Important level for gold

I have mentioned the key levels we need to watch on on gold. $1200 was the first resistance which would open up a run to the long-term trend-line and possibly $1400.

We are testing the trend-line on gold now and this is an area of caution for gold traders or investors. The rally in gold is due to the cracks reappearing in the Eurozone. The SNB removed their peg and telegraphed the rumoured QE program ahead of the meeting. Greece goes to the polls on Sunday and this QE program is simply a bailout for member states and the sovereign debt risks which a Greek exit would pose.

A further rally in the U.S. dollar could take us back down from this trend-line in gold. This would create an opportunity for the final lows in gold, which will occur before the U.S. economy turns down and gold can mount a serious run once again.

Calling the USD/CAD strength

In my last update, I advised that the USD/CAD was approaching strong resistance around 1.18. I also stated that strength beyond that level would see us make a move for the long-term highs at 1.30. See the article here: http://investfts.blogspot.co.uk/2014/12/usdcad-update.html

 The Bank of Canada has since provided the catalyst for our move, announcing a shock interest rate cut of 0.25% The market will now make a move for 1.30 as previously suggested.

Follow the trends, position yourself accordingly, and then let the markets do your bidding. The majority of speculators will have been looking for a short on USD/CAD, but the majority don't win.

Short the weak; go long the strong!

The CHF and investment success

The 30% move in the Swiss Franc is a prime example of how you can apply a contrarian attitude to the markets for investment success.

Let's underline the contrarian idea further: your success in investment will have a strong correlation to avoiding the herd mentality; the advice of non-experts; and an ability to control your emotions. The recent activity in the Swiss Franc is a clear example of this.

If you follow the mainstream media, you would have had the opinion that the SNB would be able to hold the 1.20 peg for as long as they desired. To find an edge and succeed in the investment game, you must be able to craft your own ideas. Any advice or hunch that you receive must be tested with your own techniques before getting involved.

Once again, we can look at the futures positioning and see the relationship between commercials and speculators.

The chart is from USD/CHF but you can see clearly (highlighted in yellow) the activity of both groups. The commercial futures positions (blue line) were rising, signifying that they expected the CHF to gain in value. On the other hand, we have speculators (black line) reducing their exposure to longs on the CHF and going short. 

The weekly chart on the EUR/CHF also shows a clear downtrend in the pair and a probe of the 1,20 level. 

As price began to test the level, it was clear that there was no SNB buying to take the pair higher. At this stage we have speculators piling in expecting the central bank to make a move and give them a quick profit on their longs. Unfortunately for them, the SNB never appeared.

The Swiss Franc episode must be used as an example of trying to get an easy profit in the markets. The downside of playing with the peg is too risky to get involved - from both sides - so it is important to step aside, or at least find your analysis to gauge the risks.

Had you followed the media and made your decision on the non-experts in the financial media and their religious view of central banks, you would've been blown out. Now that the CHF has plunged, we will probably have a large number of speculators trying to pick the bottom for a quick gain, which will only create further losses. This type of kamikaze investing may work once or twice but will eventually finish you. Learn to play the trends, do your own analysis, and learn to anticipate these types of moves. Emotionally reacting to a market event is a risky strategy.

The SNB- What's going on?

The surprise decision by the SNB to remove the Franc's peg to the Euro has caused major headaches for currency institutions and Swiss stock investors.

The Swiss bank stated only last month that they would defend the 1.20 floor at all costs, implementing negative interest rates, in an attempt to deflect Russian capital flows, fleeing the turmoil in the Ruble. Since the bank's announcement however, the snap election scheduled in Greece for January 25th is sure to see anti-austerity party Syriza taking control, while the ECB edges closer to a QE program. Analysts have suggested there is only a 20% chance of a Greek exit from the Eurozone, according to Bloomberg, yet many of these so-called analysts are politically pressured to avoid rocking capital markets and the bond markets will decide the fate of Greece as they did during the last crisis.

With this in mind, we should look at current events as a prelude to another Eurozone crisis and we need to follow capital flows, in order to predict future market movements. In my post of year-end closings I concluded that the Euro would make a certain test of the 1.20 level. This has occurred and we have now crashed through it to 1.15. For those who weren't paying attention, we are now lower than the levels of the Eurozone crisis and the lowest levels in over 10 years.

The Euro is now on a date with parity.

Gold is now looking to test the long-term trend-line around $1300 and it's possible that some smart money has bought into gold. I would be wary of this level and would need to see more follow-through. We may see a further drop in gold - possibly on forced liquidations - before we get the final multi-year low.

Stocks in the Swiss Market Index have been crushed since the news, with exporters being hard hit on the currency moves.

In contrast, the DAX is hitting record highs, while the Dow is falling from tough resistance.

