Out of Favor Trades: US Long-End Treasurys, Munis and USD

As I said in the yesterday's post, TA is broken, the stock market is broken, but those of us who still want to make money in the market can still look at the last remaining good TA signal - divergence. It has worked for me, most recently with ISRG.

I'm looking today at one of the three things that have been widely despised as close to worthless: US Treasuries, long-end. The chart is TLT, an ETF on Treasuries 20-years and longer. It is actually breaking down from the tight bollinger band, and whether it can snap back up from here remains to be seen. It has been pretty much in the lower bollinger band since late August/early September when Ben Bernank started QE Lite, and QE2 hasn't helped at all, contrary to what Ben said.

But what do I see in the chart? Positive divergence in MACD, and MACD histogram. RSI also has a slight positive divergence.


Checking on call options on TLT, I found a large volume on February $90 calls with the volume of 3677 with open interest of 1415. February $91 calls had the volume of 1862, but as a call spread it doesn't make sense. Checking the etrade intraday volume, the calls were being bought pretty much throughout the day for both strikes, not in one single purchase.

TLT ended Friday at $88.81.

The other one is US dollar, but I haven't seen the positive divergence on the chart yet, although it seem to sit at the point of "make or break". I think if the Obumbum's administration decides to do the American Homeland Investment Act Part Deux, it may be highly favorable to USD short-term. Combine that with the number of speculative short on USD in contrast to other currencies, and can we say "SQEEEZE"??

Munis are even more despised and hated, but it clearly shows positive divergence in MACD, RSI, and slow stochastics. See for yourself.

Do your own DD, and be safe. Although Ben's put seems eternal, if these three (Treasurys, munis, USD) dare follow the positive divergence and start going up, that may not mean well for his beloved stock market.

Commodities Breaking Out of Range

That's despite the continued strength in US dollar.

This is a 1-year daily chart of crude oil. It has been in the ascending channel since June 2009, and I've been playing the horizontal range from October 2009 until now. Today it broke above the horizontal upper resistance, though still within the ascending channel.

The upper channel resistance will be somewhere near $97.5. I personally think crude oil is headed above $100 again.

When I sold my last UCO (double long crude ETF) call options when UCO hit $13.20, I flirted with the idea of buying puts on the pullback that I thought might happen. I didn't buy, for I had a feeling that the range would be broken someday soon to the direction of the prevailing trend, which was up. I was hesitant to buy another set of calls, so I lost on that. UCO ended today at $14.20, and I'm sitting with the gain of 18% on the ETF.

I'm at a loss right now what to do with crude oil. My comfort range may be gone. I'll wait and see if it comes down to test the breakout point ($84). If that holds, I do want to add to my holdings of UCO, either the ETF itself or call options.

Here's another commodity that's about to break out of nearly 2 years of consolidation. Do I see a huge cup and handle formation? If it is a cup and handle formation, the target price will be the depth of the cup added to the handle high breakout point: $788.

My play on palladium has been PAL (call options), which has gone absolutely nowhere because I bought them at a wrong time (when it was surging in the beginning of this year). But now it seems to be breaking out of the symmetrical triangle on a huge volume. I may be in the money by the option expiration (June), just like I lucked out on PCX calls...

Other Currencies Are Sold, Not US Dollar Being Bought

Or so it seems to me. U.S. dollar has had a sharp reversal upward ever since Dubai announced the debt freeze very conveniently on Thanksgiving Day when the financial markets in the U.S. were closed.

Convenient in two ways: one, the U.S. dollar index (DXY) was just starting to bust the tenuous support around 75 to go down lower when Dubai announced its intention; it was also convenient for the commercial players in the U.S. dollar futures market, who had been net long U.S. dollar since this summer.

The sharp rise is attributed to the usual stuff: flight to safety and liquidity of U.S. dollar and dollar-denominated securities. I don't quite understand why the currency of a country whose government continues reckless spending is safe, but that's what's been said.

But is it the strength of the dollar, or the weakness of other currencies, particularly Euro and British Pound? And while the dollar has been ramping up with no fundamentals underneath it (as I can see), why aren't other U.S. dollar-denominated securities like Treasuries, agency bonds, MBS getting the bid?

When I created this chart below and took a look at it, I came to a conclusion (for now) that it is the weakness of other currencies. Why? Because it is only the U.S. dollar currency that has been bid up since Thanksgiving Day. Short-term Treasuries are flat, no bid for agency bonds and MBS, and long-term Treasuries are being sold and yields are rising. The lines represent different ETFs as proxy for underlying currencies and bonds.



UUP: US dollar ETF
FXE: Euro ETF
FXB: British Pound ETF
FXY: Japanese Yen ETF
SHY: 1-3 year Treasury ETF
TLT: 20+year Treasury ETF
MBB: MBS ETF
AGZ: Agency bond ETF

Gold Correction? Consolidation?

