Saturday Rock Blog: Smooth Operator & Welcome ChicagoStock

There is a smooth operator at work in the US treasury market. I've been paying much more attention to treasuries lately after ChicagoStock (Stewart) pointed out how bearish they have been acting lately. Recall that declining treasuries means higher yields which is generally a good thing for stocks since it means money is flowing out of risk averse government bonds. What I find really interesting is how much that market has begun to diverge from stocks lately. To me this suggests that perhaps stocks will catch a second wind before the fifth wave lower begins. The inverted head and shoulders (below) places a target around 3.2% on the 10 year note and there is a previous low at 3.25%. So I think there is definitely room for treasuries to fall further (sending yields and potentially stocks higher).
On a related note, please join me in welcoming ChicagoStock to the blog! If anyone needs a futures broker in Chicago, he's one of the best. Hopefully he will bring some of his technical expertise here to Stock Geometry. I think its definitely safe to expect more commodities charts here in the future. Again, welcome!

The curtain comes down, briefly...

Amen, madam Kaptur, amen.

US Dollar Trends

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.

The daily chart (and disclosure) above is from my good friend Stewart Solaka and I've added trend lines to the longer term monthly below.

I think 80 remains the key level for the dollar index. Below 80 there isn't any support aside from the recent all time low at 70 and the eight year downtrend resumes. If 80 can hold then I'd expect the series of lower highs and lower lows to be broken. As Stewart points out with the shorter term daily chart (top), the US Dollar has reversed. A test of 80 may be in the cards soon.

B of A: Dumbest bank ever.

Saturday Rock Blogging: Sweet Little Angel

Here is it live with James Brown, and here with Eric Claption, but I think the recording is best in the video I have above. This is one of my favorite of BB King's performances, enjoy!

Lights out for BAC (Panic/Run on the Bank)

Bank of America (BAC) looks like either it will be nationalized soon or will recover quickly, the chart currently favoring the former. The volume confirms that this move is for real but we are at an extreme condition. Daily RSI broke 20 today signaling oversold conditions and the Bollinger bands got left in the dust. Capitulation or bankruptcy?

Awaiting the 5th wave...

Its always important to be aware of the longer term picture and what I see in the two year weekly chart is a one and a half year old bear market. It seems to fit well with an Elliot wave pattern where we've completed the first two of three downwards cycles. That is, we have moved beyond denial (wave 1), more recently acceptance (wave 3) and now we await the final downwards cycle (the fifth wave) of panic. A big unknown is how far we will rally in wave 4. I would guess that the 200 dma could be reached but its moving lower each day and I'd place an upper limit at $650 on the Russell 2000. A lower target is very tough in such extremes but I'd guesstimate somewhere near $250.

Since we're waiting for panic I think it's appropriate to look at the fear index. Below I have the VIX plotted over the same period of time as the $RUT above. The index is currently down trending but there seems to be major support at previous resistance of 37.5. I could see the VIX drifting lower for some time but holding that level because a break of 37.50 should send it significantly lower which would ignite stocks. I'd conjecture that eventually a compressed VIX would pop big, beginning the fifth and final wave lower in stocks. Under that scenario the ultimate bottom is likely to coincide with new all time highs on the VIX. But again, the VIX could drift lower for a time lifting stocks.


On the more bullish side, a number of commodities are looking better on intermediate term time frames. If the recent lows in equities like DBA below can hold, it may great year for commodities. DBA has the potential to form a nice inverted head and shoulders with a target near $33 when/if $27 breaks. DBA could pullback further, as low as $23, before rounding out the right shoulder so I'd wait for lower prices to buy dips. Good luck, it should be a very interesting week between the Obama inauguration and a string of earnings reports.

