Category Archives: commodities

What to Watch in Energies

commodities, educational newsletters, ETFS, jay kaeppel

With crude oil hitting its highest level since November of 2014, the energy sector is suddenly drawing a lot of interest.  But there are few caveats that investors might want to keep in mind before getting too far ahead of themselves.

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Energy Seasonality

Figure 1 (from www.Sentimentrader.com, which is quickly becoming one of my favorite sites) displays the annual seasonal calendar for ticker XLE – the SPDR Energy ETF. While it should be pointed out that it certainly is not like every year plays out like this chart, the primary point is that the “meat” part of year of from the end of January through the end of April is nearing the end of the line.0Figure 1 – XLE Seasonality (Courtesy: www.Sentimentrader.com)

XLE Overhead Resistance

XLE has had a terrific month of April, rallying over 14% since the low on 4/2.  And while it has been an impressive show of momentum, a look at the “bigger picture” points to some key levels of potential resistance just ahead.

Figure 2 is a monthly bar chart of XLE with two significant resistance levels drawn (at roughly $78.25 and $80.50). XLE has failed twice previously at roughly $78.40 – in December 2016 and again in January of 2018.1Figure 2 – XLE Monthly with overhead resistance (Courtesy ProfitSource by HUBB)

On the plus side, XLE is clearly trending higher at the moment and there is still another 6.4% and 9.4% of upside potential between the current price and the resistance levels drawn in Figure 2.  So short-term upside potential remains.

The only real “warning” I am raising is to pay attention to “what happens (if and) when we get there” (“there” being the $78.25-$80.50 range).

Jay’s Energy ETF Index

I created and follow an index of all manner of energy related ETFs (it combines traditional fossil fuel related ETFs with alternative energy source ETFs). A monthly chart with a significant resistance level drawn appears in Figure 3.2Figure 3 – Jay’s Energy ETF Index (Courtesy AIQ TradingExpert)

Figure 4 “zooms in” on Figure 3 using a daily bar chart of my Energy ETF Index.  As you can see, as nice as the latest rally has been, there is a “day of reckoning” looming out there somewhere if the energy sectors keeps going and retests this significant level.

2aFigure 4 – Jay’s Energy ETF Index; Daily (Courtesy AIQ TradingExpert)

For the record this index is comprised of:

GEX – Alternative Energy

KOL – Coal

LIT – Lithium

NLR – Nuclear

OIH – Oil Service

TAN – Solar

UGA – Gasoline

UHN – Heating Oil

UNG – Natural Gas

URA – Uranium

USO – Crude Oil

XLE – Energy Sector

Summary

Some might interpret this piece as a bearish to neutral word of warning related to the energy sector.  In reality I am pretty agnostic when it comes to energy and (sadly) can’t offer you a “prediction” that would do you any good.

But I will be watching closely to see what happens to XLE and my own index if and when the key resistance levels are tested – especially if that test occurs after the end of the most favorable February through April period.

Commodity related assets – such as energy, especially fossil fuels – appear “due” for a favorable move relative to stocks.  If and when these key resistance levels are pierced we could see an “off to the races” situation unfold.

Until then, be careful about  “bumping your head.”

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Yes, the U.S. Dollar is at a Critical Juncture

commodities, educational newsletters, ETFS, FOREX, jay kaeppel

If you have read any of my pieces lately you are already aware that as it relates to the financial markets a lot of things are presently at a critical juncture (including my sanity, but I digress).  Today let’s add the U.S. Dollar to that seemingly ever longer list of financial areas that appear to be at a crossroads.  And this one has some large implications simply because a lot of other markets are affected at least to some extent by what happens in the dollar.

Figure 1 displays the Spot U.S. Dollar on a monthly basis.

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Figure 1 – U.S. Dollar Monthly (Courtesy ProfitSource by HUBB)

The reality is that there is no one definitive price at which to draw a “definitive” line in the sand.  So I arbitrarily picked two.  There is nothing “magical” about these two lines and a move above or below either does not technically “prove” anything.  Still, as far as this range goes, a lot of previous price moves have “gone here to die” so to speak.

Now this is the point in the article where a skilled analyst would explain in painstaking detail why the dollar is absolutely, positively destined to move higher (or lower) from here.  Sorry, folks I honestly don’t know. But there are two things I do know which might still prove useful:

1) For every prognosticator out there pounding the table that the dollar is sure to move higher there is another (equally slightly crazed) prognosticator averring that the dollar is destined to decline.  And the key thing to note is that they both can make a pretty compelling case.

2) A lot rides on which way the dollar goes from here, because there is no shortage of markets that react – at least in part – to the movements of the U.S. dollar.  This means that alot of trading opportunities will be affected/created by the next big move from the dollar.

A few examples appear in Figure 2 below which displays the inverse nature of the correlation between the U.S. Dollar (using ticker UUP as a proxy) and the market in question (for the record, a figure of 1000 means the market moves exactly like the dollar and a figure of -1000 means the market moves exactly inversely to the dollar).

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Figure 2 – Correlations to U.S. Dollar (Courtesy AIQ TradingExpert)

Now the fact that foreign currencies (ticker FXE – which tracks the Euro) move inversely to the U.S. Dollar is fairly obvious.  But note that on this list are:

*Foreign Bonds and U.S. Bonds (BWX and TLT)

*Precious Metals (GLD and SLV)

*Commodities (like coffee, soybeans and crude oil)

*Broad Commodity Indexes (DBC and GSG)

This encompasses a pretty darn wide swath of the trading world.  And every single one of them will be influenced to some extent by which way the dollar goes from here.

