Volatility has taken a pounding this week and looks poised to head even lower. That implies that the nearly relentless rally of the broad averages is likely to continue at least for a little while before buyers take a breather. The good news, if you believe stocks need a reality check now and then, is that a promising target in VXX, an index that tracks short-term S&P volatility, could bottom as early as Friday. Check out the chart in the inset to see why.
Buying Spree Is Crushing VolatilityPosted Thursday, September 20 1 comment
DJIA – Dow Industrial Average (Last:26,656)Posted September 20, 2018, 11:35 pm
A subscriber who qualifies as a Hidden Pivot ace broached a Dow rally target at 40,000 Thursday in the chat room, but I’m not keen on encouraging such speculation. Applying Hidden Pivot analysis to the long-term picture, I can make a case for a move to 34,450, but no higher. Even then, bulls would need to get past two formidable Hidden Pivot resistances at lower levels. They lie, respectively, at 27,251 (just 600 points above current levels!); and at 28,897. Either looks sufficient to turn back the bullish herd, at least for a while, and both are capable of ending the bull market.
A Fibonacci Trick
The ace Pivoteer, David Isham, has filled in for me at times and knows his stuff. His high confidence in the 40,000 target is based on the fact that it would represent a 1.61 [sic] Fibonacci extension of a regular Hidden Pivot target. He says there’s plenty of evidence to support the use of the 1.61 [sic] calculation in conjunction with Hidden Pivot levels. While this may be so, it doesn’t justify ballyhooing Dow 40,000 when there are such compelling targets at lower levels. That said, if my 28897 pivot were to be decisively penetrated I’d become a raving bull, at least until 34,450 was achieved. And if that last resistance were to get bulldozed, I’d join David’s camp enthusiastically. But there is little practical value in focusing on a 40,000 target at present — unless, perhaps, you are in the guru business and desperate to hype something…anything to get attention.
$VXX – S&P VIX Short-Term (Last:26.65)Posted September 17, 2018, 9:13 pm
In the chat room Monday, subscribers reported jumping on call options when VXX was bottoming Friday inches from a compelling downside target at 27.45. Accordingly, I am establishing a tracking position of four 21 Sep 30 calls @ 0.24, the worst price reported. As always, I’ll suggest offering half of them for twice the price paid, good-till-canceled, and a third option for quadruple the price. If you hold stock instead, you should scale out the position at the same intervals where I’ve advised profit-taking on the options. Although we have know way of knowing how far this rally will carry, we have the wind in our sails at the outset, significantly reducing the risk of the trade. If VXX relapses, I’ll stop out the tracking position @ 0.15, but you’ll have the option of holding onto it if you please. ______ UPDATE (Sep 18, 6:15): The calls ticked 0.15, but if you held onto them don’t sweat it. VXX cannot but bottom at so clear a Hidden Pivot support as 27.45, even if the exact timing of its next flight of fancy is uncertain._______ UPDATE (Sep 19, 9:23 p.m.): VXX gapped below 27.45, showing unusual weakness. I still doubt that this vehicle can stay down at these levels for long or get pushed much lower. It’s akin to submerging a beach ball below the water line._______ UPDATE (Sep 20, 10:21 p.m.): VXX has been pushed beneath an ‘interesting’ Hidden Pivot with such force that we must consider a new target. The one shown, at 25.54, would be more compelling if the AB impulse leg had exceeded a distinctive low, but that is not the case. We’ll use it anyway to bottom-fish, but I’ll leave the details up to you. I’d suggest using just-out-of-the-money calls expiring in 5-12 days.