Saturday Rock Blog: Sure Shot or Can't/Won't/Don't Stop the Bailouts

Bear Stearns bailed out by JPM bailed out by feds
FNM and FRE bailed out by feds
GS bailed out by BRKA
MS bailed out by MUFG
AIG $130B in bridge loan bailouts
Emergency Economic Stabilization Act of 2008
Citigroup gets $45B then splits up
GM $13B warm-up bailout
Crystler gets $5.5B in warm-up bailouts
CFC & MER bailed out by BAC bailed out by feds

What am I forgetting?

Update:
Throw BofA and Citi out of the Dow!

Lanworth's Final 2008 Spring Crop Report

I was passed on a pdf with this information from a Lanworth representative. Since I'm not sure how to upload a pdf here I'm just going to copy and past the text and plots. As a reminder, Lanworth uses satellite images to estimate crop yields and other useful agriculture information. See my previous posts for more info. Enjoy:

"US Spring Crop Production 2008
Final Report: 16 January 2009

Corn production: 12,216 million bushels
Soybean production: 2,987 million bushels

This is Lanworthʼs final report on US corn and soybean production for the 2008 agricultural year.

It represents Lanworthʼs best estimates of year-end production based on planted acreage, harvested acreage, and modeled crop yields at district and sub-district levels. In its 12 January 2009 Crop Production 2008 Summary report, USDA revised both its corn and soybean production estimates upward by approximately 1%. In doing so, USDA brought its production estimates for both commodities into close agreement with those issued in Lanworth's 21 November 2008 report and, indeed, those issued earlier in the year (Figure 1). To effect its revisions, USDA adjusted acreage and/or yield estimates for most producing states. Because Lanworth accepts USDA acreage estimates for states not mapped by satellite and USDA yield estimates for states not modeled, USDAʼs adjustments do affect Lanworthʼs production estimates, albeit slightly. In what follows we present updated corn and soybean production estimates incorporating USDA revisions in unmapped and unmodeled states. Here Lanworth updates its 2008 US corn production estimate to 12,216 million bushels, a negligible upward revision of roughly 3 million bushels. Lanworthʼs current estimate stands only slightly higher (115 million bushels vs 74,641 thousand).

Methods

To develop production estimates, Lanworth used planted acres mapped by satellite for 13 key states. Harvested acres for these states were determined by applying harvested fractions derived from the most recent USDA Crop Production report. In flood-affected states (IL, IN, IA, MO), Lanworth calculated harvested acres directly by applying 5 year average harvested fractions to planted acres and then subtracting lost acreage mapped using satellite imagery (see previous reports). For the remaining, unmapped states, Lanworth accepted USDAʼs current harvested acres estimates. Lanworth then allocated harvested acres to districts either directly for satellite-mapped states or, for other states, indirectly using each districtʼs historical share of state planted acres.

For each district in 18 key corn and soybean producing states and 7 spring wheat producing states, Lanworth ran a series of deterministic yield models representing a range of soil, weather, and planting conditions. Model results were weighted and combined to produce representative district yields. For minor states, Lanworth used the projected yields published in USDAʼs most recent Crop Production report. Production was then computed for each district and summarized by state.

Lanworthʼs current production estimates are provided in the accompanying spreadsheet. The data will also be published to http://ray.lanworth.com.

(click on image)

Contact: Nick Kouchoukos, (630) 250-1428, nkouchoukos@lanworth.com ©2009 Lanworth, Inc. All Rights Reserved"

I think the key here is in these last two plots. The most obvious thing is that Lanworth has clearly been estimating higher yields than the USDA for most of the year aside from some mid August corn reports. And what has the Corn and Soybean market done during this time? It plunged. Of course the agriculture market is driven by both supply and demand but its safe to say that the underestimation of crop yields by the USDA is bearish because supply is turning out to be bigger than anticipated. The second thing I noticed was how erratic the USDA's #'s were relative to Lanworth's estimates. Clearly Lanworth's method yields a more stable estimate which has got to be good for a number of reasons which are mostly beyond me. It seems to me that the actual crop numbers, the reality, is going to be relatively smooth and stable. How rapidly could the actual yield change? Maybe if there was some major flooding or other rare natural disaster, but on average I would think that yields don't make erratic moves like the USDA numbers. I continue to be very impressed by this technology.

