Death of the Dollar

 In case its not clear, my title is said with tongue firmly planted in cheek

I wrote this post 10 days ago and while it is a bit stale, it is just as important now as it was then. For the past 2-3 years I have read so many stories about how “the dollar is dead” and how “the world’s reserve currency is history”. While that may be true at some point in time in our future, right now, as with all things in which sentiment has risen to an extreme, it is moving in exactly the opposite direction that everyone predicts.

While we were closely watching the Euro and Yen fall on hard times, the lowly and unloved dollar slyly staged a breakout of a multi-year downtrend.

While many investors don’t pay attention to the movement of currencies because they are typically not a part of most investment strategies, there are very strong inter-market relationships between investments and the dollar. For this reason, the ramification of ongoing dollar strength can play havoc with portfolios that are not positioned correctly. Some of the potential major implications of this upside breakout are:

• US Dollar denominated yields could fall further
  • If bond yields fall, US bond prices will strengthen.
• Foreign denominated bond prices should weaken
• A strong dollar puts downward pressure on commodities – while not all commodities move in tandem, most commodity prices should move lower.
• Foreign stock prices should weaken.

How far the dollar can climb is anyone’s guess but the first target that shows up on the charts is the 2013 high of 85.  Beyond that and depending upon what is driving it higher, a retest of the 2009 (88) peak or even 2007 (91.5) highs may not be out of the question.

In spite of the dollar doomsayers, the (2013) world’s largest economy (European Union) is teetering on recession, the US, while not robust, keeps chugging along. Whether this is the impetus for a continued stronger dollar no one knows for sure and regardless of your long-term feelings about the dollar, right now she is the prettiest girl at the dance.  

It's like déjà vu all over again – Are biotech’s in trouble?

Yogi Berra, one of baseball’s best catchers and unquestionably its greatest philosopher said while watching Mickey Mantle and Roger Maris repeatedly hit back-to-back home runs in the Yankees' seasons in the early 1960s “it’s like déjà vu all over again”.

The darlings of this bull market, the biotech’s, had their largest pullback, a nasty 25% correction, earlier this year. When looking at the chart of the Biotech etf, IBB, it should have come as no surprise that a correction was due, the only question was how big was it going to be. We had 2 successive closes outside the Keltner channel (highlighted with the red circles) while creating negative divergence on our RSI momentum oscillator.  Closes outside the Keltner channels, like the Bollinger bands are infrequent and should not be ignored.

Fast forward to today and you can see we have the exact same setup.  2 successive closes outside the Keltner channels which have created negative divergence on the RSI momentum oscillator. The only difference this time is that you can see today’s price is stalling at the resistance level (red horizontal bar) back at the all-time highs created just before the last correction.

There are no guarantees a correction will occur this time as it did in March, but considering the current setup, this is one that warrants further attention. In the inimitable words of Mr. Berra, "You can observe a lot by watching”

Silver Bulls - Beware

Below is a weekly, logarithm chart of silver from June 2010 until May 2013.  About half way through its parabolic rise (starting from the left hand side of the chart) it paused, rose above and then fell back to retest the 26-27 support zone I have shaded in gold. At the completion of that back test, it shot up with nary a breather until it peaked at almost $50 in April of 2011. From its peak, price fell back to test that 26-27 support zone (second red up arrow) in December 2011. From there it bounced up and crossed 35 only to stop, reverse and fall back to touch that 26-27 support zone for the third time.  Once again, just as before, the bulls stepped in and pushed prices higher but this time they could only get it high enough to cross 34 before it once again reversed course and fell back to the 26-27 support zone.  But this time the bulls were exhausted, the support zone no longer held and price began to fall hard. 

There are two take-aways from the above analysis

1.   Notice how each time it bounced off of support and created a new high, each successive high was lower than the prior high. This is a big warning flag whenever it happens as it shows declining strength/momentum and the potential for a bigger price decline.

2.   A touch of a support line on a weekly chart 2x happens infrequently, 3x is rare but 4x? Its usually a death sentence to the bulls. As such, the big fall that followed should have come as no surprise.

I wanted to go through the above analysis in detail as an educational piece to setup what is happening with the shiny metal right now.  Below is a look at the same chart above except I have extended the time period to bring it up to the present.

They say the markets don’t repeat but they do rhyme. Does it look familiar? It should send chills through the veins of all silver bulls.  It has the exact same setup that we saw in the prior analysis.