As you can see in Figures 3 through 6 (click to enlarge any of the charts), what happens to the U.S. Dollar can matter a lot to what happens in these markets.

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Figure 3 – Dollar vs. Euro (Courtesy AIQ TradingExpert)

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Figure 4 – Dollar vs. Bonds (Courtesy AIQ TradingExpert)

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Figure 5 – Dollar vs. Metals (Courtesy AIQ TradingExpert)

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Figure 6 – Dollar vs. Commodity Indexes (Courtesy AIQ TradingExpert)

Summary

So the bottom line is that I do not know which way the dollar goes from here.  But I do know that whichever way it goes a lot of “things” will likely go “the other way.”  And everything listed in Figure 2 represents a lot of trading opportunities.

This represents a good time to invoke:

Jay’s Trading Maxim #17: (with credit given to George and Tom at Optionetics back in the day): Investing success involves two “simple” steps. #1) Spot opportunity.  #2) Exploit opportunity.  Everything you do as a trader or investor falls into one of these two categories.

A bunch of opportunities may soon be spotted (assuming the dollar actually ever does get around to deciding which way it wants to go…).

So focus here, people, focus…

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

A ‘Simple Hedge’ as Market ‘Bumps it’s Head’

commodities, jay kaeppel, options
The S&P 500 has “bumped its head” in a clear resistance level.  The VIX Index has dropped into a familiar support level.  Is the party over?  I hope not.  I would love to see the stock market keep heading higher.  But hey, warning signs are warning signs right?
So should we all panic?  Not necessarily.  Still – and fortunately – there is a difference between “being panicked” and “being prepared”.  So let’s talk about a simple hedge “just in case” the stock market decides to sell off in the not too distant future.
Figure 1 displays ticker SPY with a fairly obvious resistance range highlighted. As the verbiage on the chart asks, “will you be surprised if the market pauses or worse here?”1
Figure 1 – Ticker SPY at in resistance zone (Courtesy AIQ TradingExpert)
Figure 2 displays ticker VXX (the ETF that ostensibly tracks the VIX Index).  From a completely and entirely subjective point of view it can be argued that the VIX is in “the calm before the storm” mode.2
Figure 2 – Ticker VXX at support zone (Courtesy AIQ TradingExpert)
Figure 3 displays that the implied volatility for options on ticker VXX has fallen significantly and that VXX options are relatively cheap.3Figure 3 – VXX option implied volatility has fallen hard (Courtesy www.OptionsAnalysis.com)
So what about buying the June VXX 16 call for $200 as a hedge against the stock market suffering a hit between now and June option expiration?
Figure 4 displays the particulars and Figure 5 displays the risk curves.4Figure 4 – VXX June 16 call (Courtesy www.OptionsAnalysis.com)5Figure 5 – Risk curves for VXX June 16 call (Courtesy www.OptionsAnalysis.com)
Summary
As always I am not “recommending” this trade I am simply pointing out that several factors (S&P at resistance, VIX at support, option premiums relatively low, and don’t forget “Sell in May” which is just around the corner) may be coming together to make considering a hedge a reasonable idea.
The questions to ask yourself are:
*Do I think there is a chance/likelihood that the S&P will suffer a selloff in the next 7 weeks or so?
*Am I willing to risk $200 if it doesn’t?
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client

Soybeans, Crude Oil and Gold, Oh My

commodities, educational newsletters, indexes, jay kaeppel
Well I have not been writing a lot lately.  The truth is I am a little “out of sync” with the markets these days.  And I prefer to write when I feel like I have at least some idea of what the heck is going on.  Which is a good thing I think.
So for today let’s just review and update some relevant things that I have written about in the past.
Soybeans
In this article I suggested a bullish position in May soybean futures.  Under the category of “One for the Good Guys”, beans have rallied nicely as shown in Figure 1.  
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Figure 1 – May Soybeans (Courtesy: www.Barchart.com)
At this point a trailing stop – or selling half into strength and using a trailing stop on the remaining position – sounds like a good idea to me.  It should also be noted that “First Notice Day” for May soybeans is 4/29.  Bottom line, unless you want someone to dump 5,000 bushels of soybeans in your front yard (OK, it doesn’t really work like that but it is fun envision that it does), then you need to exit any and all long positions in May beans before that date.  This can involve taking profits, rolling into July or both.
Crude Oil (ETF ticker USO)
In this article I wrote about entering a somewhat bullish position using put options on ticker USO.  As you can see in Figure 2, it is “so far so good”.  At this point the trade has captured $588 of the initial $689 credit.
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Figure 2 – USO put position (Courtesy www.OptionsAnalysis.com)
One position management note: USO is at a key price level as you can also see in Figure 2.  If USO fails to break through to the upside I would consider taking some (or even all) profits and moving on to the next trade, rather than waiting another 3 months in hopes of capturing the remaining profit potential.
Gold
In this article I wrote about a relatively crude moving average method I use to help identify the trend of gold.  As you can see in Figure 3, my “Anti-Gold” index recently flipped back to being “bullish” for gold (by virtue of the fact that the “anti-gold” index flipped to being bearish).3
Figure 3 – Ticker GLD vs. Jay’s “Anti-Gold” Index (Courtesy AIQ TradingExpert)
So does this mean it is “clear sailing” for all things gold related?  Not at all.  All moving average systems are susceptible to whipsaws.  This one is no exception.  In the short-term gold and gold stocks appear to be overbought.  Still, as you can see in Figure 4, the Elliott Wave count for ticker GLD is suggesting the possibility for higher prices in the not too distant future.
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Figure 4 – Bullish Elliott Wave count for GLD (Courtesy ProfitSource by HUBB)
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client