Gone Fishing Newsletter UNLOCKED: July 9, 2017

The Week Ahead And How I’m Looking to Trade It

 Key Events:

Inflation expectations will hover around CPI + PPI readings from Japan, China, Europe and US this week. This may cause a bump either way but not as big as BOJ reiterating its commitment this past Friday to pegging bond yields to zero, devaluing the Yen, again. US retail sales Friday follows AMZN Prime Day July 11th so expect fireworks–one way or the other–as both are a read on US consumerism. Earnings season starts, albeit lightly, until Friday when The Big Four US Banks report. These four banks represent 40% of XLF so it’s kind of a big deal. Oh, and Yellen gives testimony to Congress mid-week which will be picked apart by all while active traders/investors will watch how the market reacts to the FEDs proposed tightening measures.

Key Economic Reports:

Sunday:  Japan Bank Lending, Current Account, Core Machinery Orders;  China CPI, PPI
Monday:  Germany Trade Balance,  Eurozone Sentix Economic Index, US LMCI, Austrilia Home Loans, NAB business confidence
Tuesday:  Italy Industrial Production, US JOLTS, Wholesale Inventories, API Crude Inventories, Japan PPI
Wednesday:  Eurozone Industrial Production, US DOE Crude Inventories, China Trade Balance
Thursday:  Germany, France, Spain, Switzerland, Ireland CPI, US Jobless Claims, PPI, Treasury Budget
Friday:  Japan Industrial Production, Finland, Italy CPI, Eurozone Trade Balance, US Retail Sales, CPI, Industrial Production, Capacity Utilization, Business Inventories, Michigan Consumer Sentiment (prelim)

Key Earnings Reports:

Monday:  HELE CUDA
Tuesday:  PEP TCS
Wednesday:  FAST
Thursday:  DAL
Friday:  C, JPM, PNC, WFC

Market Overview

I subscribe to both technical and gut trading analysis. Page 162, Reminiscences of a Stock Operator, the famous account of legendary trader Jesse Livermore, sums up my feelings about the current market backdrop perfectly.

Summarized below is Urban Carmel’s assessment via his Fat Pitch blog. This would be more a quantitative approach ;-).

SPX has gained every month in the first half of the year, and it is up 8 months in a row for just the fifth time in 26 years. Three of those four prior times closed lower in the next month (save 1995). The crack that opened in NDX two weeks ago has widened further. The index has now fallen 5% and has broken below its 50-dma. The NDX made its most recent all time high (ATH) on June 8. It fell 2.5% the next day and has corrected a total of 5% since then. NDX closed below its 50-dma for the first time in 137 days – the longest such streak since 1995. The consistent historical pattern is for SPX to follow, lower. That hypothesis is further supported by bullish sentiment – at a 3-1/2 year high.  Last time sentiment was this high, SPX fell 6% later that month. The exceedingly tight trading range in SPX over the past month most often precedes an expansion in volatility. Simply put, the uptrend appears to be weakening and the set up for uninterrupted gains in SPX is softening. During the past 7 years, drops of more than 4% in NDX have always coincided with falls of at least 3% in SPY. That doesn’t sound like much, but it would be the largest drop so far in 2017. Repeated touches of the 50D increase the likelihood of a larger break. A 3% correction targets the 237.5 area. A 5% correction from the recent high in SPY would target the 232.5 area, equal to the mid-April low.

For a pure technical assessment from a master technical analyst I follow, here is John Murphy’s note this weekend:


Sentiment Only Matters at Extremes

My Macro-to-Micro trading style combines Technical, Fundamental, Intermarket, Macro and even Sentiment Analysis. But I firmly contend (or maybe just to keep it simple in my head), that sentiment only matters at extremes. We’re getting close:

How I’m Positioning

Macro-To-Micro Themes:

TLT and Rates: TLT support is at $122; getting and staying above $123.50 would be LRE (low risk entry) for a bounce higher, possibly a sizable bounce back to $131/132. With Yellen testifying this week, and everyone on FedWatch for July 26th rate decision, I think a ‘sell the rumor, buy the news’ set up is setting up. Past four rate announcements have been met with rates falling–the opposite of what many expected. Whether she raises or not, rates seem to have gotten ahead of themselves this trip so I am betting that they retrace and with that TLT advances. That and we still have TNX 1.874% gap fill which happens to also be .618 retracement of the entire rate move since last summer. I know that’s far from 2.39 currently but a gap is a gap, and we were at 2.34 after an explosive move from 1.35 when I said in Feb this year that we would likely retrace to first gap fill at 2.126. With TLT above the 200D, I will have more conviction that it can move higher; XLP and XLU should similarly benefit and banks (XLF KRE) should pullback as a result.

