Every Tuesday (the day I write for The Tycoon Report),
before the article, I will list one or
two "test your knowledge" technical analysis questions and after
the article I'll list the answers. I hope you find this
fun and I hope it helps you make more trading profits.
Sometimes small bites can have a huge impact.
Technical Analysis Question of the Week:
In a Double Top (reversal), which top has more upside volume?
One significant event that Tycoon readers should be aware of is the break of support in the U.S. dollar index.
You can see in the chart below that the greenback already broke a key support level at about 76.00, and is about to test 75.
In the 1-year daily chart below, you can see that the intermediate down trend line (red line) was tested and proved itself to be potent. Circled in red, you can see that the first horizontal support at about 76.50 (the solid green line) was broken, followed by a break of the next possible support level at about 75.85.
Circled in black, above, you can see the COT (Commitment of Traders) showing more and more selling from "large traders", who, if you study the historical data, are usually correct.
Above, in the 5-year weekly chart, you can see what has happened in the past when the large traders exited the dollar this way. (You can also see there is another bottom around 71, but let's cross that bridge when we get to it.)
The dollar has been in a long-term decline for about 9 years, and the down trend was interrupted in 2008 when the market crashed and hedge fund managers reversed their long oil / short dollar position. It happened again when the Euro crisis was gripping the markets between February and April of 2010. But this thing just seems to want to go down!
In 2010, the U.S. stock market had an inverse relationship to the U.S. dollar, but that relationship hasn't been as apparent this year. The idea was that the U.S. dollar made the multi-national companies more profitable, which would bode well for the large-cap indices, and that the stock market was considered the "risky" place to be while the dollar was a "high quality" place to store value while sitting on the sidelines.
But now, even as we witness all of the uprisings in the Middle East, the devastation in Japan, and a stock market sell off, there has been no flight to the U.S. dollar. This might be attributed to the hawkish stance on interest rates in Europe and the rising euro, or to the disconnect between the low inflation that Bernanke sees (core inflation, which strips out food and energy) versus the high inflation that everyone else is starting to see. It might also be the hedge funds taking a short position in the U.S. dollar.
We are not here to give opinions on the "why". We just want to know "what" the markets are doing, and how that affects our bank accounts.
I've written in recent articles -- about Helicopter Ben, inflation, and the commodity bull -- that one contributing factor to the commodity market's strength has been and will likely continue to be a declining U.S. dollar. Most commodities are priced in the U.S. dollar, and because of this, the U.S. dollar has an inverse influence on commodity prices.
So what happens when the U.S. dollar falls out of bed?
The disaster in Japan prompted investors to take profits in certain commodities, but to go long others.
According to Bloomberg, in the week ending March 15, an index of managed money net-long positions (bets on rising commodity prices) in 18 commodities dropped 14% from a week earlier. That's the biggest decline since June 29, 2010 and the smallest net holding since early August.
The sell off was mainly in agriculturals like corn, wheat, soy (soybeans, soybean oil), cocoa, sugar, and orange juice, as well as in metals such as copper. Hedge funds cut bullish positions in corn futures by 17%, and in cattle by 8.7%.
I would use this commodity sell off as an opportunity to start nibbling on long-term commodity positions, since the food crisis isn't going away, the energy supply is at risk, and as we've been discussing, the dollar is getting weaker and weaker, and that decline will ultimately be bullish for commodities.
The U.S. dollar had an inverse relationship with the stock market for much of 2010, but that was when people viewed stocks as risky and the dollar as a safe haven. My view is that commodities are going to be considered the safe haven, while the U.S. dollar is a risky place to park your value.
I don't know if it happens this week, this month, or this quarter, but the commodity space continues to be the place to get paid, and the devaluation of the dollar is happening right in front of our faces while commodities pulled back on Japan. This, to me, spells opportunity!
Answer (to TA question from above the article):
The first top in the double top has more upside volume, as there are more buyers buying more stock. As the second top forms, there is less conviction and less confidence in the breakout. At this point, the stock isn't moving higher so much because of buyers pushing the stock up, as they buy shares recklessly with little regard to price. Instead, it's moving higher because the sellers step out of the way in an effort to allow the stock to move higher so they can exit at a better price.
