Low to be surpassed, before initiating new longs (PMH) or new shorts (PML).

Over the next five trading sessions, Ultra-Long Bond Futures achieved marginally higher prices, within the context of a consolidation area.  The April 10th trading session settled at the price of 165-14.  The lower boundary of that consolidation area was penetrated during the very next trading session.

Over the following four trading sessions, the market price declined an additional 1 point and 21/32nds on a settlement basis.  The intra-day low on April 17th and the low price of the month were achieved at the price of 162-08.  Our April Monthly Trend Level at MTrend: 162-08 stopped the decline in its tracks.

The final eight trading sessions were spent with Ultra-Long Bond futures rebounding higher off April Monthly Trend.  The final settlement price was 164-09, 1 point and 31/32nds higher than MTrend: 162-08.

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during April 2019.  In our April 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for April are:

  • M4              3051.25
  • M1              2918.00
  • M3              2890.75
  • PMH           2866.00
  • Close          2837.75        
  • M2              2772.25
  • MTrend     2729.08         
  • PML            2726.50        
  • M5             2639.00

Active traders can use 2866.00 as the upside-pivot, whereby they maintain a long position above that level.   Active traders can use 2772.25 as the downside-pivot, whereby they maintain a flat or short position below it.

Figure 2 below displays the daily price action for April 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first trading session of April saw the market price settle above our isolated pivot level at the Previous Month High, PMH: 2866.00.  E-Mini S&P 500 futures never looked back.

Four sessions later, on April 5th, the market price traded and settled above our second isolated resistance level at M3: 2890.75.  The following four trading sessions saw E-Mini S&P Futures consolidate, centered around that level.  On April 12th, the upper boundary of that consolidation area was penetrated.

The following five trading sessions saw the market price consolidate again, with the boundaries of the consolidation area essentially being M1: 2918.00 and M3: 2890.75.   On April 23rd, the upper boundary of that consolidation area was penetrated.

The final five trading sessions were spent with E-Mini S&P 500 Futures achieving a marginal new high.  April’s settlement price equaled 2948.50, a new all-time high.

Figure 2:


May 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Current Settle         2948.50       
  • Daily Trend             2940.53
  • Weekly Trend         2912.31       
  • Monthly Trend        2828.81       
  • Quarterly Trend      2718.86

Of all the levels included in our output, Quarterly Trend is the most important, because it is more secular in nature.  The market price settled back above Quarterly Trend in 1Q2019, leaving the market in “Consolidation”.

Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for four months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have also been “Trend Up” for seven weeks.

Within the context of the market price relative to the trend levels and the relative positioning of the trend levels to one another, technical analysis of E-Mini S&P 500 Futures is bullish.   

We have written extensively about our anticipation of a two-month high being needed in E-Mini S&P 500 Futures.  We anticipated it occurring in the month of March and it was realized during the second trading session of the month.  The rally from the December 2018 low has completed its objective, and then some.  Despite the bullish technical condition mentioned above, we continue to view this time window and price area as the last and best opportunity to sell longs (get short), anticipating an extended decline in both time and price.  Based upon historical occurrences, we are willing to remain patient until late May / early June before re-assessing our anticipation of a reversal.

We communicated in April our recognition of the risk of a new all-time high, and that high has been achieved.  This has led to multiple discussions with our clients and other market participants regarding right-tail risk, or the risk of the market ascending well above its current record high.  While we remain cognizant of right-tail risk, in our judgment, the realized price behavior of the U.S. Dollar, High-Grade Copper, and WTI Crude Oil (to a lesser extent) combined do not support that outcome.  If market participants are convinced of sustained-and-increasing domestic-and-global economic strength, then we posit that those asset classes offer better opportunities going forward.

Support/Resistance:

In isolation, monthly support and resistance levels for May are:

  • M4              3186.50
  • M3              3059.25
  • M1              3047.00
  • M2             2962.50
  • PMH          2956.50         
  • Close          2948.50
  • PML            2844.50        
  • MTrend      2828.81        
  • M5             2823.00

Active traders can use 2962.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Euro FX Futures

For the month of May, we focus on Euro FX Futures.  We provide a monthly time-period analysis of 6EM9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend     1.1497          
  • Monthly Trend       1.1333
  • Weekly Trend        1.1293          
  • Current Settle        1.1267          
  • Daily Trend            1.1222

As can be seen in the quarterly chart above, Euro FX Futures have been “Trend Down” for four quarters.  Stepping down one level in time-period, the monthly chart shows that Euro FX Futures have been “Trend Down” for three months.  Stepping down to the weekly time-period, the chart shows that Euro FX Futures are in “Consolidation”.

