CBOE VIX (Volatility Index)

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VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period.

Since August-October 2011 period global equity markets have been in an uptrend. During the same period CBOE VIX has fallen from 50 levels to 15 levels. Historically 50 has been the boundary for negative sentiment and 15 has been for positive sentiment. Though in the past  CBOE VIX reached 9 levels (extreme optimism) on the downside and 89 levels (extreme pessimism) on the upside, on average it consolidated between 15 and 50. 6 month strong equity market performance helped sentiment to improve and pushed the VIX lower towards the boundary of positive sentiment.

There is now higher probability of CBOE VIX to rebound from 15 levels in the following months as a result of short/intermediate term equity market correction. It is important to watch the levels on the VIX as we are now rebounding from a major support area. 

SOY MEAL

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In December 2011 and January 2012 I wrote about Soy Meal and the possibility of strong moves that could follow in Soy products.

http://techcharts.wordpress.com/2012/01/24/soy-meal-2/

Soy Meal has been forming a perfect text-book long-term symmetrical triangle and in the past two months it has rebounded from the lower boundary of its long-term consolidation range. The rebound started from 270 levels and reached 325 levels in January. It formed a clear inverted head and shoulder pattern with the neckline standing at 325 levels. This important resistance at 325 levels was broken on the upside in February. The strong breakout was followed by a rally towards the upper boundary of the long-term symmetrical triangle at 370 levels.

Strength in soy products in the past two months helped Soy Meal to reach its long-term resistance at 370 levels. This is also the inverted Head & Shoulder pattern price target. A breakout above 370 will generate a long-term buy signal for Soy Meal, but before that we are likely to see a pause in the strong rally that took prices from 270 levels to 370 levels in less than 3 months.

3 year-long symmetrical triangle on Soy Meal is on our watch list. This is a chart pattern that a technical trader/investor shouldn’t miss. It is important to note that price is now close to a major trend resistance that was tested 4 times in the past 3 years.

Crude Oil, Natural Gas & Heating Oil

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In the world of finance correlation is a statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction.

In the energy sector, Natural Gas, Crude Oil and Heating Oil prices are correlated. Though it is important to know the magnitude of the correlation between these commodities. Historical analysis of monthly returns have shown strong correlation between Heating Oil and Crude Oil. During the analyzed period between 1990 and 2011 crude oil and heating oil have shown strong correlation with 0.81 correlation co-efficient. During the same time period Natural Gas and Crude Oil have shown relatively weak correlation. Correlation was still positive with 0.31 correlation co-efficient. Monthly returns and their correlation can be seen on the figures below. Weak correlation between two instruments creates diversification opportunity. However, two closely correlated asset class or commodity would increase the risk in a portfolio.

 

Given the strong correlation between Crude Oil and Heating Oil, as the previous analysis suggests, one would expect a flat relative performance between the two commodities in the long-run. Relative performance (relative strength) is a measure of price trend that indicates how an index, commodity, stock or currency is performing relative to the other. I.e EUR vs. USD is the most common relative performance ratio that we follow everyday. It is the performance of EUR versus USD. It would have been great if we were to know that EUR/USD will trade between 1.10 and 1.30 in the next decade. During a period of 10 years we would have an edge by knowing when to sell EUR and when to buy USD.

After finalizing correlation study between the three energy commodities we search for relative strength patterns by calculating the ratio between Heating Oil and Crude Oil and also between Natural Gas and Crude Oil. Our findings show that we do actually have an edge to forecast the relative performance between each commodity. Heating Oil/Crude Oil ratio trades in a perfect range. 1993, 2000, 2003, 2008 and 2011 have been the peak levels for the ratio. At he peak levels Heating Oil was overvalued versus Crude Oil. 1995, 1999, 2002, 2004 and 2009 have been the bottom levels for the ratio. At bottom levels Heating Oil was undervalued versus Crude Oil. Knowing that Heating oil and Crude oil historically have 81% correlation and their relative performance ratio moves from one extreme to another should give us an edge. Heating Oil vs. Crude Oil shows cyclical behavior.

What about trending behavior? We know that Natural Gas and Crude Oil have 31% correlation. As a result their relative performance is not likely to be flat in the long run. Unlike the ratio between Heating Oil and Crude Oil, Natural Gas/Crude Oil ratio has shown trending behavior. 1990-2000 period shows positive relative performance, while 2000-2011 period shows negative relative performance for Natural Gas. Even though there has been spikes on the Natural Gas/Crude Oil ratio during the analyzed period, trends persisted.

CANADIAN DOLLAR

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This currency has a special place for me. During my post-graduate studies in Canada, I used to follow it closely as I was converting U.S. dollars to Canadian dollars almost every month. When I decided to move to Canada in 2003 crossrate was at 1.4 levels. 1 USD used to buy 1.4 CAD. It has constantly moved lower over the past decade and at one point it reached 0.90 levels.

