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Is It Time To Sell Yen Once Again?

September 24, 2013 by JC

You want to talk about following trends? Is there anything worse out there than Japanese Yen?

There is something important to keep in mind here: Consolidations tend to resolve themselves in the direction of the underlying trend. It’s not always the case (what is?), but more often than not, when an asset is trending: triangles, rectangles, flags, pennants, you you name it, these consolidations tend to breakout in the same direction they came from.

Today we’re looking at the Dollar/Yen $USDJPY. After a monster move from last Fall, the currency cross has been consolidating those gains in a text book range since the May highs. With lower highs and higher lows, we can see that the correction has taken the shape of a triangle made up of converging trendlines. Eventually, as prices approach the apex, something’s gotta give. I’m looking at 100.60 as confirmation of a new leg higher:

If Yen breaks down (this chart breaks out higher), you’re looking at about a 10 point measured move. This target is achieved by taking the height of the consolidation (May highs to June lows) and adding it to the breakout level mentioned above 100.60. So we’re looking for prices to get above 110.

There is a very strong negative correlation between Japanese stocks and their currency. If you look at $DXJ, the Wisdomtree Japan Hedged Equity Fund, prices have already broken out of a similar looking triangular consolidation. And it looks like it’s heading higher, which is not good for Yen.

I think we could be looking at a new leg lower for Yen. We’ll be keeping a close eye on this chart above.

Tags: $DXJ $FXY $USDJPY $EWJ $NK_F

Clips From Monday’s CNBC Fast Money

September 23, 2013 by JC

With the stock market fading off all-time highs last week, I think we discussed some important points on today’s show. Here are some of the clips:

Biotechs & Blackberry:

Apple – Bull/Bear Debate – I still don’t like it Long or Short. It’s a “stay away” as far as I”m concerned, at least for now:

Trade of the Day: Sell Netflix:

Final Trade: Bonds Look Great, especially if 10yr yields break below 2.7%:

Source:

CNBC

Tags: $AAPL $TLT $TNX $BBRY $GM $F $NFLX $XBI

From False Moves Come Fast Moves

September 23, 2013 by JC

This is one of my favorite stock market sayings. And there is a very good reason for that. The risk/reward opportunities that are created from it are surely unmatched. Most importantly, if you’re on the right side of the trade, you generally see a fast and violent move in your favor, and all this with limited risk.

The psychology is simple. A market is trending (whether it be a stock, bond, commodity or currency) and goes on to make a fresh new high (or new low in a downtrend). That new high (or low) above (or below) key resistance (or support), quickly reverses leaving those late comers holding the bag. In an example of a new high, the short sellers get stopped out of the positions they initiated against former highs. And new longs come in and buy the euphoric “breakout”. So what happens? The market quickly reverses lower leaving those new longs up there having to sell in order to get out, adding to the selling pressure that was naturally already there. In addition, the short sellers that got stopped, now have to re-short the security, adding even more sellers. This is why from false moves, come fast ones in the opposite direction.

Now that we understand the psychology behind this setup, let’s look at a real live example. My buddy Jonathan Krinsky over at Miller Tabak sent me this chart earlier today. We’re looking at S&P500 daily candlesticks setting up the potential for a false breakout:

From Failed Moves…

…come fast moves in the opposite direction. That is the saying at least. What that speaks to is when a breakout above resistance, or breakdown below support, is quickly reversed, there is often a very swift move in the opposite direction. One of the reasons for this is as a key level is breached (let’s use the SPX resistance at 1709), many participants add to long positions (or cover shorts) assuming the trend will now continue higher.

When that trend does not materialize, and the market starts heading below that breakout level, all the newly initiated long positions quickly turn into losing positions. This inevitably creates more selling pressure as these positions are unwound, and the other presumable buyers (the shorts) have already covered on the “breakout”. That is the psychology behind the phrase, which could also be called a “bull-trap”.

We mentioned this possibility in our market video over the weekend. And when asked, I said the way to invalidate this potential false move was to put in a nice weekly candle above last week’s closing highs. I don’t even think we need to make new highs this week, just hanging out above last week’s highs and closing on a positive note Friday would be reason enough to get much less bearish.