So what's going on in the markets? Bonds in Greece and the Eurozone have fallen over the last month as the markets feared the consequences of a Syriza victory, but have bounced a little recently on hopes of a softened stance from Syriza. Following the SNB's move, the smart money has now exited the Swiss market due to currency valuations and investors are now seeking security in Swiss bonds, where the ten-year has gone negative, and in Germany, who have also seen yields falling. The advance in the Dax is showing that investors are also happy to take positions in the large-cap European stocks, rather than invest in peripheral bonds, with the safe havens now going negative. Despite comments within the EU that Greece would not create systemic problems, the markets still do not trust these views, while the SNB's U-turn only underlines the risks of trusting the power of policy-makers over markets.

These movements are important to understand if we are to see further turmoil in Europe after the Greek election. The Euro looks destined to hit parity against the dollar; gold will find a bottom soon (if it hasn't already); and bond investors will shun peripheral, risky bonds preferring to accept negative returns rather than take the risk of large bond losses or bank bail-ins like we saw in Cyprus. This is not a time to be taking positions in risky bonds, or in areas such as Greek shares. With the ECB looking to implement QE and the risk of contagion from Greece once again, this is a time to be cautious. The problems that we have seen in the currency brokers is another note of caution for investing in risky areas. 

Crude speculators are still long

This is a very important, and quite stunning, chart for those looking to call the bottom in crude oil.

As I've mentioned in previous posts; alongside the extreme build in supply and declining demand, a real driver of this collapse in crude has been the rush-to-the-exit from speculators. The build in speculative positions, highlighted in black, has been huge, after a base in mid-2010 and has stretched beyond all historical averages.

Futures positioning always finds commercial positions (blue) at the right side of market turns and this time was no different. It's clear from the chart that commercial players handed their longs to speculators around the $100 level and the continued declines have led to a flood of loss-taking.

The worrying issue for anyone bullish on oil, is the realization that speculators are still long, and largely so, from a historical perspective. If we hold under $50 and continue lower in the medium-term then more of these longs will surrender. If we get a counter-trend bounce in oil and more bullish entrants, it will only increase the pain in the long run.

Don't be the bag holder

Nice channel on CAM here:

Note the failure at the top end of the channel, followed by a collapse to the lower line. Price has fallen under this and made a retest of the support line. 

CAM could flush through the low here and fall further; or it could create a double bottom and try to get back inside the channel. Either way, the use of technical analysis gives us a clear edge. If you're a serious investor, don't be left holding the bag at the failure of the $75 level.

Making calls

I wanted to highlight a call I made on Stocktwits previously:
http://stocktwits.com/message/29693332

At the time, price was labouring around $100.30 and I stated that failure to hold would likely see a test of $85.

A few weeks later and price had indeed crashed to that level, after a failed attempt to push higher.

This is why you need to use a mix of fundamental - and technical - analysis. If you liked Gilead at $100; you'll like it even better at $85.

The current state of play

A few charts for those who follow this blog regularly:

Firstly, the U.S. dollar:

The U.S. dollar is butting-up against resistance on the monthly chart. This is obviously a big level and would dictate moves in other markets, depending on the outcome. Breaking through here could lead to further dollar gains.

If we pull-back, I would expect another test towards this level.

Gold:

A rally occurred recently in gold, but seems to have died out (FED/Stocks) a little. $1250 is initial resistance to see if we can continue to $1400. Failure to get above here could see the next leg down for a low.

Oil:

Oil is still weak. A weekly close under $50 and we may see lower 40s soon. A counter-trend rally should come soon in oil, which get all talking about a bottom. $35/40 is a good place for a bottom but we might not see significant oil gains again until 2016, or beyond...

How the market doesn't work

The market is a complex beast-- but in the end -- it all boils down to supply and demand. If the buyers overwhelm the sellers, then the market will rise; and vice-versa.

There is a belief among some market commentators that everything in the market is connected and if only they follow a few correlations then they should make money. Following the beliefs of these people will not only cost you money in the short-term, but will continue to put you on the wrong side of the markets forever.

The sad reality of those who have called a bear market since 2009, is that they were dead wrong; likely have no skin-in-the-game to the short-side; have done nothing to adjust their expectations to the current trends; and worse, don't even have history on their side.

To continue looking for reasons for why a continued bull-or-bear market is false, is simply a childish, loser mentality for investing that too many of us fall for. You are either on the right side or the wrong side of the market move and the longer a trend continues on the medium-to-longer-term time-frame, the harder it is to change that trend. Buying dips -- or selling rallies-- in the direction of the ultimate trend is the safest and easiest way to make money.