Click here to download the original pdf file. Also, find the latest Lanworth related news here.

At the bottom end of a narrowing range

This weekend I've been looking at this rising wedge/pennant pattern that seems to be present in all the major indexes. It starts in late November when the last 52 week lows were made and coincides with a seasonally strong period of time. Volume has declined as the range narrowed and it seems something is about to give. Friday's action suggests we may be headed lower since all the major averages except the Russell 2000 closed and the Q's back below their 50 day moving averages. Below I've got the double Russell 200 etf UWM, which I bought on Friday at $19.19.

Given the late action on Friday (which involved 50 dma breaks) I'm not so comfortable with this new position which I was buying at potential 50 dma support. If we slip much below this level I will once again be worried that the long term down trend is continuing (and get the heck out of UWM). Its not over for the bulls just yet though, we are merely at the lower end of the rising and narrowing range. The daily stochastics have given a sell but the CCI is holding.

If the market doesn't breakdown here then one long term chart I keep looking at and like is the ICE weekly. It seems to have good support around $60 and it's 50 dma is beginning to slope upwards:
I own some ICE with a stop at $60, and frankly, I am not worried about all the analyst downgrades last week. Analysts have proven their ineptitude to me time and time again, I view their opinions as buying opportunities in this case. First off all, ICE stands to benefit from the new CDS exchange system being developed. Further, they will see higher volumes from a renewed interest in commodities as they bottom. ICE actually announced record volumes last Tuesday in energy contracts. Read: record volumes->record revenues or analysts are wrong. But of course, I'm in it for the chart.

Saturday Rock Blogging: Unchained Melody or Oil Inverted Head & Shoulders

Disclosure: I own DXO, USO calls and my gas tank is full.

Economic Stress Relief

Squishy banker dolls are now available for economic stress relief at SqueezeTheBanker.com. The advertisers should have some fun with this one I'm thinking. The slogan could be "turn the credit crunch on the creditors" or "only $8.99, buy one before your dollars become worthless" or "if you pay taxes, Paulson put the squeeze on you, now put the squeeze on Paulson." Ah, I love the internet.

Things are looking a lot better

I know a lot of you out there are tempted to sell/short this bear market rally but given the chart above I have to caution against it. Divergences in multiple indicators have been signaling a rally for months and although markets have rallied significantly from their lows I see substantial room to run further in the context of a long term downtrend (the SPX 200 dma is 27% higher). Volume was weak on Friday's new year breakout and because of that I would expect a pullback early next week, but things are coming together for the extended rally I have been anticipating for some time now. The technical picture has improved dramatically with all major averages trading above their 50 dmas which may even start to turn up soon. While the October and November highs could and should provides significant resistance, I'd guess we reach the 200 dma before this bear market rally ends.

One sector that looks particularly good right now is solar energy. This chart is overbought but looks just fantastic. Couple a bottom in energy with a broad stock market rally and the solars will take the lead. After a pullback, perhaps to the 50 dma, I am going to be adding FSLR, SPWRA, JASO and ENER.


Disclosure: I am long DXO and USO calls. I also have calls on JASO, ENER and SPWRA.

Saturday Rock Blog: Think I'm In Love or Why I Think Oil Bottomed at $35 (~$28 on USO)

Energy traders must be falling in love with this chart again. I think it looks quite similar to the top (but upside down) with a failed break followed by a trend break the other way. Although, as extremely bullish as this chart looks I think we are all nervous about the thought of rising energy prices in a recession.


This post is a follow up to these posts and a sister to this post. And for those of you who get nervous charting a derivative, here is the continuous crude contract. Hat tip to ChicagoStock.

Disclosure: I am long DXO, USO calls and my gas tank is full. I also have calls on JASO, ENER and SPWRA.