#$fxc

Canadian stocks are testing a potentially significant breakdown.

Believe it or not, the dog days of a Wall Street summer are just around the corner. And it appears as if the dog days of the post-February stock rally have already arrived. The rally has stagnated and stocks appear to be stuck in limbo. On the one hand, you have the former all-time highs and a slight deterioration in breadth conditions while on the other, you have conditions that are not yet ripe for any type of material breakdown in the broad stock market. Therefore, it would not be a surprise to see stocks continue to drift for a time while waiting for either side to build up a more convincing case.

That said, there has been one possible bearish change in character since the calendar turned to June. That is, while the post-February rally had thus far seen prices of most indices able to clear key resistance quite easily, that is no longer the case. We have seen multiple examples recently where various segments of the market have stopped precisely at obvious resistance levels -- like they’re supposed to. The Canadian stock market is one such example.

After topping out in September 2014, Canada’s main stock market index, the S&P TSX Composite (TSX) has made a series of lower highs and lower lows. That said, the rally in the TSX since January has been quite impressive, tacking on about 25% and making a slight higher high on a short-term basis. However, as mentioned the TSX rally stopped earlier this month right near resistance where it was supposed to. And it is fairly formidable looking resistance.

As the chart shows, there are several analyses around the 14,250 level that make the recent peak quite compelling as a potentially more substantial top. First off, we have the all-important 61.8% Fibonacci Retracement level of the decline from the 2014 top to the January low. Secondly, we have the breakdown level from August 2015, from which the decline in the TSX significantly accelerated. In addition, we have the 500-day moving average (not shown), which does a fairly good job of delineating longer-term trends.

Lastly, we arguably have a pattern traced out since the February lows called a rising wedge. A rising wedge consists of higher lows and higher highs, with the highs rising at a shallower trajectory than the lows. And despite the higher lows and highs, the pattern is actually a bearish formation. In our experience, more times than not. the rising wedge culminates with prices breaking down below the lower bound. That is precisely what happened in the TSX about 10 days ago.

This loss of the lower trendline of the wedge is potentially devastating for the TSX, in particular because it occurred just off of multiple, transparent resistance levels. The index is making a run right now, possibly, at testing the breakdown level of the wedge, etc. Should this test fail as soundly as the TSX did upon its initial foray into resistance, it may well be reasonable to begin considering that the early-June high was the top for the post-February rally.

Again, while the formidable resistance is the key takeaway as it pertains to the TSX, the larger message for the broader market is that rallies in various markets are beginning to fail right where they should. This shows a drying up of demand. It is also a far cry from the first several months of the post-February rally wherein markets around the globe were blowing through resistance levels that should have stopped them.

That action was likely the result of the breadth and momentum thrust off of the February lows that carried markets farther than expected. At this point, the benefits of that thrust have likely run their course. Markets are beginning to trade again based on their own, current merits. For the broader market, that may mean that stocks will continue to drift sideways until clearer evidence arises suggesting a big move, up or down.

However, based on its chart, and prices’ reliable adherence to it, the Canadian stock market would probably be lucky, at this point, if it was able to merely drift sideways.

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More from Dana Lyons, JLFMI and My401kPro.

This 5-pack looks at the US$ and several currency ETF's that seem to highly influence commodity prices.

CLICK HERE TO ENLARGE CHART ABOVE

Last week the US$ was testing 1-year falling support above (lower right chart), where it might have created a bullish reversal pattern (bullish wick) at this support line. Let me make this clear, I am NOT saying that one week's price action in the US$ makes a trend.

On the flip side, the Aussie$ (FXA), Canadian$ (FXC), Euro (FXE) and the Franc (FXF), might have created bearish reversal patterns (bearish wicks) at falling resistance lines (at the red arrows).

Commodities remain in a down trend over the past few years (lower highs and lower lows). What these "commodity sensitive currencies" do at falling resistance, will have a big impact on whether commodities can breakout of this trend over lower highs and lower lows. What King Dollar does at support, could have a big impact on Gold, Silver and Copper in the near future.