XLF: I will likely short into Friday’s earnings announcement when The Big Four announce. As rates have potentially run too far too fast, so too may have banks and with a few bank CEO warnings around trading revenue, I think it worth a ‘flier’ on some selective shorts for EPS plays. I also think recent breakout by banks, notably C, need to retest resistance/now support before committing capital for the long haul. After all, a breakout is only as good as its retest. My short PT (price target) is $24 then $23. Above $25 on a weekly and I am wrong; below $23 on a weekly and we are headed to pre-election lows around $20.

USD/JPY: I did not see Friday’s announcement from Japan coming. I strongly believed, and was positioned, for a market to roll over, and hard. If Kuroda hadn’t come out and recommitted the BOJ to their zero-interest rate peg (last time was Feb), I would already be positioned in many shorts versus stopped out of many. But that’s trading. There is risk involved!  Now I am watching closely to see if 1. Kuroda joins the global rate-rising party, 2. Credit market loses faith in Kuroda, 3. NIKK stops going up. The Tell: if the NIKK falls instead of rises, it could be a clear sign of ‘failing confidence’ in the grand Japanese experiment. Keep in mind, this view is not consensus let alone ‘path of least resistance’. Suffice it to say, trading SPY/SPX/VXX/VIX against the dollar-yen trade with conviction is in vein until the BOJ breaks their position or the market breaks it for them.

SPX: My bias is to the short side in SPY as earnings get underway. I was a big proponent of buying the rumor in Fall of ’16 with the thesis that the earnings recession had troughed. I am now inclined to sell the news of earnings being priced to perfection now. With valuations now well above average, it’s hard to embrace ‘the consensus’ expecting earnings to grow about 10% this quarter and 20.7% for all of 2017. Translation: the bar/expectations have likely gone from too low to too high.

VIX: My bias is to the long side in VXX. There are too many reasons to detail here. I will have to do another post. So how do I trade a volatility product long that is designed to fall continuously? Carefully and through Timing. Also, I prefer to use credit spreads financed by selling puts. Moving forward assume I will ALWAYS have some form of long-biased VXX position on. And I may even add SVXY calls to that. We are entering a period of more volatility not less. Careful.

IWM: After seven months of sideways, I believe small caps will move ferociously down in a few weeks, so I want to be positioned with a put spread in September at a minimum. The break of $138.50 will bring about $133 very very quickly. Think March 20 flash crash but it won’t recover until pre-election $125 – $115 area.

EEM: I am swing short. In the same way that big tech has taken off and pulled up EEM (since big percentage of revenues come from overseas), I believe a forthcoming pullback in tech will pull them lower. Also EMB (Emerging Market Bond ETF) is representative of EM credit (Credit Leads Equity!) and it has already broken down on the chart. With that, EEM looks ready to fall so I am waiting patiently with put spreads.

EWG: Last week the German DAX broke below the previous high forming what appears to be a double top. The question then is whether the DAX and other European markets have turned so in anticipation I am waiting patiently with put spreads.

Money Rotates Somewhere

And it’s rotating out of Tech I believe. Pullbacks can be quiet then all at once or loud and one by one: Think TSLA, DIS, GE, ORLY/AAP/ AZO. My job as a volatility, directional, macro-to-micro trader is to be positioned for the next run or reversal, before it happens ideally, and I think a Nasdaq pullback is here so who’s next?

FAANMT: AMZN has prime day July 11th and no one is talking about a flop. NVDA has a gorgeous topping pattern that could result in a 50% retracement but no one dares talk badly of this cult favorite that has risen ~500% in ~15 months. NFLX has been the one listless FANG this year, a reminder that a tired leader is one more likely to fall. MSFT is fighting gravity despite falling out of a tight weekly wedge and laying off thousands. AAPL is forming a very ominous head and shoulder pattern with measured move to $132 that looks to time with its next earnings release. FB is just ridiculously overvalued, like TSLA was before it’s 17% drawdown in 3 days last week. Fun times.

QQQ: Head and shoulders has measured move to $130. Above 139/140 I’m wrong. The 200D is down around 127 with 132 as strong weekly support.

XLK: Above $55.50 and I’m wrong but otherwise I’m betting this is headed down to $53.50 then 52.50 in time. Remember, technology represents the largest sector in the S&P 500 (at 22%) so there is a reason I’m highlighting this space. That and I want to catch another TSLA downdraft!

I could be wrong — will know soon enough — in which case I will be flexible and buy the bubble until I see signs, again, of a reversal!

Momentum Trades

TSLA was an inside day on Friday with large buying volume after a week of bloodletting. It would not surprise me if this heads higher to $327 and maybe even $355 again before slowly curving and giving up the ghost down to gap fill at 280 and resting at 200 day price target of $250. I will chase long and short.

NVDA looks ready to pull a TSLA to 120, at least. Remember this was a $25 stock in February 2016. The 50 day is $95 which is 50% Fib retracement and I am positioned with straddles and put spreads.