Look back on any bull market and you will see areas of exuberant market behaviour. Even when markets have stretched beyond fundamentals and defied correlations, there is still a reason that demand is higher than supply. You can fight this all the way but you won't be fighting it to the bank.

Quit sulking about price action and learn how to use it to your advantage.

Year end closings

As we approach the monthly closings for year-end I will share the charts and my views.

Firstly on the S&P500:

Despite the weakness of the S&P500 this week (likely year-end profit-taking) the monthly chart is setup for further gains. It's likely we will see gains in January through new position building. Greek elections on January 25th may take the wind out of the market but we may be setting up for a bubble move in stocks. Retail involvement is still low but may be limited after previous losses. The market looks set to go through 2100 though, after which a bull move may take us higher. With Japan pushing QE and the ECB looking likely to join them, we are certain to keep pushing higher until we have another structural break (think Tech bubble pop/sub-prime pop).

Euro:

A very weak monthly and yearly close in the EUR/USD assumes a certain test of the 1.20 level. This will probably happen in January as a result of the Greek elections. The results of this election and possible QE from the ECB could see further losses through 1.20.

Oil:

Crude prices are also electing a very bearish monthly/yearly closing, as WTI breaks through $53. Price should test the $40 level in 2015. We may see a counter-trend rally soon but the outlook for oil is bearish.

On the U.S. Dollar:

The U.S. dollar may put a top in soon for a pull-back, however the bullish trend will continue. The BOJ and ECB are going all out to devalue their currencies, whilst the oil price decline is threatening sovereign debt in oil-producing nations. Talk of the dollar's demise is still premature and there is too much risk out there that could see a run to the dollar.

The smart investor's guide to gold

I have just finished writing a new ebook: "The Smart Investor's Guide To Gold".

The book is available in the Amazon Kindle store here: http://www.amazon.com/Smart-Investors-Guide-Gold-ebook/dp/B00RHULU00/ref=sr_1_1?ie=UTF8&qid=1419716433&sr=8-1&keywords=smart+investors+gold

"The Smart Investor's Guide to Gold" is a professional and unbiased look at the investment considerations of gold as an asset, alongside an analysis of the current monetary and financial regime to provide a smart investment strategy for gold.

The book is based on the the same research and analysis that I use throughout the blog. In my opinion, too many writings on gold are based on scare stories and get-rich-quick schemes, which has cost investors a lot of money over recent years. I fully support the use of gold in portfolios, and believe we are nearing a bottom in gold prices, yet we must still observe the cycles and trends in order to invest wisely.

When to use volume

I don't use volume as an indicator too often as it can distract from the trend at hand, or create a bias in your mind when you see an increase.

The following chart on QQQ though, is an example of when volume can be used to assist your decisions on a market's next direction.

The yellow lines I've marked on the chart are highlighting big volume builds in the stock. It's clear looking at these, that the 'smart money' buys heavily into the bottoms. 

If you look at the October bottom, the volume was well above the average: a good sign that large transactions were building and a continuation of the up-trend was likely. We also got a nice bounce off the 200 moving average here.

Anatomy of a low

The following chart highlights the creation of a medium-term low in oil. Price was falling into the end of 2013, where the low was made.

The break of the downward trendline is important and the market usually rallies before retesting the lows (or near to).

The rally in price through the first half of 2014 gave us two important trendlines to gauge the breakdown in price. Note also that the rectangle around the bottom is around two months in length before the final low.

The next chart shows where price went in the second half of 2014.

The key points here are the trendline failures at rectangle A & B. The failure at A was the final attempt to form a low at the year-to-date low around $92.

My thoughts on the 'Black Swan'

Sorry to disappoint any ballet fans out there, but the 'Black Swan' I talk of here, is the metaphor popularized by Nicholas Naseem Taleb, in his excellent book, "Fooled by Randomness", which was used to describe market risk.

The idea was based on early studies on nature, where only white swans had been discovered. When the discovery of black swans was made, it turned previous thought and analysis on its head.

Taleb used the metaphor to describe events that the market does not see coming. One example of a Black Swan would be the Russian default in 1998, whose effects caused a market crash and the collapse of a Wall St hedge fund; complete with bailouts. The sub-prime mortgage debacle of late 2007, is another situation where previous expectations were flipped upside down. Ratios and risk measures that had created a boom in mortgage lending were suddenly irrelevant and the effects were chaotic.

My thoughts in relation to the Black Swan are based on my experience in the market. In mid-2007, the stock markets and housing markets seemed too-good-to-be-true (they were) BUT, until the Black Swan became clear it was only safe to play the current trends, regardless of your thoughts on the market. I use this only to highlight that when the market is showing extreme exuberance, there is still profit to be made going long with tight downside protection. In 2007, the bullish belief was so great, that the market bounced higher following the collapse of Lehman Brothers: one of the largest Wall St banks with extreme contagion risk.