What FXA, FXC, FXF, FXE do at falling resistance, should give us a big clue to where commodities might be a couple of months from now. If they breakout, the CRB index could do well. In some ways, the world might "hope" these currencies breakout, to keep global deflation at bay.

The brisk 3-month rally in the Canadian Dollar has brought the currency back to the 2015 breakdown level of decade-long support.

We don’t typically cover currencies too closely; however, given the U.S. Dollar’s year-long consolidation, there has been no shortage of interesting developments in the FX market recently. This includes, presently, the action in the Canadian Dollar, a.k.a., the “Loonie”, which has suffered extensive damage over the past few years in conjunction with the deflationary spiral in commodities.

The Loonie’s decline accelerated last July when it broke down below the 0.78 level versus the U.S. Dollar (CAD/USD) which had served as support for the prior decade. Following a swift drop down near 0.68, the currency bounced in January and has now found its way all the way back to near the 0.78 level again.

You’ll note on the chart that the approximate 0.78 level held as support at the major 2008-2009 lows in the CAD/USD and again in early 2015. Following the July breakdown below the 0.78 level, the CAD/USD tested the level in October. The former decade-long support indeed proved to now be resistance as the CAD/USD failed precisely at the breakdown level. As mentioned, the currency proceeded to drop a further 12% drop into January. 3 months later, it has now rallied back to the 0.78 breakdown area again. Will this level serve as resistance once more?

While the fact that the 0.78 level has served as a 10-year pivot point is certainly the best reason to expect the level to act as resistance, it isn’t the only reason. There is also a convergence of 3 key Fibonacci Retracement lines right at 0.78 that may reinforce the area as resistance. These lines include:

23.6% Fibonacci Retracement of 2007-2016 decline

38.2% Fibonacci Retracement of 2014-2016 decline

61.8% Fibonacci Retracement of May-January decline

We would expect this area to provide, at least initial, staunch resistance for the Canadian Dollar. If so, it may be indicative of a broader barrier in the global “reflation” trade that remains in effect currently. If the Canadian Dollar fails decisively at this 0.78 level, and other related assets follow suit, it may clinch the post-January rebound in commodities and commodity currencies as simply a mean-reversion, “dead cat” bounce.

However, if the CADUSD can convincingly break out above the 0.78 level, it may instead suggest that the move of the past 9 months was a massive false breakdown. This would be further evidence that the reflation trade is for real and more durable than merely a dead cat -- or dead loonie -- bounce.

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More from Dana Lyons, JLFMI and My401kPro.

The Canadian Dollar seems to trade with the weather lately.  It fell from a peak in hot sunny July to a bottom in cold snowy February.  From there it just sat until mid April when it started rising with the temperature as the ice and snow melted.  Seems an easy currency to trade huh?

Well if you are about to buy the Loonie, as traders call it, you might want to know that the mountains in the west are due for 5 inches of snow today.  Oh, and the chart of the currency is approaching a critical area.

The chart shows that fall in value over the back half of 2014 and the stabilization.  The bounce now is nearing the 38.2% retracement of the move lower.  This is a key measure for traders, especially currency traders.  It is an important Fibonacci level, but it is more than that.  This particular Fibonacci is a turning point for a show of strength.  Until the Loonie gets over this level it is characterized as a bounce, not a reversal.  

Meaning that failure there is the bet.  And the momentum indicators are playing along with that.  The MACD is rolling lower and about to cross down, while the RSI is reaching overbought territory.  Should it 'correct' through time instead of a move lower then a continuation over 38.2% should attract more interest in the currency and target a move to the 61.8% retracement near 88.  

This winter has been harsh everywhere.  Snow in the Carolina's, Dallas, and southern California is just crazy.  But in the northeast and midwest it was a second batsh$t crazy winter.  I live outside of Cleveland and there is so much snow I can't get my car out of the garage.  There is no where for the plow to put the snow.  And the ice on my roof, ugh.  I just paid some guy $275 to climb a ladder and bang a hammer on 7 feet of 6 inch thick ice to break up an ice damn.  So knowing that Spring is right around the corner is like seeing a light at the end of the tunnel.