Follow Jon Krinsky on Twitter: @JKrinskyPGA

Tags: $SPY $SPX $ES_F

Weekend Market Chat With Dr. Phil

September 20, 2013 by JC

This was definitely an important week. After the FOMC decision (or lack there of), stocks and bonds both rallied. The difference is that bonds went out near their highs for the week, while stocks rolled over and got crushed after Wednesday’s initial euphoria. Meanwhile breadth and momentum continue to deteriorate in stocks but there are still some names in uptrends that we can focus on. Readers asked us to look at $DDD and $DXJ so we went into details on the two of those.

I hope you enjoy!

Tags: $DXJ $ZB_F $TLT $TNX $DDD $SPY $SPX $ES_F

Interest Rates Also Like Living Dangerously

September 19, 2013 by JC

With Wednesday’s big move in bonds, I think now is a good time to review the 10-year yield. This 2.7% level has been my line in the sand for months. I still believe that if yields fall below that area, there is probably a lot more downside to go.

The chart is pretty clear. We’re looking at resistance from early July and again in early August. After it broke out, that level became support in late August. Now we’re back here again. But with the most recent highs in rates, momentum was already rolling over. That bearish divergence suggests that a sustainable break below 2.7% is likely:

I included some fibonacci retracements for potential support if rates do indeed break down. The 38.2% retracement coincides with the July lows. So 2.46% looks like a decent area for a bounce. And then somewhere around 2.1-2.2% would be a logical area for support as there was some churning in that area in May and June.

All of this would be extremely positive for bond prices, which are putting in a nice bottom themselves. And everybody hates bonds. We haven’t seen this much hatred for the asset class since early 2011, just before a 25% rally in 30-yr futures and 40% rally in the iShares 20+ Year Treasury Bond ETF $TLT. Here is what the Consensus Inc. Bullish % chart looks like. Talk about extremes in pessimism:

Source:

Consneuss Bond Bullish Percentage (SentimentTrader)

Tags: $ZB_F $ZN_F $TLT $TNX $TBT

FOMC Day: Monday Morning Quarterback

September 18, 2013 by JC

I wanted to take a few minutes to talk about my day. I think it’s important to look back and reflect on your decision making, whether it was right or wrong. This post is both for me (to look back on in the future) as well as for you (the best way to learn is from other people’s mistakes right?). I’m not a day-trader but with this much volatility, there are some things we can do intraday on a day like this.

Let’s begin with how I started my Wednesday. I came in heavy short Vietnam after it rallied back last week to retest broken support. This one seemed like a no-brainer to me. With all that former support just above 18 broken that badly, the first retest has to be met with sellers right? And it was. We nailed. Now, did I cover all my shorts at the lows? Of course not. But I did get half off down in the 17.60s-70s.

I also shorted the heck out of the russell2000 this morning after the new all-time high that it put in at the open couldn’t hold for more than a couple of minutes. Talk about sick risk/rewards. I nailed that one. Pre-fomc decision, your boy was looking nice on that short. But I didn’t cover a single share and got stopped out when it took out those highs. Lesson learned. Don’t be greedy.

I came in Long US Treasuries via $TLT Calls. After the morning dip started to reverse higher, I doubled the position. This time I was smart, I took off my add before the rate decision. But I guess I wasn’t that smart, because they ripped a lot higher later in the afternoon. Man this market is humbling…

As far as that Vietnam short position? The half piece I had left ripped in my face after 2 o’clock. But did anything change? No, we’re right back to where we shorted it originally. So put back the other half position that we covered earlier…..

Now it’s 3 o’clock or so. Everything is hitting new all-time highs: S&Ps, Dow Industrials, Trannies, the Dow Theorists are going buck wild….but look who’s not making new highs. Look who isn’t even close to all-time highs. Look who has been quietly underperforming for months: regional banks $KRE – okay, S&Ps are approaching R3 and regionals are not making new highs – let’s short the heck out of them.