Today I’m analyzing Canadian dollar and giving Tech Charts visitors a “heads up” on the possibility of a strong breakout in the following days. Canadian dollar formed several consolidation ranges in the past year. In Aug-Sep period a sideways consolidation, in Oct-Dec period a contracting range (symmetrical triangle) and now over the past one month another sideways consolidation. Each breakout from these consolidation ranges was strong and was followed by a directional move. Canadian dollar has been trading in a range between 1.009 and 0.995. Price found support above the 200 day moving average, a bullish development. We are likely to see a breakout soon. Please note that volatility reached an extreme low reading and a breakout could result in a strong move. A break above 1.009 level will be very positive for Canadian dollar. A break below 0.995 will be negative. My suggestion is to wait for a confirmation and take action when one of these levels are breached.

USD/JPY

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This time is different… Is it really different? The price action on USD/JPY will help us answer this question. A lot has been said and done for Japan, for its economy and for its currency over the past decade. 5 years trend has been downwards on USD/JPY declining from 125 levels to 75 levels. Deflation, earthquake, tsunami, quantitative easing and government intervention… All sorts of news effect and outside force has shaped the up and down swings on USD/JPY.

This is one of the most exciting charts and should be watched closely in 2012. 80 levels has been a critical support for the cross rate and lately we are seeing USD/JPY pushing above 80 levels, possibly reversing the false breakdown below 80.

In the past 5 years every counter trend rally found resistance at the 200 day moving average. Though there were few violations, none of them held above the long-term average more than two months. During the same time RSI had a clear downtrend.

Recently we are seeing USD/JPY rally towards the 5 year-long trend resistance and also breach above its long-term moving average at 78 levels. RSI is also breaking the 5 year-long downtrend. All bullish signals for the USD and bearish for JPY.

Is it really different this time? Will USD/JPY reverse its 5 year-long downtrend and rally towards 100 levels?  USD/JPY should be on our watch list in the next few months.

COPPER

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Readers of Tech Charts blog will remember my earlier analysis on Copper.(http://techcharts.wordpress.com/2012/01/05/copper/) On the 5th of January Dr. Copper was the first commodity that signaled RISK ON environment for the first part of 2012. Copper was the first commodity that broke out of its consolidation range (symmetrical triangle) at 355 levels. It was after this breakout that we have seen strength in the energy sector and other commodities.

Dr. Copper after rallying from 355 levels to 390 levels, entered into a sideways consolidation and in the past one month it has been trading between 370 and 400. Our famous volatility indicator reached another low level. We are now looking forward for a breakout from the latest consolidation range. It is important to note that price has successfully held above the 200 day moving average over the past one month (bullish). In the short-term we are likely to see a breakout in either direction. We need to see a confirmation. No anticipation at this point. A breakout above 400 levels will push prices towards 450 and a break below 370 levels will result in a correction towards 350 levels.

GOLDMAN SACHS COMMODITY INDEX

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This week we have seen some major breakouts. I have analyzed most of them in my previous updates. Commodities index had a strong run and broke out of its 6 month-long consolidation range. I have mentioned that this could be an inverted Head & Shoulder continuation pattern. It looks like this pattern is now confirmed after the strong breakout above the neckline at 675 level. Possibility of pullback should not be ruled out! It is very common to see a pullback to the previously broken support/resistance levels after these type of major breakouts. On the weekly chart it is now clear that the long-term uptrend (2009-2012) is intact and price remained above the 200 day moving average and also in the parallel trend channel. If I should give a rough calculation for the inverted H&S price target it would be 765 level. This is also the highest level the index reached in 2011.

I’m also updating the daily chart as well as weekly chart to see the strength of the breakout from the 6 month-long consolidation range. The breakout occurred at a low volatility period and also completed a nice symmetrical triangle at 680 level before continuing higher. Please note that energy sector has been the biggest factor followed by metals strength during this breakout. You can check my previous posts on energy sector strength.

http://techcharts.wordpress.com/2012/02/18/natural-gas-crude-oil-gsci/

http://techcharts.wordpress.com/2012/02/10/light-crude-oil-3/

NATURAL GAS, CRUDE OIL & GSCI

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This week we have seen strength in the energy sector with Brent Crude continuing higher after the breakout from its consolidation range, Light Crude Oil testing the horizontal resistance at $103.75 and Natural Gas trying to rebound from a major support at 2.45 levels. Strength in energy sector helped the Goldman Sachs Commodity Index breakout from its year-long consolidation range.

While I was reading futures magazine (www.futuresmag.com) I came across this nice presentation with numbers on natural gas-producing countries. I wanted to put the numbers in a nice graph and share them on this post. Meanwhile, I have updated the energy sector charts and reviewed the technical outlook. Below are some numbers for top 10 natural gas-producing countries with their annual production, consumption and proven reserves. In terms of production and consumption EU is in great disadvantage. While Qatar and Norway have the advantage to export their production due to their relatively limited consumption. In terms of proven reserves Russia, Iran and Qatar are the top 3 countries that can benefit from higher gas prices if they were to rebound from today’s depressed levels.