Technical analysis of Euro FX Futures is unequivocally bearish.  Having said that, there is one technical factor that gives us caution.  The condition was met in 2Q2018 that makes us anticipate a 2-quarter high within the next two quarters.  That would be achieved this quarter with any trade above 1.1695.

Support/Resistance:

In isolation, monthly support and resistance levels for May are:

  • M4         1.1587
  • PMH       1.1386
  • MTrend   1.1333
  • Close        1.1267
  • M3            1.1245
  • M1            1.1237           
  • PML        1.1157
  • M2            1.1129                       
  • M5            1.0779

Active traders can use 1.1386 as the upside-pivot, whereby they maintain a long position above that level.  Active traders can use 1.1237 as the downside-pivot, whereby they maintain a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

Cartography Corner – February 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of January

Euro FX Futures

We will begin with a review of Euro FX Futures during January 2019. In our January 2019 edition of The Cartography Corner, we wrote the following, with emphasis given to bolded excerpts:

In isolation, monthly support and resistance levels for January are:

  • M4             1.1900
  • M3             1.1723
  • M1             1.1605
  • PMH          1.1575
  • Close         1.1523
  • MTrend     1.1437           
  • M2             1.1392
  • PML           1.1321                       
  • M5             1.1097

Active traders can use 1.1575 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 1.1437 as the downside pivot, whereby they maintain a short or flat position below it.

Figure 1 below displays the daily price action for January 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  During the first trading session of January, the price traded, and settled, below our isolated downside pivot at MTrend: 1.1437.  The sell signal for active traders was given.

However, our next isolated support level at M2: 1.1392 stopped the decline and, beginning the next trading session, Euro FX Futures generally rallied for five consecutive sessions.  With January 9th’s settlement price of 1.1610, the buy signal for active traders was given.

After achieving the high price for the month on January 10th, Euro FX Futures declined for eight of the following ten trading sessions.  (The sell signal for active traders was given, yet again, January 18th.)  The low price in January was reached on January 24th at 1.1338.

The final five trading sessions were spent with the price ascending back towards, but not reaching, our isolated resistance level at PMH: 1.1575.

Active traders following our work completed three trades during the month, with 2 losing trades and one being scratched.  Using settlement prices, the resulting loss equaled 0.82%.      

Figure 1:

 

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during January 2019.  In our January 2019 edition of The Cartography Corner, we wrote the following, with emphasis given to bolded excerpts:

In isolation, monthly support and resistance levels for January are:

  • M4             3002.00
  • PMH          2814.00
  • M1             2810.00
  • MTrend     2677.03
  • Close          2505.25        
  • PML            2313.00
  • M3             2252.25        
  • M2             2000.00        
  • M5             1808.00

Active traders can use 2814.00 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2313.00 as the downside pivot, whereby they maintain a flat or short position below it.

Given the still-relatively-large distance between monthly levels, we suggest using the weekly levels each week to guide us through the month of January.

Figure 2 below displays the daily price action for January 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  With exception of January’s Monthly Trend level, our monthly levels were so far removed from January’s price range that they are not included on the chart.  However, we have included the first quarter’s Quarterly Trend level.

In lieu of our standard commentary, we wish to highlight 2 observations.  The first, which can be used as a rule, is the following.  When market prices get abnormally extended away from Monthly Trend, as they were at December’s low, they normally will attempt to rally back to Monthly Trend.  We always expect a rejection on the first test of that level and a fierce battle between longs and shorts on subsequent attempts.  The 2 circles on the graph highlight the test of January’s Monthly Trend in the first candle and the solid rejection of that level in the second candle.  In the first instance, that rejection was worth 60 points.  In the second instance, that rejection was worth 50.25 points.  110 points will pay the light bill.

A mentor of ours used to say, “Markets make three drives to a high.”  The two rejections of, and subsequent penetration through, January’s Monthly Trend level are a clear example of this, which leads to our second observation.  Despite having closed above Monthly Trend, and the associated noise surrounding market participant expectations of Federal Reserve policy, the market’s ascent stopped directly in front of Quarterly Trend (2710).  As stated in the above discussion regarding Monthly Trend, we expect a rejection on the first test of that quarterly level and a fierce battle between longs and shorts on subsequent attempts.  A quarterly settlement above that level would be significant in our judgment and, although not anticipated, we would respect it.