Winter (read snow) starts around Halloween in Cleveland so my misery has been going on for 4 months.  A long time for a 3 month season.  But I think of my neighbors to the north and how bad they have it.  Yes they are used to the snow and cold but what I am referring to is the cold spell in the Canadian Dollar.  The Loonie has been chilling since the beginning of July.  That is a long winter for the currency.  But there are signs of spring arriving there as well.

The chart of the currency ETF that mirrors the Canadian Dollar ($FXC) above gives the signals.  the first is at the top of the chart where the RSI, a momentum indicator, has been moving higher since the beginning of February.  Like a crocus peeking through the snow, it is piercing the mid line on its way towards the bullish zone.  The MACD at the bottom is also driving higher.  The divergence of these momentum indicators, leading price to the upside puts the Loonie on your radar.

Looking at the price action itself, the currency made a bottom to end January and started higher.  Finding resistance at about 80.30 its pullbacks have been shallower each time.  This creates a technical pattern called an ascending triangle.  A technician would look for a move of about 2.50 on a break of the triangle.  And the Bollinger Bands® shown by the blue envelope are tightening suggesting a break may happen very soon.  Will it be a spring bounce for the Loonie?

In a world of slowing growth, currency debasement has become the economic weapon of choice.

In the last month alone, we have seen central banking easing measures announced in Romania, India, Switzerland, Egypt, Peru, Denmark, Turkey, Canada, the Eurozone (QE), Pakistan, Albania, Russia, Australia, and China.

More cuts are on the way, we are told, as there is seemingly no end in sight to the tit for tat moves of this global currency war. If we look around the world at the major central banks, with the exception of Brazil (who has been forced to hike because of high inflation), everyone is in easing mode.

Even Russia reversed course in January and cut rates by 2%, shocking everyone after their emergency rate hike in December. Despite year-over-year inflation of 15%, the Russian central bank was under intense pressure to lower rates from industry and commercial banks.

Zero-bound No More

As we have seen, 0% is no longer the lower bound when it comes to central bank actions. After reaching 0%, they have moved to quantitative easing (as was done in the U.S., Japan, and the UK) or the previously unthinkable: negative interest rates.

Last June, the ECB moved its deposit rate to -0.2%. After a few months, this was viewed as “not enough” to crash the Euro and the pressure started building for a full-scale quantitative easing program. The ECB delivered a few weeks ago with a €1.1 trillion plan. With rates already at all-time lows across the Eurozone, the intention of the asset purchase program was clear: debase the Euro.

In response to these actions, Switzerland has moved its target rate down to -0.75% and Denmark moved its benchmark deposit rate to -0.5%. The moves are not over, though, as Denmark is expected to cut its benchmark deposit rate to -1% this week.

Taking a page from the Mario Draghi playbook, Denmark’s Central Bank Governor Lars Rohde has pledged to do “whatever it takes” to keep the Danish krone from appreciating. This may include their own quantitative easing program to further push down yields, Rohde said in a recent interview.

If Everyone Debases, No One Debases

The absurdity of the global race to debase and believing it is a panacea for slowing global growth is clear.  Currencies are all relative and if everyone debases, no one debases. Even if we assume that you can debase and benefit via improving exports, by definition someone else is hurt. Unless you believe that debasement lifts overall global growth, this is a mathematical fact.

Over the past year, as we have seen attacks and counterattacks across the globe, what has really occurred is a broad depreciation against the U.S. dollar. This is clear when looking at a chart of the Australian dollar, Yen, Euro, Canadian Dollar, and British Pound against the U.S. dollar.

When viewed against one another, the advantages are less clear. If we are to believe that these countries are debasing their currencies in order to boost exports and growth, then U.S. exports and growth must in turn suffer as a result. Someone has pay the price as there is no free lunch in currency war games.

Where there has been a free lunch thus far is in the stock market, as the prevailing narrative is that when Japan, Europe or anyone else debases it is bullish for all stocks. This is entirely sentiment driven, of course, and will continue as long as faith in central banking is intact.

