MCP Market Update: January 21st, 2018 – Rate Risk Increases
MCP Market Update: January 16th, 2018 – Blow-off or Acceleration?
Reminder: As I will be on vacation from January 29th through to February 16th, we will likely miss updates for the 5th and 12th of February – apologies in advance
US equity markets continued to rally strongly to the point of rising exponentially over the first couple of weeks of 2018 driven by the dovish Fed, Trump tax cuts and investor exuberance. I find it unusual for equity markets to accelerate this late in the cycle as usually only highly leveraged commodities like Silver squeeze exponentially (or the Nasdaq in 1990’s) – the higher we go I suspect the bigger the fall (unless the laws of gravity no longer apply).
Importantly, the US$ FINALLY made the new cycle lows we had been looking for which added further fuel for the commodity market rally – these markets are fundamentally linked (as commodities are priced in US$) and I do not expect one to turn decisively without the other. We are now looking for a completed wave structure for the decline and subsequent bullish US$ reversal. We have been patient thus far so let’s not jump the shark.
US equities including the SPX have started the year rallying at an increasing rate. This type of price acceleration “usually” occurs in the heart of a 3rd wave OR in the midst of a leveraged 5th wave blow-off. Therefore, if this is a genuine 3rd wave rally this equities rally may have a lot more upside to come. Alternatively, we could be in the final stages of a 5th wave blow-off as shown by the red count. We have blown through relevant upside targets so the key question we have to ask as speculators is whether this rally is the real deal OR are we blowing off into a speculative peak (highly unusual given the breadth of the rally). I don’t know the answer as yet but importantly we have not been fighting this. I have tried to illustrate the exponential nature of this rally by the series of rising red trend lines shown below.
SPX Daily
Hedgers have been adding shorts in this melt-up. Meanwhile we have Daily Sentiment at 96 for US equities.
Importantly, momentum measures are now at new high extremes since the start of the post-GFC rally. Either this rally has much further to go to the upside OR we are setting up for an epic fail. Note on the monthly SPX chart below that RSI peaked in June 1996 while the rally continued into March 2000 with a series of lower RSI peaks – the same is NOT true of the Nasdaq rally over the same period where the RSI peaked into the highs (more evidence of a blow-off top). I am pointing this out so readers are aware of the potential outcomes and the dangers of exponential 5th wave blow-offs. I don’t know which of these playbooks plays out BUT we should be mindful of the POTENTIAL of an ending blow-off (shown by the red count above) and what that might mean for markets in this time of speculative euphoria. The key message here is that we can all protect ourselves of either outcome with the use of tail hedging.
SPX Monthly
Nasdaq Monthly
Meanwhile, Nasdaq futures shorts are getting squeezed.
Note the DJIA’s now exponential rise in what is a muddling economy but prices are being driven by increasing leverage (debt) and speculative exuberance.
DJIA Monthly
Now that the Russell 2000 has achieved our upside objective we are looking for evidence of a reversal – our “canary in a coalmine”. Trade above 160.55 for IWM invalidates the “ending diagonal” structure and will likely lead to increased strength. Key inflection point here for the small caps.
IWM Daily
RTY is approaching invalidation of its ending diagonal above 1615 – remember, if we don’t fail asap then we could extend much higher.
RTY H4
Interestingly, the VIX has NOT made new lows despite the strong new year run-up in US equities as this pincer move continues. Take note.
VIX Weekly
VIX traders are adding longs at a faster rate than shorts likely for tail hedging which likely explains the VIX not making new lows while equities are at ATH’s.
To the global equity markets and the DAX reversed from megaphone resistance we highlighted in prior updates. The November highs remain key resistance as trade above that will likely lead to another strong wave higher. Until then, our bias remains lower back towards 12700 and potentially much lower. Ideally, we don’t want to see the DAX trade back above 13400 to maintain bearish momentum.
DAX H4
The European Banks have broken out to the upside given rising rates in the Euro area. Bulls don’t want to see this back inside the triangle as this is likely a 5th wave rally.
Euro Banks Daily
The NKD has stalled since our triangle thrust higher but has held up despite a strengthening Yen. No interest for me here as there are no clear signs of a bearish reversal so the wave may extend higher.
NKD Daily
It is concerning that NKD traders have gotten so bearish which may imply that wave (v) of 3 is incomplete.
The ASX200 (SPI) reversed lower last week from recent highs but continues to hold breakout support. Still no interest for me here until we get a clearer structure to trade against. Trade back below 5950 prior swing highs may get me interested on the short side.