$DXY – NYBOT Dollar Index (Last:93.91)Posted September 16, 2018, 5:05 pm
The Dollar Index, currently trading for around 95, is poised for a breakout that seems likely to hit the century mark within the next 12-24 months if not sooner. This is going to put added pressure on foreign earnings of U.S. multinationals as well as increasing the already ponderous weight on bullion. My long-term forecast for the Dollar Index calls for a test of highs near 120 that were made more than 17 years ago. If so, the implication is that February’s 88.25 low marked the beginning of a monster rally like the one that took DXY from 79 to 100 in 2014-15. There’s no way the dollar could reach 120 in a normal economy. The forecast implies that at some point, the U.S. will experience a catastrophic deflation that makes dollars scarce. A wave of bankruptcies could cause this, and the most logical place for it to start would be in the collapse of a public-employee pension system that is already a sinkhole waiting to happen. This is a liability that cannot be monetized — at least not without touching off hyperinflation. For reasons that I have written about for more than a decade, it is all but certain to occur. For further discussion of this, click here to access an interview I did on Wednesday with Cory Fleck of Korelin Economics Report and National Investors‘ Chris Temple. _______ UPDATE (August 21, 5:25 p.m.): The dollar has gotten sacked recently, but it would trigger a theoretical ‘mechanical’ buy signal if the weakness continues to x=94.64, shown as a green line in this chart. A 93.18 stop-loss would obtain. _______ UPDATE (August 27, 9:33 p.m.): Gold bulls beware: DXY has tripped the ‘mechanical’ but signal flagged in my update from a week ago. _______ UPDATE (Sep 15): The dollar rallied then relapsed after tripping a mechanical buy signal in late August. As this chart makes clear, however, the signal is still valid, subject to a stop-loss at 93.18. The relapse suggests there is more weakness than we should prefer in a ‘mechanical’ trade, but the purpose of this type of trade is to free us from having to make such judgments._______ UPDATE (Sep 20, 10:42 p.m.): The Dollar Index tripped an appealing buy signal on August 28 that is now close to being negated by five weeks of brutal selling. ‘Mechanical’ trades are designed to handle such stress, but this may be a somewhat unusual exception. Gold has mildly benefited from the dollar’s weakness, but not enough that we should be impressed.
$BRTI – CME Bitcoin Index (Last:6464.97)Posted September 13, 2018, 5:20 pm
Bloomberg news is out with a breathless dispatch tonight that suggests digital currencies have bottomed. If so, I can find no compelling evidence of it in the charts. Their expert is a guy named Michael Novogratz, a former Goldman Sachs partner who likes the current look of Bloomberg’s Galaxy Crypto Index. It measures the performance of the largest cryptocurrencies versus the dollar and was compiled jointly in May by Bloomberg and Novogratz’s investment fund, Galaxy Investment Partners. I use the CME’s Bitcoin Index (Symbol: BRTI) myself, and it looks brain-dead to me. I would turn quite bullish if BRTI were to thrust above the 8594.57 peak labeled in the chart (see inset), but until such time as that happens, I’m inclined to think it will dip first to the 4396.32 target shown in the chart before warranting our serious attention.
$SIZ18 – December Silver (Last:14.220)Posted September 3, 2018, 5:04 pm
I posted a worst-case target of 9.35 here earlier, but because things might not turn out that bad, I am proffering an alternative at 13.527 that allows for a less dire outcome. However, that is my minimum downside projection for now, and regardless of what your long-term strategy is for silver, I would not recommend buying any more of it until 13.527 is reached. For purposes of bottom-fishing, you can expect a significant bounce from that number, given the precise bounce in December 2017 from p=16.024._______ UPDATE (Sep 12, 6:33 p.m.): I’ll start believing this rally, sort of, if and when it thrusts above the 14.590 peak shown. If it can do so without much correcting or zig-zagging between here and there, that would shorten the odds that it’s for real. ______ UPDATE (Sep 13, 4:45 p.m.): Today’s nasty reversal was not what I had in mind when I stipulated that the futures exceed 14.590 without much ado. But because the upthrust generated a fresh impulse leg on the hourly chart before relapsing, I’ll give bulls the benefit of the doubt for the time being.
$TSLA – Tesla Motors (Last:308.44)Posted August 20, 2018, 9:11 pm
My gut feeling is that Tesla shares have seen their highs for a long while. Usually I let the charts do the talking, but in this case I’ve jumped the gun to sketch out a bearish head-and-shoulders pattern as it might develop over the next 15-20 months (see inset). This is just speculation, of course, but it’s not farfetched to “see” a left shoulder and head already in place on the weekly chart. Although the SEC is likely to rough up CEO Elon Musk for his ill-considered tweet about taking the company private, legal troubles will probably be the least of his problems. He has flatly asserted the company will be profitable from this point forward, but it’s hard to take him seriously, since there are reportedly serious design flaws and manufacturing problems besetting Model 3.
The Upside of Failure
Tesla sales are down in Europe and likely to fall further as formidable marques such as Jaguar, Mercedes Benz and BMW enter the market. Musk could pull a rabbit out of the hat with some startling development in battery storage, but that is not an odds-on bet either. It doesn’t help that, from a financial perspective, the automaker has been skirting bankruptcy.
If the head-and-shoulders pattern plays out as sketched, the stock is headed below $200, well beneath the recently revised price targets of some high-profile analysts. Tesla fans shouldn’t despair, however, since a collapse in the share price would force Musk to get his formidable mind back on the basics rather than on the stock’s ups and downs. Somewhat removed from the limelight, he would have the breathing room to do what he had started out to do — i.e., sell enough expensive cars to generate the cash needed to produce a true mass-market vehicle.
