THE KEYS TO THE COMMODITIES (FNV,CGNX,BOTZ)
In the next couple of weeks, a significant technical signal will be triggered that will affect commodities, in particular, and the stock and bond markets in general.
It’s found in the daily chart of the U.S. Dollar – an item viewed regularly by technicians the world over – and it looks like this…
This is the U.S. Dollar Index (DXY), a composite value for the dollar that’s derived from its performance against a basket of six important global currencies.
What you’ll notice, first and foremost, is the rollover occurring in the daily moving averages (circled, in red). The last of the salient MAs (orange) is now within days of turning below the long term yellow line, and when that occurs the technical nail will be driven into the dollar coffin, with all moving averages unfurled and trending lower.
That’s not to say, of course, that we won’t see some bouncing and retracing over the next couple of months, as that will surely happen. What we are asserting is that dollar weakness is about to be confirmed as a feature of our financial landscape for the intermediate term, that is, anywhere from two to eighteen months.
Get used to it!
We would also add that sub-waterline RSI and MACD indications (in blue) support the dollar bear analysis.
So what, you say?
Well, first up, you should know that this is the first such technical occurrence in the Dollar Index since the summer of 2011. At that time, the dollar was nearing its intermediate term lows and shortly thereafter turned higher, so if history is a precedent, the current decline may, in fact, be short-lived. But there’s little gainsaying that a decline is now in the works.
The DXY weekly and monthly charts are also leaning bearish and show the next lines of support for the buck at DXY 90 and 87 (black insert, above).
Feel the Heat
The strongest pull on the cheap dollar leash will be felt in the commodities, which move as a group inversely to action in the dollar.
From oil to foodstuffs to the industrial and precious metals, upward pressure will be applied, and as the following chart of the PowerShares Deutsche Bank Commodities Index ETF (NYSE:DBC) shows, the overall commodities complex is on the verge of an upside breakout as we write.
A number of technical developments are all occurring simultaneously –
- Price has hit resistance (in blue). A move above $16.55 will signal that the breakout has occurred.
- All the important moving averages (in red) are on the verge of unfurling, and all are trending higher. We shouldn’t have to wait more than a day or two for this, and when it does occur, a significant cohort of technical buyers will emerge.
- RSI and MACD indications are now bullish. The former crossed above its halfway ‘waterline’ just over a week ago, and MACD confirmed by surfacing today.
Taken together, we have a picture of an imminent move higher in the commodity complex, and that, too, may be implied in the following bit of chartist loveliness.
It’s nearly half a century of commodity prices, as represented by the Goldman Sachs Commodities Index (GSCI) divided by the S&P 500. And as you’ll see, we’re currently at a very extreme read.
Compared to the high-flying equity market, commodities have been given short shrift of late. In fact, we’re now at GSCI/S&P levels never seen in the last 50 years, a phenomenon that will shortly correct in one of two ways. Either stocks will back off appreciably, or commodities will take wing. Or, more likely, both.
And while that could make for a healthy pairs trade, our priority is to focus on the commodity side at present; indeed, on a single subsector – and we’ll get to that in just a minute.
But first, we have a single, open trade that requires your attention.
It was opened in a letter called Investor, There’s a Bug in Your Olive Oil that arrived in your inbox on November 9th and recommended you sell the CGNX May 18th 185 CALL for $1.35 and buy the BOTZ June 15th 25 CALL for the same price. Zero premium was the result.
And today: good news.
The CGNX CALL trades for $0.40, while the BOTZ CALL goes for $0.90. Buy back the former and sell off the latter, and you come away with $0.50 on nothing laid out. Adjusted for minimal commissions gives you a take of 233% in less than two months.
And a wonderful gift for the New Year.
Of course, Docktor…
Our trade for the week is a play on the precious metals, for whom we’ve been bullish for some time now.
But within the precious metals, we have a favorite play that we’ve made consistent profits from over the years. And it’s to that stock we turn once more for our final effort of 2017.
The company is called Franco Nevada (NYSE:FNV), and for those who are not familiar with it, here it is in brief…
FNV is not a precious metals miner, it’s a royalty company. That means it buys a percentage of the actual gold output of real miners, offering cash to the companies for their operations.
And the strategy has been enormously successful.
As the chart below shows, the overall trajectory of the price of bullion has had little effect on the fortunes of Franco Nevada.
The chart begins with gold’s bottom in late December, 2015 and her subsequent 20% rise to date. Franco Nevada, as you can see, has tacked on better than 70% during that period.
We have every reason to believe that an imminent rise in the price of commodities will offer FNV longs a far more robust return than even that.
To that end we’re advising the following –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns for a safe and happy New Year’s. Be careful out there, and stay warm!