Oh wow, S&Ps are still rocking, and Regionals are rolling over – let’s short more….

Nice, treasuries are flying. As we approach the 50 day moving average in $TLT – we’ll take the rest off. Flat the bond position…

But now regional banks are red. And no one seems to care. I like that. Do we cover? How much do we hold on to? It’s the first sector that’s red since 2 o’clock. We’re short the hell out of them. Do we be disciplined? Or do we push the envelope? They went right through VWAP like a knife through warm butter. The market is speaking – let’s stick with the moster position. S&Ps are rolling over back below R3 and regionals are now down 0.40% and it’s only 3:30.

Ok now we’re back down to the lunch lows in $KRE – let’s not be greedy and take 1/3 off. Fine, pull the trigger. Covered at 36 – nice trade J – 2/3 short position left.

Ok so now there’s about 25 minutes left in a very volatile day. I’m having a nice one P&L wise (thanks to bonds and the regional bank short). I have 2 positions left – VNM and KRE: both shorts. P&Ls are approaching intraday highs from earlier today (you know, the ones I gave up for not covering enough….)

Regional banks still look like crap – now they’re down 0.75% and at the lows of the day – all while S&Ps are just ticks from all-time highs. Stick with it J.

It’s 3:40, S&Ps are bouncing to retest R3 and regionals got no bounce – making new lows for the day. Stick with the short J.

We’re approaching the 20 day moving average, which is also the 5 day. Let’s cover another 1/3 here in $KRE. P&Ls are at highs of the day, let’s not be greedy – we nailed this trade. Okay, put in a limit order a few pennies above those moving averages – $KRE now down almost 1% for the day and 2% from the highs. I hope we get filled. Someone once told me that limit orders limit profits…..

It’s 3:45 – vietnam chilling near the highs of the day. not good. Treasuries rolling over. Nice! Good sale.

Meanwhile $HLF the one I sold all of yesterday and have no position in is chilling at $73.00 – right at last year’s all-time highs. Nothing to do there yet. Man I love this one…

10 minutes left until the market closes. My 10-minute chart in $KRE still hasn’t put in a green candle since we shorted it just before 3 o’clock. Still haven’t gotten filled on my short cover. Damn! Vietnam making new highs. Damn! Emerging markets also at highs – not a coincidence. Damn!

Okay market is closing, I’m not getting filled on that limit order in regionals, let’s just take it here and leave the other 1/3 position into tomorrow. Vietnam looks great, way too much strength to be short this much, let’s cover what we added back on and leave half on against former support and the 50 day moving average.

Should we get back in the bond trade? Nah, let it chill out a bit and we’ll worry about it later in the week.

Anything else? Pissed I missed that emerging markets trade. Oh well….

P&Ls near the highs of the day, but man we could have done so much better….

***

What could have I done differently? –> Covered half the Russell2000 short, or even all of it before the fed meeting. We were up so nice going into it. Why take it through an announcement that we have no control over. My bad.

What did we do well that we could potentially do again in the future? –> Shorting the underperformer right at the highs. Great risk/reward, failed at the 50 day, first one to turn red. We crushed it. Job well done.

So how else did we screw up? –> Re-shorted Vietnam a bit too early. Just like we shorted the weakness in banks, we should have taken the strength in emerging markets and Asia pacific a bit more seriously. It was starring at us right in the face.

And that was my day….how was yours?

Check out my Stocktwits Steam to see most of this stuff tweeted out live.

Tags: $VNM $KRE $TLT $ZB_F $SPY $ES_F

Can We Really See a Short Squeeze in VIX?

September 18, 2013 by JC

The volatility index isn’t something that I mess around with very often. In fact, even during 2008 when the negative correlations between VIX and stocks were near perfect, buying volaitlity still wasn’t my trade of choice. I was much more likely then to just short Financials. Today, I still don’t ever buy VIX as a hedge or as a directional play. But there’s something interesting going on that I think is worth mentioning.

