Weekly Report Week 35: CRB, Oil, Euro, Dollar, Gold, Semiconductors
Sam Laakso | Sep 01, 2018 11:36PM ET
For new readers of the blog, I recommend reading the terminology page before the weekly reports.h3 Commodities/h3
The CRB has managed to produce a weekly close above the intermediate decline trendline. This is the second major confirmation after the weekly swing last week that an intermediate advance has begun. Even in bear markets the intermediate advances in CRB tend to last at least 6 weeks before topping. I think that commodities in general are in a bull market and so I would expect the advance to last for at least 10 weeks before topping. The 3 year cycle low is due in mid to late 2019 for the CRB. However, I think that if we are going to get a recession this year like many other signals are suggesting we should see at least one more right translated intermediate cycle in the CRB before the 3 year cycle tops. The 3 year cycle low will be characterized with a preceding left translated and failed intermediate cycle.
What I'm not that fund of in the short term is the fact that most of the major commodities are below their 10 DMAs which is a show of relative weakness. Zinc, copper and Natural Gas all closed the week slightly below their 10DMAs. Oil accounts over 20% of the CRB and so oil is responsible for a big chunk of the recent gains in the CRB. We have a clear daily cycle low in oil on 16th of August which I count as a failed daily cycle low as I think that the low on 17th of July was also a DCL which just topped on day three. I'm likely going to do a direct long trade in oil if we can get an HCL in oil next week. An HCL should push the 3 day RSI to oversold.
All in all, the CRB is showing a normal yet elongated intermediate chart.
An intermediate advance should always turn the 10WMA up and so now we need to see a couple of weekly closes above the 10WMA in both CRB and oil. Even without this confirmation, I'm already quite certain that a new intermediate advance is underway and so a HCL would be a good spot for a long trade.
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Recessions are often triggered by inflationary spikes. In the past, this has been characterized by 100% YoY rise in oil prices. If you think about it, it makes sense. A sudden degrease in consumer purchasing power leads to falling consumer spending which in turn leads to falling sales in businesses and the contraction of the economy. I suspect that in order to trigger a recession in the US, we'd need to see oil prices jump up considerably later this year and possibly early next year as well. If we won't see a 100% YoY increase in oil prices this year, I would suggest that the recession will be postponed by at least a year from now and in that case a potential spot would be the initial rally out of a 3 year cycle low in 2019 in the CRB.
As a coinflip trade, I have some Crude oil calls for February with strike at $75. This means that if we're to get a inflationary spike by the end of the year followed by a recession, one of these calls would be worth at least 23 000 dollars (lowest 100% YoY can be achieved at $98 on 6th of October 2018. This is an unrealistic target but the further the year progresses the more money one call would be worth in the recession scenario). Considering that these calls traded at $1,66 on Friday, with a multiplier of 1 000 that results into 1 660 dollar per contract. This produces a very nice risk reward of over 1:13. Keep in mind that this is currently the very lowest price a 100% YoY can be achieved. Currently we would need about a 40% increase in oil price to achieve this goal. Oil did that in little over 3 months in the last bubble top.
h3 Currencies/h3The euro has rallied to a major resistance zone between 1,16 and 1,185 after producing a strong rally and a weekly swing last week. I believe that the euro put in an ICL on 15th of August and so 16 day into a daily cycle is a prime spot for an HCL to occur.
As I mentioned in the case of oil, an HCL should push the 3 day RSI oversold and in the case of the euro, I'd be willing to add to longs at that point.
The dollar did manage to close the week above 95 which is a show of strength. The dollar index also produced a convincing reversal candle closing the week slightly green. However, if the euro has produced an ICL the dollar has produced an intermediate cycle top.
At the moment I think that the dollar produced a half cycle low on Tuesday and so I think that the dollar will fall to new lows soon. The way I'm seeing it is that the dollar will produce another leg down in the next two weeks, print a DCL and produce a left translated cycle towards the final ICL. I think that the euro will produce an HCL next week which will coincide with a short term top in the dollar.