The present action in the stock markets are similar to the markets of 2007, but until we get our 'Lehman moment', it is not advisable to fight the trend. When the Black Swan comes it will be clear.

Weekly closings - Stocks, Oil, Gold

Stocks

Another strong weekly close has been elected by the Dow bulls and we have approached some key overhead resistance.

The market has closed strongly through 17,800 and now eyes 18,000. Support above 18,000 and we would likely see clear-blue-skies for the equity markets again.

Love it, or hate it, I have written on the subject recently to give some ideas: http://seekingalpha.com/article/2634995-equity-bears-still-dont-get-it

I still don't think we have seen the 'blow-off' style top that accompanies bull markets like this, although, as the NASDAQ approaches it's all-time high I may be proved wrong. There is still the option that if sovereign debt contagion was to happen through Russia, Venezuela, emerging markets, Japan, Europe (large list) then tech may be shunned for 'bellweather' industrial stocks. We watch and wait.

If you think this action is crazy on stocks, understand that markets have exhibited the same types of insanity for over a hundred years or more. Psychology takes over from fundamentals until the top. We will however look back one day and see where the inflection points were. Until then, you have to stay with the trend.

'Don't fight the Fed' but protect the downside on longs.

Oil

Crude Oil has put in a promising bullish close this week and may stabilize/rally from here. Obvious target is to clear $60 and test $70.

I'm still wary of the $40 level but in my previous posts you'll see I talk about price action. Rallies happen in the middle of a basing setup. Market feeling for its lows.

Gold

A disappointing close for gold, with a bearish candle on the week and failure at $1200. This can all change rapidly in such a risky global economy and as the Dow reaches strong overhead resistance, it wouldn't be a surprise to see a top in stocks, rally in gold and oil.

On a portfolio basis, I am looking at oil ETFs and strong balance sheet oil/energy plays that have been unfairly dragged down.

Exxon for example, can be bought around 11-times earnings against Facebook's 70-times. No contest.

I will continue to look for a bottom in gold to test the highs but may come mid-2015.

If I see support on S&P or Dow then I might play ETFs with futures exposure incase of blow-off top mentioned above.

Good luck trading and please buy my book, advertised on the left to build the investment skills that I try to share here.

Oil charts look ominous

Despite a bounce on OPEC's statement that low oil was "temporary", the chart has fallen back to give a bearish signal. With the stock market rising strongly off the FED announcement and gold looking a little weak also, it's possible we will get another leg up in risk, with a leg down in commodities.

The weekly chart doesn't look any better on crude oil and the levels at $50, and more so $40, look like a potential magnet zone for crude. I wouldn't be surprised to see these levels targeted in the "risk off" move that I mentioned. 

***I went long oil at $60, with an extra position at 55, which allowed me to take the second portion at $60.

I will hold off any other buying now but the lows at $40 would be a strong entry for me. Further lows will ensure that oil stays depressed into 2015 but there are always bounces to take advantage of.

Remember also, that OPEC cut production by 75% in the 1980s and couldn't halt price so awaiting their actions here is also futile. As yesterday and today's rally showed, OPEC created a small opportunity to cut loss or take a small profit,

The 1980s chart is shown below for reference:

If the oil price was to stay depressed through 2015 - 2017 it would do considerable damage to economies and corporations as it did in the 1980s. 

Gold update for the week

Gold has stuttered around the $1200 level and has failed to see continuation into the preferred zone.

The Fed comments today gave a rally to stocks and could create a 'risk-off' situation into the weekend, following a turbulent week.

Continued weakness into the weekend could see another leg down towards $1000.

USD/CAD update

The plunging oil price has knocked the wind out of the Canadian dollar and price is approaching a key zone; highlighted by the gold rectangle.

The top dotted line near 1.1800 signifies 'The last low before the high', which is often a strong support or resistance level. A breach of that resistance would clear the way for a run at 1.3000.

Looking lower on S&P

The chart below highlights key areas on the S&P500 monthly:

The weekly chart highlights the more immediate concerns:

Levels are extremely stretched so I'd be looking to play strong fundamentals over momentum here. Unless you can manage a tight stop-loss.

3 things Wall St doesn't want you to know

http://money.cnn.com/2014/12/10/investing/wall-street-not-want-you-to-know/index.html?fbmoney121114wallstreet0630story

1. "Hold" often means "sell"

2. A lot of what we're saying is just noise

3. Half of us (and you) need to be wrong

Posted this for a bit of fun, however in point 2, the author highlights the dangers of technical analysis over fundamentals- as if the two can't be used together? Ridiculous.