$TYX.X – 30-Year T-Bond Rate (Last:3.034%)Posted August 19, 2018, 5:08 pm
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$TNX.X – 10-Year Note Rate (Last:2.87%)Posted August 19, 2018, 5:05 pm
J.P. Morgan Chase CEO Jamie Dimon recently raised his forecast for rates on the Ten-Year Note, currently trading just below 3%, to 5%. He’d predicted a rally to 4% back in May but now thinks the bull market in stocks could run for another two or three years, putting additional upward pressure on long-term yields. For its part, Rick’s Picks has told subscribers to expect a push soon above the 3.11% peak recorded back in May — a peak we had foreseen five months earlier when the Ten-Year Note was paying around 2.35%. We offered no specific target at the time but will now: 3.32%, as shown in today’s chart (see inset).
It’s hard to square Dimon’s interest-rate forecast with the notion that the bull market in stocks has a few more years to run. Our gut feeling is that anything above 3.25% will asphyxiate the U.S. economy and send it into recession. The housing sector is already in a sharp downturn as reported here last week., and even a small turn of the interest-rate screw could asphyxiate it, along with auto leases. This would be a double whammy for the stock market, since mortgage rates have been held for a long time at levels that allow Americans to buy more home than they can afford. Similarly, car leases are structured so that we can drive more car than we can afford. The silver lining here turns out to be an unappealing scenario: rates go no higher than 3.50-4.00, but only because the U.S. economy has nosedived. _______ UPDATE (August 19, 5:07 p.m.): The uptrend stalled at 3.106% and in the three weeks since has receded to the middle of the 2.72% – 3.11% range in which rates have fluctuated for the last six months. My bias is neutral for now. Here’s an updated chart.
$USU18 – Sep T-Bond (Last:2.857%)Posted August 12, 2018, 3:07 pm
I’ve been predicting higher interest rates on T-Bonds and T-Notes, but a dissenting post by ‘Oldman’ in the Rick’s Picks chat room sent me to my charts for a closer look. Bottom line: Based on the technical evidence, I still expect long-term rates to rise. I’ll explain why shortly, but first let me present Oldman’s argument, since he makes some excellent points. He posted Friday afternoon as follows:
“According to Sentimentrader.com, 1) 0% of the market is bullish on T-Note prices (i.e., 100% are expecting higher rates); 2) only 17% of the market is bullish on T-Bonds (i.e., 83% expect higher long-term rates); 3) commercials have NEVER been longer in T-Notes than they are now, and 4) Large Specs have NEVER been shorter in T-Notes than they are now. Four good reasons for a trade, so I went long Ten-Year Notes at 119^24 (stop 118^24), targeting 122^24 & 124^00. There is heavy resistance at 122^24, so I may go short thereabouts with 110^20 target. Ten -Year Notes (December) were up ^23 earlier today but closed ^17.5 at 120^02.5. They are up 1^07 since August 1st. Have a nice weekend everyone.”
Hidden Pivots Say ‘Higher’
While Oldman’s figures are sufficient to raise doubts in the minds of Bond bears — of which I am one, albeit only mildly so — a strict technical interpretation of the charts leads me to believe that the rise in long-term rates begun a little more than two years ago will continue, at least for a while. Based on the Hidden Pivot Analysis I rely on to determine such things, I see two details that portend a further rise in yields. The chart itself shows interest rates on the Ten-Year Note. Notice that the first time the uptrend encountered resistance at the red line, a ‘midpoint Hidden Pivot’ at 2.677%, it smashed through it. Such price action at ‘p’ usually indicates that the ‘D’ target with which it is associated — in this case 3.319% — will be reached. Another telling detail is that the most recent rally leg, from just above the red line to a mid-May high at 3.115%, exceeded an ‘external’ peak at 3.036% recorded back in January 2014. That ‘refreshed’ the bullish impulsiveness of the weekly chart, implying that the pullback since then has been merely corrective rather than the beginning of a major bear leg.
Let me also reiterate a point I made here earlier — that I doubt rates can go much higher than the 3.319% target in the chart. At that level I would expect increased borrowing costs to choke off economic activity to the extent that upward pressure on rates would ease. But we’re not there yet, and that’s why I am suggesting that bond bulls save some ammo in order to jump aboard when rates are topping and T-Bond prices are bottoming.
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Tuesday, Sept 11, 2018
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