Category Archives: Currencies

Multiple Confirmations

Chart traders often find themselves with conflicting commodity trading signals. On the same chart, one man’s failing rally is another man’s bull flag. While looking at multiple time frames of the same chart can yield drastically different projections. How often has a daily chart given a strong indication one way, only to have the weekly chart totally counteract it in the context of the bigger picture?

One analysis technique I like to use when individual charts are yielding conflicting signals, is correlated chart analysis. For example, while the Dollar Index may yield mixed signals, I can use the Euro, Yen, Pound and Canadian which make up 57, 14, 12, and 10% of the index, respectively, to develop a consensus of the markets traded against the Dollar.

Another example would be to use interest rate futures to determine a bottom in the stock index futures. In times of duress, money flows out of the stock market and into the safer government backed securities. This is the, “flight to quality,” so frequently discussed in print and on t.v. Currently, there is much debate as to whether the bottom is in for the stock market or, not. As a trader, I’m not concerned about the rest of the year, only finding quality trading opportunities. Recent statistical analysis is suggesting the stock market rally may continue (see, “Counter Trend Moves…What’s Next?) However, conflicting evidence manifested itself during yesterday’s stock market decline. The flight to quality generated a significant rally (higher price/lower yield) in interest rate futures. However, it’s important to keep in mind that interest rates were rallying off their lowest levels in a month. Yesterday’s action suggests a further rally in in interest futures and declining yields over the coming weeks.

So, we now have statistical analysis that suggests a two week rally in both 5yr. Notes and the S&P 500. Has using multiple market analysis created more confusion than clarity?

Fortunately, macro economic theory holds that, in a healthy normal market relationship, we will see a positive correlation between interest rates and stocks. Therefore, if the pressure is off of the stock market and we are turning the economic corner, it is very possible that we see rallies in both of these markets. It is reasonable to suggest that yesterday’s correction in the stock market was a necessary correction in a market that bounced off of its lows too far and too quickly. Furthermore, given that the interest rate quadrant did not fall through the June lows as the stock market bounced does suggest that we may be seeing a return to “normal” market behavior. Lastly, given the election season, the Federal Reserve Board is far more likely to cut rates at the next meeting than to raise them.

Mother Nature’s Resilience

The current corn crop appears to have materially overcome the delays of a wet spring. April’s plantings were 30% behind normal. The picture became grimmer when May’s plantings were as much as 50% behind normal. This led to serious concerns as yield has been directly correlated to planting date, with yield falling consistently with date planted after May 1st. However, through the modern technology of GPS, tractors were able plant through the night as the weather allowed. This led to being fully planted by USDA Grain Report June’s acreage report. Now, corn has been in the ground and had a chance to grow with some periods of sunshine and good ground water tables. Mother Nature has done her thing as corn across the country has been racing to catch up. Currently, even with all of the delays in planting, corn rated in “good to excellent” condition is ahead of the five year average!

Given the drastic change in perspective from a dire spring to excellent condition as we head into the pollination period, it’s not surprising that the market has sold off as dramatically as it has. However, it’s important to keep a global perspective on the corn market. Even if corn is on the pace of 155 bu/acre yields, at 87.5 million acres planted this will still leave us with a stocks to usage ratio at or, near all time lows. This is also consistent with the International Grain Council’s expectation of global ending stocks being 24+ mmt lower than last year. Furthermore, with the Dollar expected to decline through the end of the year, we will continue to see strong export demand, especially in China as Hog feed usage continues to climb. We will be able to track China’s purchases through the Commitment of Traders Reports.Ultimately, as we have fallen to test the April –  June congestion between $5.70 and $6.20, traders and hedgers should prepare to use this as a longer term buying opportunity.

US Dollar Index

Here is one for the statistical folks out there. It is a very rare combination to have a large speculative long position, which can be checked in the Commitment of Traders Reports in the face of large one day gains in both oil and gold. In fact, it has happened only 4 times. Three out of four occurrences saw the Dollar decline by an average of 2.1% relative to yesterday’s close 72.79. The trough of this decline comes approximately 26 days after the event. Therefore, we can look for a Dollar objective of 71.34 around August 8th.This fits pretty well with the last Dollar trade posted….expecting a test of the 71.00 lows.