NFLX above $160 and I’m wrong but this looks headed to 130 without even a news catalyst.

TWTR is an oversold tech and above $18 on weekly I like it to $22 measured move. I have Sept calls.

IBB is not ready. XBI is not ready. XLV is already cooked. And yet I still own CELG (part of IBB), SRPT (part of XBI) and THC (part of XLV).

FXC looks to pullback as USD/CAD looks ready to bounce off channel support.  Strong recent Canadian figures, including the stellar last two jobs reports, coupled with the US rate tightening, suggests that a Canadian hike is a strong possibility. This combination could push CAD to new 2017 highs and none of that is good oil.

FXY with GLD looks lower, and with that GDX, until they bottom and I see a trend reversal confirmation sign. More on this below.

DB swing long is not only a play on German rates moving higher but also a play on the Euro long thesis.

Energy Needs Some

UNG looks to be bottoming very soon. Below $2.50 I am wrong otherwise this looks like a continuation head and shoulders to $3.8 again, at least.

USO does not look done bottoming. I have been saying for sometime I see $38 give or take which is bottom of the channel. With that XLE components are at risk so my weapons of choice for shorting: USO XLE XOP XES and HYG. Also XOM has tight, liquid options for trading but needs to break $80 and stay below to stay short. Intraday I will follow UOA (unusual option activity and chase components within a sector where I see the Big Boys entering. Oil + Gas is one of those Big Boy playgrounds.

The problem with this entire sector is that it may be near a tradeable bottom and both tops and bottoms can be whipsaws for traders and investors alike. I like this sector less as a result even though deflation from the BOJ, a pullback in US rates and higher CAD would put pressure on commodities, like oil. Point is: it is tricky business to be short at or near the bottom so please tread lightly and carefully.

Let’s Talk About Gold

I see the bull case and I see a bear case so I will be placing a straddle on GLD and GDX next week with monthly options and let the chips fall where they may. GLD on WK sup at $115 likely heads to bottom of the channel/triangle at $112 area. TIP (inflation protected bonds) is also on WK support. If/When GLD bounces, it can se see $130 but I have my doubts as to when it bottoms in large part because it follows the Yen, and the Yen is being manipulated lower. Translation: devaluing the Yen is the same thing as exporting deflation across all commodities: gold, oil, dollar, rates, steel… Of course there are mitigating factors like supply/demand considerations, oversold bounces, policy impacts but I still contend that gold is A Tell on inflation and Gold is not confident right now. My thinking: wait a week to get through Yellen testimony and potential bottom forming reversal signals to prove itself. If it’s as big as a rally as Dec ’16, you will have time to get in.

Macro Considerations: Recession and GDP Fears

I am not on recession watch, exactly, but I know many are and I find it fascinating to follow their arguments. Mine is simple and hasn’t changed since Trump was elected. I fully expect GDP numbers to repeatedly be revised downward from their estimates, despite what Trump promises, and I fully expect Trump to fail at passing a tax reform/infrastructure spending/healthcare plan, let alone one the American people can live with. Despite slow economic growth and Washington grid lock, however, the market can (and has) rallied – despite North Korea, Russia, China; Carney, Yellen, (Ivanka).

Don’t get me wrong: Growth matters. Inflation matters. Investment, Spending, and Productivity matter. And all are suffering under massive negative Debt and Demographic trends. But I can’t trade successfully based on what I think ‘should’ happen. So here’s what I do track in order to better predict big market moves and trend reversals: Unemployment Claims. And these continue to fall, so we are ‘okay’ until that changes. Why are they ‘so’ important? Well, they are The Tell, as they start to rise, about 6 months before a recession. And more the the point: the market will smell it and volatility will pick up. In particular, I watch that cute little pink line…below is good, above is bad.

Best Reads This Week

This is the BEST macro analysis I have read all year. Charts! Predictions! Flow!  with his  actually predicts USD/JPY $130 and SPX $2800 this year. Whoa.


This is Larry McDonald’s  thesis on why we have experienced secular stagnation and endlessly low bond yields. The U.S. has been in a productivity depression! His data suggests lots of financial engineering – not enough real job creation.

There is No Such Thing as a Bad Tick 

This is The Macro Tourist ‘s humorous, educational post on how and why Central Banks are sending real rates higher and in the process sucking money out of precious metals.

Personal Note

The past month plus has been inconsistent at best with these newsletters as I have had Big Family goings on (mostly good, thank heavens) and then the holiday break ALL while I run a daily trading room and ACTIVELY trade multiple accounts. I know I owe you more big picture macro analysis and more timely actionable micro trade ideas. I spent extra time this week to do some ‘catching up’ for you. Hope it helps. I am also available nights and weekends to discuss your investments. In consideration of your patience, we will be extending your Gone Fishing Newsletter subscription service an extra two weeks.

Again, I greatly value your business and your feedback is welcome anytime!




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