Technical Analysis Question of the Week:
In a Double Top (reversal), which top has more upside volume?
******
One significant event that Tycoon readers should be aware of is the break of support in the U.S. dollar index.
You can see in the chart below that the greenback already broke a key support level at about 76.00, and is about to test 75.
In the 1-year daily chart below, you can see that the intermediate down trend line (red line) was tested and proved itself to be potent. Circled in red, you can see that the first horizontal support at about 76.50 (the solid green line) was broken, followed by a break of the next possible support level at about 75.85.
(Click on image to enlarge)
Circled in black, above, you can see the COT (Commitment of Traders) showing more and more selling from "large traders", who, if you study the historical data, are usually correct.
(Click on image to enlarge)
Above, in the 5-year weekly chart, you can see what has happened in the past when the large traders exited the dollar this way. (You can also see there is another bottom around 71, but let's cross that bridge when we get to it.)
The dollar has been in a long-term decline for about 9 years, and the down trend was interrupted in 2008 when the market crashed and hedge fund managers reversed their long oil / short dollar position. It happened again when the Euro crisis was gripping the markets between February and April of 2010. But this thing just seems to want to go down!
In 2010, the U.S. stock market had an inverse relationship to the U.S. dollar, but that relationship hasn't been as apparent this year. The idea was that the U.S. dollar made the multi-national companies more profitable, which would bode well for the large-cap indices, and that the stock market was considered the "risky" place to be while the dollar was a "high quality" place to store value while sitting on the sidelines.
But now, even as we witness all of the uprisings in the Middle East, the devastation in Japan, and a stock market sell off, there has been no flight to the U.S. dollar. This might be attributed to the hawkish stance on interest rates in Europe and the rising euro, or to the disconnect between the low inflation that Bernanke sees (core inflation, which strips out food and energy) versus the high inflation that everyone else is starting to see. It might also be the hedge funds taking a short position in the U.S. dollar.
(Click on image to enlarge)
We are not here to give opinions on the "why". We just want to know "what" the markets are doing, and how that affects our bank accounts.
I've written in recent articles -- about Helicopter Ben, inflation, and the commodity bull -- that one contributing factor to the commodity market's strength has been and will likely continue to be a declining U.S. dollar. Most commodities are priced in the U.S. dollar, and because of this, the U.S. dollar has an inverse influence on commodity prices.
So what happens when the U.S. dollar falls out of bed?
The disaster in Japan prompted investors to take profits in certain commodities, but to go long others.
According to Bloomberg, in the week ending March 15, an index of managed money net-long positions (bets on rising commodity prices) in 18 commodities dropped 14% from a week earlier. That's the biggest decline since June 29, 2010 and the smallest net holding since early August.
The sell off was mainly in agriculturals like corn, wheat, soy (soybeans, soybean oil), cocoa, sugar, and orange juice, as well as in metals such as copper. Hedge funds cut bullish positions in corn futures by 17%, and in cattle by 8.7%.
I would use this commodity sell off as an opportunity to start nibbling on long-term commodity positions, since the food crisis isn't going away, the energy supply is at risk, and as we've been discussing, the dollar is getting weaker and weaker, and that decline will ultimately be bullish for commodities.
The U.S. dollar had an inverse relationship with the stock market for much of 2010, but that was when people viewed stocks as risky and the dollar as a safe haven. My view is that commodities are going to be considered the safe haven, while the U.S. dollar is a risky place to park your value.
I don't know if it happens this week, this month, or this quarter, but the commodity space continues to be the place to get paid, and the devaluation of the dollar is happening right in front of our faces while commodities pulled back on Japan. This, to me, spells opportunity!
******
Answer (to TA question from above the article):
The first top in the double top has more upside volume, as there are more buyers buying more stock. As the second top forms, there is less conviction and less confidence in the breakout. At this point, the stock isn't moving higher so much because of buyers pushing the stock up, as they buy shares recklessly with little regard to price. Instead, it's moving higher because the sellers step out of the way in an effort to allow the stock to move higher so they can exit at a better price.
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