SPI Daily
To the bond markets and while the world is getting bearish bonds, the TLT chart just shows continuous range trading – strong trade below 122 would likely signify a break down in bonds and rally in rates.
TLT Daily
The TYX shows a similar choppy structure with no clear impulse since the 2016 rally. Tough to trade until we get a clear direction but I’d prefer to buy from lower.
TYX Daily
The TY bond declined into long term support but there is no evidence of a bullish reversal as yet. The mood remains bearish bonds and traders are now very short into structural support. For this decline to look impulsive it would need to accelerate lower from here. I think the better bet is to buy some cheap calls against the herd as I am wary of shorting into the hole here.
TY Daily
While I still prefer this ending wave C structure, we have no real evidence of a turn except for a small potential hammer on the Daily. Tough to call a low just yet until we get confirmation of a turn.
TY H4
TY longs capitulating here into long term support.
The US30yr bond broke shelf support but has failed to follow through to the downside so far. Despite the bond market pessimism, prices really aren’t breaking down as yet so I am wary of the potential for a false break. The decline from the September 2017 highs continues to look corrective unless it starts to accelerate lower from here which is not my base case. I don’t like the R/R of being short bonds here near term.
ZB Daily
ZB bulls may also be giving up here but less one-sided than TY and FV.
The 5yr continued trending lower with no clear signs of a bullish reversal while the declining wedge remains in play. Traders are extremely short so be careful of the asymmetric positioning!
FV H4
To the FX markets and the DXY finally made new cycle lows that we had been waiting for. We need to see this wave subdivide into 5 waves to complete the bigger picture decline and look for a bullish reversal. So far so good.
DXY Daily
DXY H4
DXY traders remain flat as we make new cycle lows.
The Euro shows the same picture as we approach our upside targets for this rally. We continue to look at this as an ending wave prior to a bigger picture Euro decline.
EURUSD Daily
EURUSD H4
Euro traders have continued to pile in to longs while bears have capitulated – a very one-sided bet being placed here so beware.
The USDJPY declined towards our 110 support after breaking 112 as we discussed previously. We are approaching an important inflection point where USDJPY is approaching support and Gold is approaching resistance. Trade below 109 likely sees 104 under the alternate red count (if Gold breaks out to the upside). Watch correlated markets here.
USDJPY Daily
USDJPY H4
YEN traders remain strongly net short so there is a risk the USDJPY continues to decline as traders are caught short?
The Aussie$ tried to reverse lower from our 0.7900 resistance area but reversed higher on Friday. As mentioned last week, the short positioning of traders made me wary of joining them – the bear count is invalidated above the September cycle highs where we will have to reassess the bigger picture. The impulsive look of this rally has me on the sidelines until we get evidence of a reversal. Next resistance is in the 0.80 area but we’ll sit tight given the US$ downside risk.
AUDUSD Daily
Aussie shorts may finally be capitulating…
The USDCAD is approaching Fib 61.8% support once again but we don’t yet have buy signal so we will see how this retest of the lows evolves. Tough to get long the US$ until downside momentum moderates.
USDCAD Daily
The USDCNY failed to hold trend support but the Fib 61.8% resides in the 6.38 area – this decline looks impulsive but once again, I am interpreting this latest decline as a 5th and final wave where upon completion we should be looking for a bullish reversal. Until then I’m standing aside.
USDCNY Weekly
To the commodity markets and Crude Oil failed to break our $63 support (tweeted last week) and continued to extend its advance with new highs. As we’ve said previously, Crude is unlikely to turn until the US$ does so patience is required as we might take a few shots at a turn. I just like the R/R here for shorts as we look for this wave 5 of (C) to end.
CL Daily
Crude traders extending historic long positions… when this market reverses, the door to get out will be very small.
Brent is in the same structural position as Crude. Looking for a turn lower now that $70 upside targets have been met.
Brent Crude Daily
Natty Gas ripped higher as expected but the bigger picture structure remains unclear. Ideally we see a 5 wave rally towards 3.44 while 2.70 holds the downside. We are approaching the top of the range so buyer beware.
NG Daily
Natty traders remain short in the hole.
To the PM’s and Gold has continued to rally back towards the top of the range as we had been anticipating. The triangle structure is invalidated above 1380 where we will have to consider the potential for a break higher towards 1450. Approaching an important inflection point for the PM’s as bulls pile in.
Gold Daily
Gold traders piling into longs once again…
Silver is also now at trend resistance in the 17.50 area so it is also at a near term inflection point. No signs of a reversal yet but we are watching the US$ carefully.
Silver Daily
Silver shorts capitulating once more.