Let’s start our technical review with Natural Gas prices. After the global sell-off in 2008, natural gas had a weak recovery from 2.45 levels to 6.1 levels. Since the beginning of 2010, price moved sideways/downwards and recently reached 2009 low levels at 2.45. However during the same time period both Light Crude Oil, Brent Crude Oil and Heating Oil moved higher and recovered most of their 2008 losses. 2.45 level is a major support for Natural Gas and we can expect a rebound from this level towards the 200 day moving average at 3.45 levels.

In the beginning of February I analyzed Brent Crude Oil and drew attention to the bullish outlook and the symmetrical triangle that formed over the past one year. We can see that Brent Crude is now breaking out of the year-long consolidation range and helping the energy sector perform better in the commodities universe. It is important to note that large part of Goldman Sachs Commodity Index is composed of energy sector and strength in energy sector will have a positive effect on the GSCI.

http://techcharts.wordpress.com/2012/02/05/brent-crude-oil/

It was a strong week for Light Crude Oil. Price moved from $99 levels to $104 levels and closed at the important horizontal resistance. Light Crude might be forming a bullish continuation Head & Shoulder pattern with the neckline (resistance) standing at $103.75. Next week we should watch Light Crude for a possible breakout from this bullish pattern. A decisive breakout above $103.75 will target $115-$120 area in the intermediate term.

Almost all related charts are giving the same bullish signals. Brent Crude oil broke out of its consolidation range earlier in the month. This week we have seen a breakout on GSCI and now we are expecting a similar breakout on Light Crude Oil. Goldman Sachs Commodity Index breached above its horizontal resistance at 675 level. This should be regarded as a bullish signal for commodities. For the strength to continue on GSCI in the following weeks, price should stay above 675 level.

 

APPLE (AAPL.O)

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Though one share of Apple still not as valuable as one ounce of Gold, Apple with its products and its value in terms of market cap has been widely followed and discussed over the past five years. Every day I go through hundreds of charts and analyze different asset classes and I come across great opportunities that I share with you here on this platform. In this post I’d like to show a remarkable similarity between two strong uptrends. These uptrends drew investors attention and they have been widely discussed and followed in the financial media in the past few years. But before I analyze these two charts I would like to give a short definition of a parabolic move.

Parabolic trend is an exponential curve. The shape of the curve is parabolic and it reflects the acceleration in price activity. The curve (price) starts off almost as a horizontal line. The slope of the curve (price) increases exponentially as price action moves higher. The parabolic curve eventually develops to a point where the last points on the curve create a vertical line. The curve is then completed and so is the trend that it defines. Parabolic trends are momentum driven and when the trend ends, the sell-off is often dramatic and substantial.

Gold, in the second half of 2011 had a parabolic move. This was part of the continuing long-term uptrend that took off from $1,570 levels and reached $1,909 levels in less than two months. Interestingly, price reached the upper boundary of the long-term trend channel at $1,900 levels and entered into a multi month correction which started with a sharp sell-off.

Similarities between the uptrends on APPLE and GOLD  caught my attention while I was analyzing the technology stocks in U.S. During the uptrend APPLE respected the long-term moving average and found support at each correction. It also trended higher in a clear trend channel. The exciting part of this uptrend is the last run off from $400 levels to $526 levels in less than two months. The parabolic move reached the upper boundary of the long-term trend channel. Price behavior, technical indicators and the duration of the trends are similar for APPLE stock price and GOLD.

Is this an intermediate term peak for APPLE and can the stock price enter into multi month correction? Can the correction start with a sharp sell-off?

 

COFFEE

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If a market is below its 200 day moving average, it is likely to experience downward pressure on each high volatility period. When analyzing a chart I try to make sure below conditions are satisfied.

1) Direction on the long-term chart should be clear. If a market is above its 200 day moving average I should trade the bullish breakouts and expect the short-term chart patterns to break upwards. If a market is below its 200 day moving average I should trade the bearish breakdowns and expect short-term chart patterns to resolve on the downside.

2) I always follow volatility and look for chart patterns. Low volatility begets high volatility and vice versa. I combine volatility breakouts with the long-term technical outlook.

On the 23rd of January I’ve posted the long-term chart for COFFEE price. (http://techcharts.wordpress.com/2012/01/23/coffee/)

Long term price chart signaled weakness for COFFEE with stop-loss at 240 levels. Since the last update price moved lower and technical outlook deteriorated. Given that the price has been trading below the long-term moving average the latest volatility breakout on the daily chart signaled additional weakness in the short-term. COFFEE price is in a clear downward trend and with the intermediate/long-term stop-loss standing at 233 levels. Unless price moves above this level we should expect lower prices for COFFEE.