From Stability to Volatility

On that point , faith in central bankers to solve the world’s economic problems has never been higher, but the effect on markets seems to be slowly changing. For years central bank actions have been a source of stability and calm, but they are increasingly becoming a source of volatility.

This volatility will likely continue as the currency wars intensify and markets become more and more dependent on the continuation of easy monetary policy.

Ending the War and Saving Capitalism

Is there any hope for an end to the currency wars? Perhaps. There is a now a growing consensus that the U.S. Federal Reserve will make a peace offering with a rate hike by the middle of this year. This will be the first increase in rates for the U.S. since 2006, over nine years ago.

There is much debate today over whether they will or should go through with such a hike given the ongoing easing in the rest of the world. The rising dollar is already putting pressure on U.S. company earnings and this could intensify if the Fed chooses to finally raise rates.

But the alternative, doing nothing, may be more harmful still as the unintended consequences of distorting market rates is becoming more and more obvious the longer the Fed stays at 0%. As Bill Gross said recently, the Fed needs to raise interest rates to “save capitalism” which depends on the “rational hope that an investor gets his or her money back with an attractive return.”

Will the Fed choose to “save capitalism” or continue with the command economic system that has been serving the short-term interests of financial assets to the detriment of the real economy? I would like to think that Janet Yellen and the other voting members will choose capitalism but they cannot serve two masters. They either need to abandon the Bernanke “wealth effect” theory or continue the status quo.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

After the initial breakout earlier this year and successful retest of former resistance, I have consistently said that the USD/CAD chart is one of my favorites in the entire world. And you guys know how many I look at. More specifically I’ve liked this chart from a structural perspective because of the 4-5 years of basing. I don’t like it when people take victory laps after a good call because I constantly preach that it’s not about being right, but about making money and managing risk properly. So bragging about a great call contradicts that type of mentality. So I don’t like to do that myself. But today I am going to make an exception because for educational purposes I think that not pointing out how beautiful this base has been and the consequences of its breakout would be doing a disservice to all of us, particularly newer market participants. I have highlighted each point in the chart with a blue number.

When looking through charts, I like mine clean. I don’t like messy charts that are all over the place. I have to say, that this one really has behaved so well and remained so clean that it has almost been impossible for me not to love it. The first thing that stood out to me earlier this year (Point 1) was the initial breakout above several years of resistance. Here is the weekly chart showing this breakout above 106 to start the year that gave us an initial target just below 113 based on the 161.8% Fibonacci extension of the most recent decline, which took place from October 2011 to September 2012:

Once this initial target was achieved in March of this year (Point 2), prices pulled back and retested the initial breakout level. Notice how not only did former resistance turn into support (we call this “polarity”), but there was also an uptrend line from the 2012 lows at that exact same price (Point 3). After a successful retest, prices then rallied through former resistance in March and is currently hitting our target of 1.166 based on the 61.8% Fibonacci retracement of the entire 2009-2011 collapse from 1.30 to 0.94 (Point 4).

Here is a closer look at the most recent breakout and consolidation. In July prices got down to this 106 area that we can see on the weekly timeframe was former resistance since 2010 (Point 1). After rallying back to the March resistance this Fall (Point 2), prices began to consolidate and digest the gains while also acknowledging this overhead supply. That downtrend channel throughout November (Point 3) was the consolidation that it needed before heading up to the next target, which was the 161.8% Fibonacci extension of the 2014 correction and retest of that former resistance (Point 4). This also happened to be the 61.8% Fibonacci retracement of the entire 2009-2011 decline which we can see on the weekly timeframe:

For me it’s best when there are multiple reasons for levels to be relevant, whether it represents former support/resistance or if it’s a Fibonacci extension/retracement level from a previous trend. I prefer both and I think this is a great example of these support/resistance clusters turning into powerful levels. At this point I think some acknowledgement of this level would be both normal and healthy. But if we can manage to breakout at some point above this 1.166 target of ours, there is little in the way of prices heading back towards the 2009 highs. It’s a bit premature to call for that now because we like to be disciplined and take profits when targets are achieved. But after some time passes, it might make a lot of sense to reevaluate and perhaps turn bullish once again. But we’ll worry about that down the road.