That’s all for now folks. Have a great week 🙂
MCP Market Update: January 8th, 2017 – Watch the US$
MCP Market Update: January 2nd, 2018 – The Year Ahead
As we look forward towards 2018, let’s focus on some bigger picture themes:
- Global Central Bank money printing and interest rate suppression has distorted financial markets pushing investors further out on the risk spectrum. This is at a time when global debt and deficits are all time highs while global demand continues to stagnate – what happens when global rates start to rise as we are forecasting…
- The rise in Passive Investing in ETF’s (aka: anyone can do it), demise of Macro Hedge Funds and rampant speculation in Crypto-currencies (which aren’t currencies at all) suggests we are nearing a top of this speculative mania
- Global equities remain within bigger picture wave (5) rallies that commenced in 2009
– we expect global equities to top in 2018
– wave 5 of (5) started in February 2016
– while upside targets have been met, we have very little evidence to suggest an end to the rally
– VIX continues its wedge compression as we look for an expansion in volatility in 2018 - Global bond prices topped in July 2016 from where rates rose until March 2017
– 2017 started a wave 2 correction but it is unclear whether this correction is complete
– bearish Bonds - 2017 saw an impulsive decline in the DXY and rally in the Euro that is nearly complete
– we should now be in the 5th and final wave of this decline
– therefore we should expect a bullish turn in the US$ in early 2018 - Crude Oil should be completing its wave 4 corrective rally that began in February 2016
– looking for a bearish turn in CL to ultimately take out the 2016 cycle lows
– this will likely catch the most crowded trade wrong footed and coincide with a stronger US$ - Gold and Silver are ending multi-year wave (B) triangles that should terminate very early 2018
– bearish PM’s thereafter as we target Gold at $700 - Expect Commodities and US$ to turn together
Last year we forecast a strong equities rally targeting the 2500 area for SPX – the rally has been stronger and longer than expected as Central Banks pulled back from the idea of reducing QE. Momentum remains strong and the absence of a clear 4th wave of intermediate degree suggests this bigger picture rally isn’t done. We are counting this rally from February 2016 as wave 5 of V – an ending wave to this entire rally from the 2009 lows. Once this trend exhausts, we will be looking at trading from the short side because “IF” we are correct, this entire 8 year rally should be retraced. Our next measured upside target is where wave (5) equals 0.618x waves (1)-(3) which resides at 2716. We have no reason to fight this until we see evidence of a bearish reversal. 2018 is likely to feature increased volatility as we unwind 4th and 5th waves into the end of this rally but we’re not there yet.
SPX Weekly
The Daily SPX chart suggests we remain in the wave (3) rally with waves (4) and (5) to come. There are no signs of a tradable top but we are alert to a change in sentiment given the extreme bullishness. This year, we will be on the lookout for an impending market top and potential triggers for this to occur – first and foremost the wave count must be complete (no signs of this as yet) and the bullish paradigm needs to shift – likely triggered by rising yields and US$
SPX Daily
ES continues to rally impulsively and decline correctively. Until that changes the bulls remain in control but momentum is deteriorating.
ES H4
Interestingly, while equity traders are all-in, this is not the case with futures traders who remain partially hedged.
The DJIA has been the strongest index supported by the weakening US$ throughout 2017 – our expected bullish turn in the US$ will likely cause the DJIA to underperform in 2018.
DJIA Daily
The YM COT data shows the strength of this rally despite the pull back in futures longs. Physical equities leading the way.
The Nasdaq continues to subdivide higher in wave (3) supported by the 50 day sma and trend channels. This chart is more illustrative of declining momentum but as long as we continue to make higher highs and higher lows coupled with impulsive rallies and corrective declines, the trend is your friend until it bends. While we expect this rally to terminate at some point during 2018, I would prefer to see a clearer wave (4) and (5) play out first. In the meantime there has been no reason to alter our bullish stance.
Nasdaq Composite Daily
The near term NQ chart clearly shows the recent trend channel and likely push to new ATH’s.
NQ H4
NQ traders have been actively hedging as prices advance. Note the high level of shorts causing this squeeze.
The Russell 2000 looks the most vulnerable of US equity indices as we wedge into yet another high. The overlapping nature of the advance suggests an ending wave to complete wave (3) prior to a wave (4) decline towards the 200 day sma. Remember, this rally from the 2016 lows is an ENDING wave 5 which should be fully retraced on completing to this rally.
RTY Daily
The near term count (ending diagonal) suggests one final push higher for wave (c) of (v) of 5 before a bearish reversal. Trade above 1615 would invalidate this count as wave (iii) would be the shortest. Stylized pattern is shown below. Topping.