After tagging the all-time high of $1,226/ounce on Thursday last week, gold crashed on Friday on the strength of the U.S. dollar after the November unemployment number was announced. It sold off more than just just the dollar strength. The rumor was that the investors had margin calls and sold gold.

I don't know if they were margin calls on gold trade or the U.S. dollar trade. One possibility is that investors who were short U.S. dollar had to cover and unwound their carry trade (long gold).

A correction was overdue, as many say, as the rise after the October breakout was almost vertical. The candlestick formed an inverted hammer last week, indicating the trend change. The question is, how low will it correct?

This is a 3-year weekly chart of GLD, the ETF that tracks gold price. On Friday, the fall was arrested near 61.8% Fibonacci retracement from the long-term support (and neckline of the reverse head and shoulders) to the Thursday top. Since the rise in the past three weeks was particularly rapid, it could retrace back to 38.2% Fib, around $107, filling the gaps.


Slow stochastic (60,3) is still above 80 on the weekly chart, though it may be breaking below the recent trendline support. AROON's red and green lines are still very much apart, though this is a lagging indicator.

Looking at the previous breakout and correction (blue Fib lines in the chart), the level from which the breakout occurred held in the correction ($68.80). If that were to happen again, then the $100 level should hold.

The general market has been very volatile intraday these days, and the bollinger band on the major indices are contracting on the weekly charts. (Take a look at the latest newsletter about general market from Breakpointtrades.com.) Wait and see seems to be the name of the game for now for both gold and the general market.

Watch US Dollar

and watch the grass grow. But it's at the very critical point. My post in early July showed the charts of Euro and US dollar, both about to break in the direction of the prevailing trend (up for Euro, down for USD). US dollar has been sitting there ever since, within that tiny pennant/wedge.

And here's the reason that it's at the very critical point. The chart is a recycle from my other blog posted in May, but here again not much has changed since then. The US dollar index is slightly below this long-term support line of 80, but not by much (78.67 right now).

I think it will break down. The first time it broke 80 was back in August 2007, and the index dipped to 70. Then a reversal came when the stock market was showing the sign of topping in August 2008, and the reversal got violent in October as the stock market tumbled. Now the dollar is back at the support line the second time in 2 years. The first move down could be considered fake (and it was), the second time it's more likely to be the real move. (Although sometimes it takes more than two tries to break the support line.)

If it breaks down, a short-term target will be the March 08 low of 70. The dollar remained at that level for several month while the stock market was rallying. (See the green box area in the chart.)

Beyond that, no one knows, as US dollar has never, ever, been lower than that. It will be a new world for all of us on this planet. Good luck to all of us.

Currency Charts - Euro & USD

These two charts look identical. Both now have developed a bullish pennant that looks ready to break out to the upside.

I wish it were the case, particularly for the US dollar bulls. But the bottom chart is UUP, an ETF that tracks the US dollar index, flipped horizontally and then flipped upside-down. The top chart is FXE, an ETF that tracks Euro.

It looks just a matter of time, probably very soon, till we know which way these pennants break. The safe (and usual) bet is that they will break to the existing trend - up for Euro, down for US dollar. If that happens, Euro is set to retest the recent highs, US dollar is set to retest the recent lows.

Commodities may benefit (since they are still priced in US dollar), but not sure about the stock market.

Follow-Up: US Dollar vs Foreign Currencies 6/24/09

There's something funny going on. US dollar spiked out of nowhere right after 12:00 PM EST, which I posted in the previous post. It spiked again higher after the Fed's FOMC statement was released, but ended the day at about the level of the first spike up.

So I decided to check other currencies, using ETFs for convenience. These are the intraday charts of US Dollar (UUP), Swiss Franc (FXF), Euro (FXE) (top row from the left), British Pound (FXB), Japanese Yen (FXY) and Canadian Dollar (FXC) (bottom row from the left). All foreign currencies dived at the same time US dollar spiked, and after some fluctuations they ended the day near the bottom of that initial spike down.



The forex market is for the professionals and large institutions, I was told. They seem to have known the result of the Fed meeting two hours in advance. The Fed kept the target rate (0 to 0.25%), and kept the commitment to buy Treasuries, agency bonds, and MBS but didn't increase (or decrease) the committed amount. Carry trades got unwinded?

US Dollar Intraday - Someone's Buying Big

This is a 1-minute intraday chart of DXY, US dollar spot index (6/24/09). Sudden spike as you can see, and commodity stocks have turned sharply south. Who's buying US dollar? You can bet it is not retail investors (that wouldn't cause a huge spike like this).