Active traders following our work completed no trades during January.

Figure 2:


February 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend      2710.78       
  • Current Settle         2704.50
  • Daily Trend             2668.50       
  • Monthly Trend        2631.83       
  • Weekly Trend          2620.28

As can be seen in the quarterly chart above, the impressive twelve-quarter uptrend ended in 4Q2018.  As we have stated many times, of all the levels included in our output, Quarterly Trend is the most important, because it is more secular in nature.  Only one month into the new quarter and the market price is testing Quarterly Trend from below.  Perhaps Chairman Powell, as witnessed by his apparent U-turn in monetary policy, understands its significance, but we digress…

Stepping down one level in time-period, the monthly chart shows that E-Mini S&P 500 Futures are now in “Consolidation”, after having been “Trend Down” for three months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P Futures have been “Trend Up” for four weeks.

Technical analysis of E-Mini S&P 500 Futures suggests that the market has turned lower for a sustained downtrend, despite this rally off the December 2018 low.

In our January 2019 edition we wrote, “In the intermediate-term, we anticipate a rally possibly back to clustered-resistance at Monthly Trend and Quarterly Trend, MTrend: 2677.03 / QTrend: 2710.78.”  Additionally, we wrote, “Currently, we anticipate a 2-month high…”  The time window for that 2-month high is in the next one to three months, with our focus on March.  In order to achieve it in February, the market price would need to trade above 2814.00.

So far, our anticipation has proved correct.

Support/Resistance:

In isolation, monthly support and resistance levels for February are:

  • M4              3105.00
  • M3              2903.75
  • PMH           2709.00
  • Close          2704.50
  • MTrend      2631.83        
  • M1              2604.00
  • M2              2564.00       
  • PML            2438.50        
  • M5              2063.00

Active traders can use 2709.00 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

WTI Crude Oil Futures

For the month of February, we focus on WTI Crude Oil Futures.  We provide a monthly time-period analysis of CLH9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend     65.29            
  • Current Settle        53.79
  • Daily Trend            53.79            
  • Weekly Trend        52.43            
  • Monthly Trend       51.28

As can be seen in the quarterly chart above, WTI Crude Futures are in “Consolidation”.  Having settled below Quarterly Trend in 4Q2018, the most recent five quarter uptrend endedStepping down one level in time-period, the monthly chart shows that WTI Crude Oil Futures have been “Trend Down” for four consecutive months.  Stepping down to the weekly time-period, the chart shows that WTI Crude Oil Futures have been “Trend Up” for three weeks.

Technical analysis of WTI Crude Oil Futures suggests that the market has turned lower for a sustained downtrend, despite this rally off the December 2018 low.

We have been anticipating a 2-month high since November and any trade above January’s high price will fulfill that expectation.  

Support/Resistance:

In isolation, monthly support and resistance levels for February are:

  • M4             68.38
  • M3             62.17
  • M1             56.19
  • PMH          55.37
  • Close         53.79
  • MTrend     51.28             
  • M2             46.34
  • PML           44.35                         
  • M5             34.15

Active traders can use 56.19 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 51.28 as the downside pivot, whereby they maintain a short or flat position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight to many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription, we are asking you to listen.

Key Levels To Watch In The Dollar And Euro – RIA Pro

Since April, the surging U.S. dollar has caught the majority of economists and market participants off-guard and contributed to the bearish action in emerging markets and commodities. The dollar is climbing due to rising U.S. interest rates and the tightening of U.S. monetary policy as well as the rout in emerging markets that has created a “flight to safety” bid for the currency. If the dollar extends its gains, it will spell even more pain for emerging markets and commodities, which will spill over into developed markets as well. In this piece, I will analyze the charts of the U.S. Dollar Index and the euro to help determine where they are heading next.

After forming an ascending triangle pattern in June and July, U.S. Dollar Index experienced a bullish breakout last week as the Turkey drama unfolded. This breakout is a bullish sign as long as the index remains above the key 95 support level that marked the top of the ascending triangle and the peak in October and November 2017.