RTY H4
The RTY COT data shows shorts squeezed out again which makes this index more susceptible to a decline near term.
The DJ Transports are currently in wave 3 of (5) after bouncing off the 200 day sma we highlighted some weeks back. We require another wave 4 and 5 to potentially complete this multi-year rally.
DJT Daily
The VIX compression continues to wedge lower – ever tightening. Do you really want to be a seller of volatility here? Take note that momentum continues to make higher lows as per the MACD. This was the most crowded trade for 2017 – I am looking for a bullish reversal early in the new year as volatility expands. The market is gifting cheap protection so I suggest you take some…
VIX Weekly
VIX shorts remain elevated but not at recent extremes.
To the global equity markets and our 2017 Year Ahead Review highlighted the need for new highs in the NKD and DAX which have both performed as expected. NKD pushed strongly to new highs but the rally is incomplete. We are currently in a small degree wave (iv) of 3 with the expectation of (v) up towards 24000 to complete wave 3 from where we should see a larger degree wave 4 and 5 to complete the post-2009 rally.
NKD Weekly
Near term the count is unclear but we appear to be forming a contracting triangle. The question is whether we retest the 21800 area (black count) prior to wave (v) up or just push directly higher from here (red count) – the near term count is unclear. Either way, we should expect new cycle highs for the NKD.
NKD H4
The ASX200 (SPI) pushed to new cycle highs which was not expected earlier in the year. It has reluctantly followed the global equity market theme higher. This overlapping rally is likely doomed to fail but the wave count is unclear. I am looking for opportunities to short this index when we get confirmation of a turn – in the meantime I am not fighting this.
ASX200 Weekly
We are looking for the DAX to complete its multi-year rally in 2018. The DAX appears to have completed wave (3) of (5) and we should now be in wave (4) of larger degree. I would like to see a deeper correction in price and time before the next wave higher for (5). There is a confluence of strong support in the 12650 area with Fib, trend and 200 day sma intersecting. A break of this likely sees 12000.
DAX Daily
Last week we got the near term decline we were looking for but short of downside targets. Bears need downside follow through and keep the DAX below 13000 to maintain bearish momentum or risk another rip higher to retest the cycle highs forming a more complex correction.
DAX H4
To the Bond markets and as predicted in our 2017 year ahead review, we saw a wave 2 corrective rally develop throughout the year. We remain bearish from a bigger picture perspective as our base case is that rates bottomed in July 2016. We are looking for much higher rates later in 2018 (bearish bonds). The TLT chart shows the clear impulsive decline from the July 2016 highs – next we can see an overlapping corrective wave structure that either ended at the September highs or another push higher towards 133 as per the red count. We also have a potential H&S top formation with a neckline break below 122.00 likely to lead to an accelerated decline towards 117 and potentially much lower. In the meantime we are just range racing between 122 and 130.
TLT Weekly
TLT Daily
The US 30yr chart looks less clear from a near term perspective although the bigger picture theme remains (bearish). I was looking for a push higher towards the 155’00 area to establish new shorts which would help clear up the structure and give us a cleaner count.
ZB Daily
The TY looks less clear as the decline from the September highs does not look particularly impulsive. Expect strong support in the 122-123 area. Bigger picture we remain bearish but I am reluctant to short into strong support here. I’d rather be short from higher levels.
TY Daily
From a near term perspective, the decline is NOT a clear impulse although it can always extend lower. Looks to me that it is wedging into a low and I’d watch the near term red trendlines for guides. Maybe this red count below? Wary of a near term bounce from this support area previously highlighted.
TY H4
The German Bund is less clear and appears to be trapped within a larger triangle – merely range racing for the last 18 months. I have no strong view on the Bund as triangles can break either way. 158.73 is critical support.
Bund Daily
The Japanese JGB also appears range bound within a corrective channel consistent with the BOJ’s bond buying program – the structure looks like it needs higher towards 152 before the bears have a chance to potentially reverse this trend.
JGB Daily
The Aussie 10yr Bonds also looks like they need higher towards 97.75 setting up a bigger picture H&S (double right shoulder) before the bear trend can resume.
AUS10yr Daily
To the FX markets and after declining throughout 2017, the US$ is due for a strong bullish turn in early 2018 once 5 waves down is complete from the January 2017 highs. The world is universally bearish the US$ now which is the ideal time to look for a turn. We should expect this decline to terminate in the 90.00 area for the DXY. Our anticipated bullish US$ turn will have important implications for the commodity complex which we expect to turn bearish in 2018.