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The US Dollar is one of the more fascinating markets today. There are so many things going on currently that I think it’s hard to just group them all together. Remember there are several components that make up the overall index, so today I wanted to breakdown the different pieces and see how they fit together to make up the entire basket. We’ll focus on the biggest 4 names and see what we can learn from what is currently going on.

First here is the US Dollar Index itself consolidating nicely above the upper of these two converging trendlines since the 2005 highs. I have to say that as long as we’re above this downtrend line, there is no reason to be bearish this currency basket. In addition, the longer it remains above the downtrend line, the more likely that this breakout is for real. Momentum in a bullish range since 2011 and now confirming that as it enters overbought conditions is another positive for the US Dollar Index as a whole:

The Euro is something very interesting here. We do a lot of sentiment analysis and they really loved this thing in May; at the worst possible time. Now that the Euro has gotten crushed, the sentiment is at levels not seen since Summer 2012, right before the Euro exploded higher into year end. So we try and look at this market to see where we might find the beginning of a mean reversion trade.  We’ll look at the Daily chart since it is the most actionable based on current sentiment. Here we can see EURUSD rolling over to new lows and approaching the breakout level from 2012. If Euro can manage to find some support here as momentum continues to positively diverge, this would be a nice entry point on a long. Good risk/reward. But if this breaks, which there’s no way to tell at this point, we could potentially see the 2012 lows. What would worry me about that scenario is that the potential bullish divergence we’re watching may not play out, making this a lower probability long. So this is what I see. We’ll wait for a setup to come, if it ever does. If not, no big deal.

The next interesting component I see is the British Pound. I’ve been watching this big downtrend line from the highs in 2009. It looked like after a nice breakout last year, we could potentially see a nice recognition of that former support and allow for demand to take over at that trendline. Well that certainly did not happen as prices continue to fall through that and approach former support from last year (shaded gray) and 61.8% Fibonacci retracement from the 2013-2014 rally. This is something we would only consider being long if we were above that blue downtrend line. Momentum hitting oversold conditions in the recent sell-off is another feather in the hat for the bears. With a flat 200-week moving average, a lack of trend at best is likely here for now. I’m only interested above the blue downtrend line:

One of the most incredible moves in recent years has clearly come from the Yen. The Japanese are absolutely destroying their currency over there. After the initial breakout from this symmetric triangle a year ago, prices stalled at the 61.8% Fibonacci retracement from the 2007-2011 decline. But notice how the acknowledgement of that supply came through a sideways consolidation and not through a downside correction. This is the stronger of two ways for prices to correct, in this case through time rather than through price. After breaking out again in August, prices retested that level last month successfully and we’ve been off to the races ever since. We are now above the 161.8% Fibonacci extension from that symmetrical triangle last year, which also represents the highs in August of 2008. Our next target is up near 120 based on the 2.618 extension of that triangle. I think that’s where we’re headed next. With momentum in a solid bullish range, there is no reason not to be bullish USDJPY unless we break back below the August 2008 highs, where a more neutral approach would be best. 120 here we come.

And finally, this one has to be one of my favorite charts in the world. I love big bases. Is there a nicer base than USDCAD over the past several years? From a structural perspective, this is one that I talk about and write about constantly, for obvious reasons. We have big rounding bottom since 2010, a nice breakout at the end of last year, a successful retest of former resistance, momentum in a bullish range and now we’re ripping to new highs above the 161.8% Fibonacci extension from the 2011-2012 decline that was acknowledged by the sellers this March. The next target is above 116 which represents the 61.8% Fibonacci retracement from the 2009-2011 decline:

So all in all, the Dollar is still the stronger side of all of these fractions. I see no reason to be short the Dollar Index here, particularly with this much strength vs the CAD and YEN. I think the Euro can set up a mean reversion soon, but we’re just not there yet. I’m looking at that specific market tactically and the rest more structurally for the purposes of this discussion.

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