Crypto Consequences

While the crypto mania continues to froth ever higher, it appears that digital financial transactions come with a real-world price. Read on:

The tremendous growth of cryptocurrencies has created an exponential demand for computing power. As bitcoin grows, the math problems computers must solve to make more bitcoin (a process called “mining”) get more and more difficult — a wrinkle designed to control the currency’s supply.

Today, each bitcoin transaction requires the same amount of energy used to power nine homes in the U.S. for one day. And miners are constantly installing more and faster computers. Already, the aggregate computing power of the bitcoin network is nearly 100,000 times larger than the world’s 500 fastest supercomputers combined.

The total energy use of this web of hardware is huge — an estimated 31 terawatt-hours per year. More than 150 individual countries in the world consume less energy annually. And that power-hungry network is currently increasing its energy use every day by about 450 gigawatt-hours, roughly the same amount of electricity the entire country of Haiti uses in a year.

That sort of electricity use is pulling energy from grids all over the world, where it could be charging electric vehicles and powering homes, to bitcoin-mining farms. In Venezuela, where rampant hyperinflation and subsidized electricity has led to a boom in bitcoin mining, rogue operations are now occasionally causing blackouts across the country. The world’s largest bitcoin mines are in China, where they siphon energy from huge hydroelectric dams, some of the cheapest sources of carbon-free energy in the world. One enterprising Tesla owner even attempted to rig up a mining operation in his car, to make use of free electricity at a public charging station.

In just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will start to outstrip what’s available, requiring new energy-generating plants. And with the climate conscious racing to replace fossil fuel-base plants with renewable energy sources, new stress on the grid means more facilities using dirty technologies. By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.

Will 2018 Bring the Return of Inflation?

The strength of the global economy is one reason why the stock market has started 2018 in a buoyant mood (with the Dow passing 25,000). At some point, in any expansion, businesses find it harder to recruit workers or get the materials they need; these bottlenecks cause wages and prices to rise. Central banks then start to tighten monetary policy, a process that can eventually turn the market (and the economy) down (recession). For years the US has been in a deflationary environment in spite of the FED’s ongoing attempts to do everything possible to create inflation but that looks like 2018 may signal a change.

Because commodities rise in an inflationary environment, following their price can be very profitable for investors in the back-end of the business cycle. The $CRB index is a basket of 19 liquid and highly diverse individual commodities is about the best proxy I have found which can help determine the direction of commodity prices. Taking a look at the chart of $CRB we see the index has been in a severe downtrend from 2014-2016 and after bottoming has consolidated sideways for 2 years. But it looks like it may soon change as it is attempting to breakout to the upside.  The consolidation is forming an inverse head and shoulders bottom pattern which projects, if it breaks out and confirms, to the 2015 highs, almost 30% higher.

I have learned the hard way that commodities are a fickle group and are not as reliable as stocks are when looking at charts and attempting to interpret what is next. As such I prefer to get additional confirmation before committing investment capital. What better confirmation than looking at the biggest market of all, bonds and see what, if anything, they are saying. You may be asking what do bonds have to do with commodities. The common thread is inflation so checking in on TIPS (Treasury inflation protected securities) makes a lot of sense.

In the chart of TIPS below you can see that they, like the $CRB index are knocking on the door looking as if they want to break out to the upside. The cup and handle continuation pattern that has formed points to a target move of 5% higher (don’t scoff, that’s a big move for bonds)

Whether we see inflation or not will only be known later in time. With both commodity prices and TIP bonds looking as if they want to go higher, is a signal the markets believe inflation may not be too far around the corner. As with all pattern breakouts, you should never invest unless the pattern triggers and confirms, which neither the $CRB or TIPS have yet done. Until then, it will pay to watch these two closely in the coming weeks/months for investment opportunities. 2018 may be shaping up to be a great year for inflation hedged investments

Dubbya Bottom

Back in July of last year I wrote about the W bottom pattern that had formed in Vietnam’s stock market ( “Good morning, Vietnam”). It occurred after a long one and half year downtrend that was followed by a one and half year sideways consolidation potential bottom.  At the time I mentioned that If it broke out above the upper blue resistance line and held, it suggested an upside target of $18, a 20% move higher. The chart I posted at that time was:

Fast forward 6 months and I am happy to report VNM closed at $18 yesterday as you can see in the updated chart below. 

As always, when our targets are met we have to ask, “what now?” My investing rules are such that if my upside target is achieved, I am required to sell at least half of the position. In the case of VNM, because the chart still looks constructive and there appears to be more room to the upside (2014 prior highs near $21 is the next target), an investor should consider selling just ½ and letting the rest run. Of course, each person needs to make those decisions based upon their own risk tolerance. If you decide to hang on to some shares, be aware you will need to give it some room to wiggle as it is currently very overbought and due for a pullback/consolidation before a big move higher can occur. For those that are watching and wishing, do not chase, the next opportunity is just around the corner

December 2017 Charts on the Move Video

I do a quick recap on 2017 and take a look at what 2018 will likely bring for investors in this months Charts on the Move video.

https://youtu.be/KrBsM59DhM8

Understanding Support and Resistance

One of the most basic (and important) elements of Technical Analysis is support and resistance. They represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearishness and selling. Demand is synonymous with bullishness and buying. As demand increases, prices advance and as supply decreases, prices decline. When supply and demand are equal, prices move sideways (consolidate) as bulls and bears slug it out for control.

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.

Taking a look at a post I made back in July of this year regarding Grainger, GWW, the chart illustrates that price was approaching a prior level of support.  As such, I was expecting it to find a bottom and experience at minimum, a reversion to the mean bounce. Additionally, momentum would likely form positive divergence and be the wind behind any bounce. July’s chart is below

Fast forward 5 months ahead to now, taking a look at the same chart of Grainger updated with recent action we can see how price did find that bottom, it also formed positive RSI divergence and provided a very nice tradeable bounce opportunity. 

In this case, GWW actually provided something much more than a tradeable bounce as it has  gained more than 50% from the July bottom. Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it is sometimes difficult to establish exact support and resistance levels, being aware of their existence and location can greatly enhance analysis and forecasting abilities. If a security is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a security is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and potential reversal. The bottom line is if a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.