DX Weekly
We need to see a complete 5 waves down to new marginal cycle lows in the 89.50-90.50 area before we can turn bullish the US$ as shown below.
DX Daily
DXY traders remain flat for the last 6 months.
Like the DXY, we are looking for this year long Euro rally to end in early 2018 and completely reverse as we head to new cycle lows and parity.
EURUSD Weekly
This correction in the Euro from the 2015 lows is counted as an expanded Flat (3-3-5) with wave (C) targets at 1.618x wave (A) in the 1.23-1.24 area as shown below. Upon completion of wave 5 we will be very bearish the Euro as we look towards parity for this pair.
EURUSD Daily
Euro traders remain long and soon to be wrong.
The USDJPY spend 2017 going nowhere and range racing and it is starting to look suspiciously like a bullish triangle / pennant which fits our bullish US$ theme for 2018.
USDJPY Weekly
From a near term perspective, a decline towards 110.00 Fib support would present the best buying opportunity while a decline below 107.30 opens the door towards 104.
USDJPY Daily
A decline towards 110 would help flush out some of these short Yen traders.
The Pound continues to frustrate and hold trend support. We are still looking for wave 5 of (C) down but we don’t have a clear setup. Trade above 1.46 eliminates this count but I am probably not trading it until I see a clear structure to trade against. My least favourite dollar pair but I think there is significant downside risk with Brexit.
GBPUSD Weekly
It appears that most GBP traders have given up and are now flat.
The USDCHF remains range bound but I’d rather be a buyer in the 0.95 area for the next potential leg higher – no clear structure here but underlying sentiment favours the bulls down at trend support.
USDCHF Weekly
The bigger picture structure shows an A – triangle B – C wave corrective rally from the 2016 lows which likely completed wave (4). Near term, the Aussie$ is approaching our previously defined resistance in the 0.7900 area from where we would look for the downtrend to take hold for wave 3 of (5). Bearish the Aussie$.
AUDUSD Weekly
Once again, we are looking for the strong US$ to take hold.
AUDUSD Daily
Aussie$ longs capitulated at exactly the wrong time…
The USDCAD has declined to strong support in the 1.24-1.25 area from where we would look for a bullish turn. US$ bulls need to step up. Bullish USDCAD.
USDCAD Daily
CAD traders now flat after being whipsawed.
To the commodity markets and “IF” we are right about the impending bullish US$ reversal, the commodities will likely decline as a result. The bearish setups are definitely there. Crude Oil is a particularly interesting short prospect given the extreme long positioning of traders and 3 wave corrective rally into prior wave 4 resistance at 62.50 – our bigger picture structure is looking for a final wave 5 down for new lows below $26. We are alert for signs of a bearish reversal which should coincide with a bullish reversal in the US$. Bearish Oil.
CL Weekly
CL should now be in the final wave 5 of (C) where it is vulnerable to a bearish reversal although we have no evidence of this just yet. Awaiting signs of a bearish reversal to get very short against the herd.
CL Daily
Bulls pushing the envelope to new extremes! The longer they get, the more exciting this opportunity.
Perspective…
Brent Crude shows the same structure as we approach $70 resistance.
Brent Crude Daily
Dr Copper has pushed higher into a cluster of Fib resistance but the structure remains bullish until we see evidence of an impulsive decline – I have no strong view on the good doctor but the rally is extended and I would be looking for at least a correction towards 2.60 on a break of 2.90. I have no strong long term view for HG.
HG Weekly
Natty Gas continues to break hearts as it ripped higher from our support area – the count is unclear but we should expect an initial upside target in the 3.40-45 area. I would not chase this but look for a 3 wave correction of this current advance to add longs – the reality is we continue to range trade and we are now back to the middle of the range. I have no strong long term view for NG.
NG Daily
Overloaded Natty shorts have been torched as expected.
To the PM’s and we remain bearish from a bigger picture perspective. 2018 will likely be the year that Gold declines towards our $700 target which will be where we will be getting very long physical Gold. The immediate question is whether prices turn down from the red triangle resistance or pushes through higher towards 1450 targets. This will largely depend on the US$ in the near term as we look for a bullish reversal.
Gold Weekly
Gold Daily
Interesting that the bulls have been reluctant to jump on this latest rally but still very few shorts.
Silver also continues to look bearish from a bigger picture perspective with a continuation of 3 wave corrective structures within a triangle.
Silver Daily
Silver shorts smoked again as it rips higher from our support.
That’s all for now folks. Looking forward to a great 2018 🙂
