market analysis

Lets start with the currency and work our way backward through a couple of charts to see if we can put this all to use.

The US Dollar continues to exhibit a pattern of “lower highs” coupled with the current fundamentals (the printing of 85 billion new dollars per month) suggesting to me – further downside is certainly in the cards. A lower dollar leads to higher prices in our commodities market right? – which in turn puts pressure on bond prices and interest rates.

(Short of looking at individual currencies vs USD specifically – $DXY will suffice for this example.)

The entire commodities complex clearly bottomed in June, and has taken a nasty pullback to an extremely solid level of support. As the USD rolls over – we can expect higher prices in commodities.

The $CRB after bottoming in June is now at support.

The symbol “TLT” tracks the price of the U.S 20 Year Bond. As the price for bonds falls the rate of interest paid rises (the price of a bond and its yield are inversely correlated).

20 Year Bond prices appear to be falling

Lastly in this wonderful chain of events we look at the SP 500 (or futures symbol /ES) and see that if indeed the intermarket analysis holds any water – a falling dollar creates  rising commodity costs, in turn leading to inflationary pressures pushing interest rates higher and bond prices lower – eventually spilling over ( as businesses begin to feel the pinch of higher borrowing costs) and lastly effecting equities.

SP500 Futures are nearing levels of resistance.

Now please keep in mind that these things don’t all happen “on the turn of a dime” – but all things considered it would appear that this is the scenario currently playing out in markets – as the dollar printing continues, commodity prices start to rise, bond prices turn lower (and interest rates higher) – and lastly we will see a reversal in equities.

I am still sticking with the timeline of late Feb to early March where I envision the stock market to start making its turn, as we can clearly see that the chain of events unfolding is leading us in that direction – likely sooner than later.

I don’t necessarily expect stocks to “crash” as we have to keep in mind that the FED will do anything in its power to keep prices elevated  – but as the forces outlines above begin to take hold – “sideways to down” looks far more likely than any type of rocket to the moon. 

Imagine if you will the “Global Commodities Market” much like you would your local farmers market. Vendors from far and wide, there with their goods on display and priced to sell. You’ve got corn, sugar, coffee, wheat, beef, gold, silver, copper, oil and even some live cattle there in the back. Everything a person (or a nation) could ever need, all there in tidy rows – neat and organized, ready to go.

Only thing is  – you’ll have to make a quick little stop to see me at the “foreign exchange window” before heading in……….. as you guessed it – all items are priced in U.S dollars.

With global trade in the trillions of U.S. dollars every year – and this “market” paying  taxes to the U.S. government. It’s a pretty good system for the U.S don’t you think? – Not to mention my little “currency exchange” on entry – (I’ll save this for another post and topic entirely).

The U.S. dollar and commodity prices generally trend in opposite directions. As the dollar declines (relative to other currencies)  the reaction can be seen in commodity prices.

Commodity prices have a direct effect on bond prices. As commodity prices escalate in an inflationary environment – so in turn interest rates rise to reflect this inflation. Rising interest rates and bond prices (TLT) fall. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well.

Putting this all together does take some time – but by monitoring even just the USD and the major currency pairs, a couple of commodities such as gold  or silver, the SP 500 and the 20 year bond (TLT) – the average trader at home should be able to get a handle on “what’s really going on”.  I spend my time in the currency window as I strongly believe that moves in other asset classes are first seen here – as the fx market is the largest and most liquid on the planet – dwarfing the daily volume of the NYSE by well over a 100 times.

We can look at a real world example next……..

Intermarket Analysis:

The analysis of more than one related asset class or financial market to determine the strength or weakness of the financial markets or asset classes being considered. Instead of looking at financial markets or asset classes on an individual basis, this type of analysis looks at several strongly correlated markets or asset classes such as stocks, bonds and commodities.

I thought it might be of interest to some of you to get an idea of which symbols /markets / indicators / areas I monitor –  in coming up with my overall market analysis. Trust me, if you are only watching one asset class or concentrating on a particular sector or  a single market, you might as well put a blindfold on, tie an arm and a leg behind you – and head down to the beach for a swim – you are sunk.

Currencies:

I follow the following pairs religiously and could likely quote you the given price and recent price action summary without looking at the screen.

• USD/JPY, USD/CHF, USD/CAD
• AUD/USD, AUD/EUR, AUD/CHF,AUD/JPY
• NZD/USD, NZD/EUR,NZD/JPY
• EUR/USD, EUR/JPY
• GBP/USD,GBP/JPY
• CHF/JPY
• CAD/JPY

These pairs are constantly monitored on every single time frame (from the monthly all the way down to the minute to minute action) – and a trade will be initiated in any one (or all pairs) at a moments notice. These pairs are viewed on the Metatrader 4 Platform that is available 100% free from many brokers online.

Futures:

These symbols may look a touch cryptic to some as they are not as commonly seen / used. Please look them up  – and yes..use them.

• /GC –  (gold futures)
• /SI – (silver futures)
• /CL – (light sweet crude futures)
• /ES – (SP 500 futures)
• /YM – (Dow Jones Futures)
• /NKD (Nikkei Stock Exchange Futures)
• /DX (US Dollar Futures) – I beat alot of people up about watching this specifically as I trade/observe the USD against the majority of currencies on an individual basis – but yes…it’s on my screen.

I use the “Think or Swim” trading platform for all of my futures, stocks and options charting and would suggest you do the same as it too is 100% free and provides some incredible tools.

Other Symbols: 

This is getting a little long so I will break it into two posts, as I still havent explained much as to “what I look for” and how all of this comes together. Not to mention the 30 or 40 more symbols I need to list. So….watch for part 2.