Daily Dollar Chart

The longer-term U.S. Dollar Index chart shows how the currency broke out of a bearish channel pattern in April and recently broke above the key support and resistance level at 95. The next price targets and resistance levels to keep an eye on are 100 and 104. If the recent bullish breakout remains intact, those resistance levels are likely to act like a magnet for the Dollar Index due to their psychological importance. If the index is eventually able to break decisively above 104, it may foreshadow even more powerful gains ahead.

Dollar Weekly Chart

The euro, which trades inversely with the U.S. Dollar Index, broke down from a descending triangle pattern, which likely means that further weakness is ahead if it stays below the 1.1600 resistance level that marked the bottom of the triangle and the lows in October and November.

Euro Daily Chart

The longer-term euro chart shows how the currency broke below a bullish channel in April and fell beneath the key support zone around 1.1500 to 1.1600. If the euro stays below this level, it may attempt to gun for its next support level and price target at 1.0500, which marked the lows from 2015 to 2017.

Euro Weekly ChartFor now, the U.S. dollar and euro remain in a confirmed uptrend and downtrend respectively. It is extremely important to watch the U.S. dollar right now because it is one of the major influences on emerging markets and commodities. As developed nation central banks tighten their monetary policies, the unwinding of the stimulus-driven emerging markets boom of the past decade is likely to send the U.S. dollar much higher.

The “Smart Money” Is Bullish On The Dollar

After a brief post-Presidential election surge in 2016, the U.S. dollar has been in a steady downtrend since early-2017. The dollar’s grind lower has helped to boost non-U.S. currencies as well as commodities prices, which trade inversely with the dollar. Now that the “short-dollar, long everything else” trade has been going on for so long, it has become extremely crowded: the consensus view is that this trade will continue for much longer and even accelerate. On the other hand, the “smart money” are betting heavily on a reversal of this trade, as I will show in this piece.

For the past several months, the U.S. Dollar Index formed a triangle consolidation pattern as it digested the financial market volatility. The index broke out of this triangle pattern today, which is a bullish sign as long as the breakout remains intact (ie., the index remains above the top of the triangle pattern).

USD Daily

The longer-term chart shows how the “smart money” or commercial hedgers (see the green line under chart) have built up a bullish position in the U.S. Dollar Index futures. The last several times the hedgers built similar positions, the Dollar Index has rallied. The dollar’s downtrend since early-2017 has occurred within a channel pattern, and the triangle pattern discussed in the prior chart can be seen within this channel. The Dollar Index needs to break out of both the triangle pattern and the channel pattern in a convincing manner in order to signal the end of the downtrend.USD Weekly

The euro, which trades inversely with the U.S. dollar, formed a similar triangle pattern over the past several months and has broken down from this pattern today. This breakdown is a bearish sign for the euro and a bullish sign for the dollar as long as the euro’s breakdown remains intact (ie., it doesn’t reverse and break back into the triangle pattern).

Euro Daily

The “smart money” or commercial euro futures hedgers have built their largest bearish position in at least a half-decade, which increases the probability of a bearish-euro/bullish-dollar move in the not-too-distant future. The commercial euro futures hedgers have a short position of nearly 200,000 net futures contracts, which is far larger than their relatively bearish position in 2013 and 2014 before the euro weakened sharply against the dollar.

Euro Weekly

The “smart money” or commercial futures hedgers are also bearish on the Japanese yen, which would also be bullish for the dollar if they are proven right. The yen experienced bearish moves the last couple times the commercial hedgers positioned similar to how they are positioned now.Yen Weekly

The “smart money” are currently bearish on the British pound as well and have a strong track record of positioning bearishly ahead of major pound routs over the past half-decade.Pound Weekly

If another wave of dollar strength occurs, it would be very bad news for crude oil and the overall energy sector (crude oil and the dollar trade inversely). The U.S. dollar’s surge in 2014 and 2015 was the trigger for the violent crude oil bust. Even more concerning is the fact that the “smart money” are more bearish on crude oil now than they were immediately before the 2014 oil bust, as I discussed in greater detail last week. While oil’s short-term trend is still up for now and I believe in respecting the trend, there is a very real risk that another violent liquidation sell-off may occur when the trend changes.

WTI Crude Monthly

For now, I believe everyone should keep an eye on the U.S. Dollar Index to see if today’s triangle breakout has legs and if the index can break out of its longer-term channel pattern. While most market participants currently believe that further bearish dollar/bullish commodities action is practically guaranteed, they need to be aware of the tendency for the market to “tip over when everyone gets to one side of the boat.”

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