I suspect that the next daily cycle in the dollar will left translate produce a final leg down to an ICL. In the big picture it doesn't matter if the dollar has put in an intermediate cycle top or not. Once the top is in, there's loads of room for price to fall before the next ICL which should push the weekly stochastics to oversold and break the intermediate advance trendline.
Gold is likely just going to follow the euro and so if the euro will produce one more undercut below 1,13 gold will likely follow to new lows. For now, that is not the scenario I'm looking at and I think that the euro and gold will produce HCLs together next week. In my opinion, next week will be a good time to try another long trade in gold. A good place for a stop would be just below the HCL. The risk is very low, and the reward remains massive as we are facing an intermediate degree rally in gold.
If the FED is going to pause the rate hikes in the next FOMC meeting later this month, that would surely cause a lot of buying pressure for gold. Granted, the metals sector is so heavily manipulated by many large market operators it'll be hard to say accurately what will happen to gold if the FED quits raising rates, but my view remains bullish. If the free markets were in play, I'd say that gold could be sniffing a pause in FED rate hikes, but we'll find out the answer later this month. Remember that cycles and sentiment drive the markets and that the FED is not leading but actually following the markets when it comes to rate hikes.
If you missed the bottom like I did two weeks back, I think we'll get a good entry opportunity early next week. An intermediate degree rally should run for at least 6 to 8 weeks (that being in a bear market) and considering the massive COT positionings, we could be in for a massive short squeeze that has the potential to break out above the 2016 highs. When the risk is as little as less than one fiftieth of the reward depending on your entry, that's a trade I wouldn't want to miss.
What comes to the yuan gold peg scenario, I'm not ready to make a call for that. XAU/CNY had a rather flat week and so the situation hasn't changed from last week .
h3 Semiconductors/h3I'm going to cover a new area which I have yet to touch in the blog, but what I follow regularly. The Philadelphia Semiconductor Index has been consolidating around the all time highs since January the same way as tha Nasdaq Composite did back in 2015 and 2016. In 2017 the SOXX outperformed the QQQ which in turn outperformed the SPY (NYSE:SPY) and so when the next buying opportunity in stocks arrives in form of an ICL, I'll probably use the SOXX for a long trade in stocks. A breakout to new all time highs could launch a big rally like it did in the Nasdaq.
The S&P 500 is has pushed to new all time highs which makes the current intermediate cycle right translated. Bear markets tend to start with a left translated intermediate cycle and so we aren't likely to start a bear market at least without a very convincing rally from the next ICL. I should note that ICLs are always a good buying opportunity, no matter if in a bull or a bear market and so it's usually worth to try and trade a move out of an ICL even if the cycle is destined to left translate.
The longer the consolidation, the bigger the move we can expect. If the US won't be heading to a recession this year we will likely put in a 4 year cycle top to US stocks next year. My plan is to go long US stocks in the ICL just in case the recession gets postponed again. I might cut this position in half during the intermediate advance if it starts to look like we are going to produce a left translated intermediate cycle which could precede a recession in the US and which could lead to a bear market in stocks.
I plan to hold my oil calls in case of a recession but I'm also going to try and enter a direct position to SOXX during the next ICL. If the FED is going to follow their plans and raise rates later this month, that should result into a relief rally coming out of an ICL. However, if the FED is going to stop raising interest rates, the recession trade will steeply gain odds.
The beauty in cycles and swing trading is that you can try multiple times to enter without draining too much of capital and that's exactly what I'll be doing for the next long stocks trade.
As I mentioned in the previous weekly report, I have now moved to Hong Kong and so this is the first weekly report from Hong Kong. Following the markets has been interesting as I'm living exactly 12 hours ahead of Wall Street and so I'm pretty much unable to follow the regular market hours. In general, I'm using way less time following the markets daily which could actually be a good thing as following the markets too closely is a classic mistake and often leads to overthinking. I hope the time difference works the same way as it did for Nicolas Darvas (reading suggestion).
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