1.   3 touches at a critical support zone

2.   3 lower high bounces after hitting support.

3.   3 pushes of hidden bearish divergence (price is falling while momentum is increasing)

Technical analysis is just the study of the past to attempt to get a vision to the future.  There are, of course, no guarantees but if the past is any indication, silver bulls should be afraid, very afraid.

JJC - Graindrops keep falling on my head

The markets are always right in the long run but sometimes in the short term they get it wrong and overreact.  When that occurs it can provide a wonderful investment opportunity for those who are patient and have a long term investment horizon.  I have been watching grain prices since they peaked the middle of 2012 and have been water-falling downward ever since. The further I see them fall the more I become interested.

In the longer term weekly chart of the ETF that tracks the grains index (JJG) below you can see it has not been this oversold since this index has been in existence. Notice how the last time in 2008 when it was this far outside of their Keltner channels (green band) it popped up almost 50%. Just because it is oversold though does not mean it can’t get more oversold and it’s time to say the “bottom is in”.  Notice how at the end of June it broke down through the first line of support and is sitting at another critical level right now.  Also noteworthy is the volume spike in July which may be the indication of capitulatory selling.  These are all very reassuring signs a bottom may be close I am not completely convinced as 1) we don’t have positive momentum divergence or did we go back and touch the previous all-time lows.  While these are not required, they make me less confident committing money to this investment at this point as picking bottoms can be akin to catching a falling knife. 

When all the signs are not there, drilling down to a shorter time period can be very helpful.

Below is the daily chart of JJG looking back over the past 12 months and the first thing that should jump out at you is the waterfall decline, an almost 30% drop since May. On the positive side, the positive divergence I was looking for on the weekly chart shows up here. This is why it is mandatory to look at shorter time period charts as it has to show up first in the shorter time frame before it can in the longer period.  Two final constructive arguments that were not apparent on the weekly chart are the bullish falling wedge and the price-volume profile (gold bars on left side). 

A break above the blue dashed downtrend line, a break out of the falling wedge (solid blue lines) AND a closing price above 39.65 should give investors a compelling reason to look at JJG as a possible addition to their portfolio.

NIB - Chocoholics revolt

choc·o·hol·ic

noun \ˌchä-kə-ˈhȯ-lik,
A person who likes to eat chocolate very much

Sure, most food prices have been rising but when it comes to chocolate, for some, it becomes personal. Mars, the company behind the likes of M&M's and 3 Musketeers, said it was raising prices for chocolate products in the U.S. by about 7 percent to make up for higher ingredient costs. The decision followed a similar move from Hershey a week prior to Mars’ proclamation, which announced an increase of roughly 8 percent in wholesale prices.

A look at the price chart of the ETF that tracks cocoa prices (NIB) you can see prices have been on a tear since the first part of last year. After falling almost 50% in less than a year, prices bottomed in 2012 (somehow I don’t remember seeing the announcements from candy makers for a reduction in candy prices back then because of lower ingredient costs.  Hmmmm… how can that be?). For the next year prices bounced around and once again found a bottom (and note how it turned out to be) at exactly the same price in 2013 as it was in 2012.  In April 2013, price broke out of the blue down trend (resistance) line, retested that same line again in May and June and then began its comfortable, steady rise since. Prices have climbed 50% from the bottom.

Since the 2013 bottom, you can see price has been well contained and nicely bounded by the rising blue channel.   Also note the support/resistance line I drew in the 39-40 area. You can see back in 2011 that was an important area as price bounced off of it many times (it acted as support). Price eventually broke through to the downside after multiple attempts to hold. Even though price broke through that level, it still remains very important but rather than acting as support, it flips to resistance. So it should not surprise anyone that the first time price tried to move above it in April of this year it was rejected. Rarely does a support/resistance area of historical importance get penetrated on the first attempt.  After hitting that area initially, price moved back down to the lower blue channel in an attempt to build up enough energy (find more buyers) to make it through on the next attempt. Its easy to see why it was able to make it on the second attempt when you look at the huge spike in volume that occurred. The bulls stepped in with conviction. Now with price above, that line that was resistance will act as support in the case of a pullback.

With price not overly extended and all indicators bullishly configured, I would expect we see even higher price in our future. This combined with the fact cocoa prices typically peak in December (as you can see in the chart below), a retest the prior highs of 51-52 seems likely.  If this is the case, you chocoholics may want to go to Costco now and load up in bulk before the manufacturers find another reason to raise prices.