Trump Builds Spectacular Wall… of Worry (DBC,QQQ)
You gotta hand it to the guy.
With all his extreme plans and revolutionary positions and bombing raids and war on the media and threats of more; with all the brouhaha he’s created among fellow Republicans in Congress and the apparent fallout with his closest advisors and even his core constituency; with the game of chicken he’s apparently decided to play with the Spending Bill, with Obamacare and North Korea and Russia and Paul Ryan…
With all that…
One would think that everyone and his sister would be fleeing Dodge on the first coach out – and taking their investments with them!
All the hullabaloo has managed only to goose the markets in a way absolutely no one expected half a year ago, leading to one of the most prolific climbs in stock market history, and certainly the best jump in any post-election period this country has known.
Was it always the plan to sow confusion and unpredictability in order to stimulate the markets?
Not likely. But it’s happened all the same, and our feeling is that there’s a whole lot more to come:
- On the part of the new president, because he seems to enjoy the atmosphere of havoc and the role of iconoclast that he and others have cast him in, and
- On the part of the markets, which always respond well to a backdrop of widespread anxiety and foreboding.
Matt McAbby is the funniest man alive – EVER!
So what’s that got to do with the price of iron ore in China?
Glad you asked.
The market’s rise has been putting pressure on the commodities. The breakdown in the iron ore market over the last month (seen below) is symptomatic of an over enthused speculative cohort, that bid up prices post-election in anticipation of massive infrastructure budgets and the possibility of trade wars with China, Mexico, Canada and potentially others. That, along with a growing iron ore supply glut, eventually led traders to take profits.
In short, the price rose too far, too fast and was overdue to come back to earth.
Take a look –
The question remains as to whether the rest of the commodities are due to experience a 25% retrenchment, or if we’re now through the worst of it. Certainly, the base metal complex has pulled back along with both food and petroleum products – and the broader commodity averages, like Bloomberg’s and Deutsche Bank’s Commodity Indices all show significant declines of late.
That said, it’s hard to see more in the offing.
Have a look at the Deutsche Bank Commodity Index Tracking Fund (NYSE:DBC) for the last six months –
Certainly, the market has been very volatile of late, and most recently has shown steep weakness.
But a look at the price action shows we’re still making higher lows (red circles), and if we move higher than the last retracement high at $16.10 (in blue), the uptrend will remain in force.
Will that happen? Hard to say, but until we see a breakdown below the last retracement low at $14.70, we have to figure that the bulls still hold the upper hand.
RSI and MACD indicators are neutral to negative at the moment, offering little of predictive value in green).
So Where To?
The excitement grows when we pull back to look at the weekly chart, where both the long commodity decline and the current bottom take on clearer focus.
Have a look –
From the last major high in the summer of 2014, DBC declined 56%, wiping out a huge slew of longs in its wake.
But according to RSI and MACD indicators, the picture began brightening as early as January 2015, when positive divergence against price revealed the selling momentum to be slowing (green lines). Since then, both indicators have climbed above their respective waterlines, giving us a bullish buy signal from June of last year.
Commodities buyers from that time, however, have likely been frustrated, as the index has largely trended sideways, building a base and waiting for a breakout.
We believe that breakout is now imminent.
Precious metals have not participated in the latest commodity declines, and that gives us reason to believe the commodities as a group have seen their worst.
After a devastating six year bear market, there’s renewed hope for commodity bulls.
But what’s it got to do with the precious metals?
Intermarket technical analysis teaches that the commodity spectrum generally follows movements in the precious metals, the latter being more sensitive to buying and selling patterns for the broad class of ‘real’ assets.
And how have the precious metals been behaving of late?
Like a go-go girl in love.
This is gold, as represented by the SPDR Gold Trust ETF (NYSE:GLD), for the last six months –
Gold has risen without a thought to the rest of the world and its noisome intrigues. As has silver.
And now it’s time for the rest of the commodities.
Before we offer you a commodities trade, we have one initiative to report on. It closed last week on expiry, and we lost the full principal.
The letter was sent on March 9th, was called Exclamatory Straddle and recommended you purchase the QQQ April 21st 136 CALL for $0.23 and the QQQ April 21st 126 PUT for $0.70. Total debit on the affair was $0.93.
And it just didn’t go down.
Unfortunately, there was almost no movement in the index after the trade was set, so both options deteriorated substantially – and quickly. We monitored it closely, but there was literally no chance to roll it out, up or down.
We take the loss with a heavy heart, and regrets.
In the meantime, we’re creating a synthetic long with DBC.
And it looks like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,