First of all, traders that have bought a derivative or an ETF on the VIX have mostly been losing money for years. We all know this, it isn’t a secret. The $VXX ETF itself has been nicknamed the widow-maker by some of the circles around new york city. So there’s that kid touching a hot stove sort of mentality, “It’s burned me one too many times”. This anger is a nice backdrop for a potential long position.

So why am I bringing up something that I rarely ever talk about? Well, the last time that investors had this many short positions in VIX futures was just before the volatility index rallied 34% on Feb 25th. This was the biggest rally the index had seen since the summer sell-offs of 2011. Last month, short positions initiated by hedge funds reached all-time highs according to CFTC data.

Bloomberg:

“This year’s rally in U.S. stocks has led to a 19 percent
plunge in the VIX, creating profitable strategies to bet against
volatility futures. A decline in equities and subsequent
increase in share-price swings would bring losses for VIX short
sellers, which may drive them to cover the trades, according to
Ramon Verastegui of Societe Generale. Increased demand for the
contracts will push volatility higher and may exacerbate the
stock-market selloff, he said.

The concentrated short in the VIX futures is like a red
point if you look at a map of the market, signaling potential
risk,” Verastegui, head of engineering and strategy at the
French bank, said in a Sept. 13 interview from New York. “A
short squeeze in the VIX will have an impact on the volatility
market and that can spill over into other markets, accelerating
a move down in the S&P 500.”

Looking at this chart, I don’t really see much of a reason to get really long volaitlity here. It’s just not the way I would position the portfolio. But I think it’s important to recognize the possibility here based on the one-sided exposure in the marketplace. What are the implications? That’s what I’m mostly concerned with.

I know a lot of you guys follow and trade the VIX much more than I do. So if some of you would like to weigh in down in the comment section, I would be curious to read what you have to say. Feel free to discuss.

Tags: $VXX $VIX $SPY

The Dreaded Black Candles Are Appearing

September 16, 2013 by JC

It doesn’t get uglier than the infamous black candlestick. This is especially the case at or around important resistance. And we’re seeing them showing up in the S&P500, Russell2000, MidCap400, and even in the MSCI Emerging Markets. To make matters worse, the Nasdaq100 tried to put in a big black candlestick, but failed to stay positive putting in a long red one instead. Nasty….

For some of you newcomers, we like to use Japanese Candlestick charts because each individual candle tells a story. In the case of this evil black one, it indicates exhaustion, followed by some selling pressure. You see, after a nice advance (as has been the case in equities), a black candle like this can foreshadow a reversal or key turning point. Here’s what these guys look like: 9-16-13 qqq black The Japanese tell us that the longer the black candlestick, the worse the implications are for the security in question. So let’s think about the psychology for a minute. Forget today’s news, let’s just focus on price. The market gaps higher at the open, gets everyone excited, but then fizzles as the day goes on to close at or near the lows. After a nice advance, the market is just tired. The bulls saw their chance to sell and jumped all over it. Those who didn’t are caught holding the bag. And that’s why a candlestick like this appears at or near turning points. Think of it like an omen of sorts.

Last time I wrote a blog post about something like this was last summer. We started to see the black candlesticks showing up in both US Dollars and US Treasuries. At the time, it seemed like the entire world was bearish equities and using these “safe” assets as a hiding place. Well, as it turned out, the black candles did indeed provide us with a heads up that something was changing. Those black candles marked highs in both the US Dollar Index and US Treasury Bonds that we haven’t seen ever since.

Ignore the black candles if you want. But when they show up, I pay attention….

So how does this get worse? and How does this get better? These are the questions we should all be asking ourselves.

In my opinion, a gap lower Tuesday in these averages leaving this one black candle standing alone is probably the worst case scenario. This would create an island reversal of sorts, another bearish pattern, which would confirm Monday’s action and would probably lead to a fast and violent sell-off. How do we invalidate the black candle? I think if we have an inside day Tuesday and kind of chill out for a few days before eventually taking out Monday’s highs, that would be really constructive.

Careful out there….

Tags: $SPY $IWM $MDY $EEM $QQQ $UUP $DX_F $TLT