Saturday, 29 April 2017

Next Probable Bitcoin Price Target: A Brief Technical Analysis

My investment in Bitcoin is a small sum (well, i bought it at $586 the 1st time using fiat currency, and it has more than double in less than a year. One day in the not-so-distant future, it won't be a small sum. If you put $10k into Bitcoin in July 2010, your holding is now worth about $146 million today. Not too shabby. There's simply no "investment" that outperforms Bitcoin. It's still not too late to get in by any stretch of the imagination. I reckon i could become a Bitcoin millionaire in a decade time).

My interests in it isn't pure financial gain, so i shouldn't trade in and out (my interest in Bitcoin is complex and it's composed of 40% intellectual, 30% political, 20% emotional, and 10% financial reasons). But the trader in me just couldn't help but to trade the chart's peaks and troughs. Who could resist to become a Bitcoin millionaire? I just wanna become one sooner than later. Wanna! Gotta!

Having said that, i actually haven't really looked at its chart for awhile (i've been very busy trading the stock and gold markets). Today, i've just remember to look at the BTC, and so i decided to do a quick 5-minute TA on the BTCUSD price chart. Interestingly, it happens to be not too far from a pivot level. So it demands some action on my part, soon.

 Scenario 1 

Last time, when i sold my BTC holding on early 2017. It wasn't easy to locate the price target, but i managed to sell reasonably close to bottom of the rising trend channel, which at the time wasn't established. I was simply lucky to have exited so closely to the lower trend line. Once this rising channel is established, guessing the next few price target would be easier.

Bitcoin (BTC) price chart
Scenario 1 for the next price target

The arrow point in the chart below shows a likely next price target, which is where the price touches the lower trend line. We don't know exactly where the price will test the lower trend line because that depends how fast the price drops. If the price drops to the lower trend line tomorrow (an extremely unlikely event), then the price target would be around $1000. If the price tests the lower trend line in the vicinity where my arrow points at, it would be around $1080 - $1100. The slower the price declines from here, the higher the price target it would be.

It's possible that prices can rise a little bit (say another $50) above the upper trend line from here even if scenario 1 is being played out. It's called a head fake or false breakout.

 Scenario 2 

There's a 2nd scenario though. That the BTC price continues to rise from here and the next target will be where the price tests the upper trend line. And the next price target for this bullish 2nd scenario would be in the vicinity in the $1500 or slightly higher. Remember that $1550 is only an estimate because nobody knows when the prices will touch the upper trend line. It's better to watch this then relying on the fixed value of $1500.

Bitcoin (BTC) price chart
Scenario 2 for the next price target

 In Summary 

While both scenarios are possible, they're too close to call which one will eventuate. I feel scenario 2 is slightly more likely to play out with the price target of about $1500.

The next few trading days should give you a good indication which scenario is developing.  If the prices keep on rising in the next few days, scenario 2 will likely to play out. If the price falls below $1280 in the next few days or weeks, scenario 1 is playing out.

Remember, prices can do anything it please. But the scenarios i depicted are just more likely. Doesn't mean i can't be wrong.

I'm quite happy to sell quite soon (probably next few days, or before middle of May), regardless of which scenario it would play out. And then i will buy it back when price returns to the bottom trend line, which i'm confident it will do soon (a matter of a few months), after testing the upper trend line.

Thursday, 27 April 2017

Relationship Between XLF and Bond Yield Curve Steepness: A Study

 The Short Term View 

Since the Trump's presidential victory in Nov 2016, the immediate outcome of that event is the incredible spike in TNX (10 Year Treasury Note Yield), and the corresponding rise in financial stocks as captured by XLF (Financial Select Sector SPDR Fund). This is caused by the anticipation of Trump's pro-growth policies, which would be highly inflationary if the policies are successfully implemented.

Apart from such anticipation of financial deregulation (repeal of Dodd-Frank Act) and tax reduction, the only actual and material effect on XLF is caused the steep rise of TNX, which brought about the corresponding rise in XLF. As the media (almost all CNBC commentators) and others (on blogosphere)  suggest that the steep rise in TNX causes the yield curve to steepen, and that benefits financials' profitability. The financials need a wider spread between short-term and long-term bond yield to make money. So one can comfortably conclude: steeper yield curve leads to rising XLF prices.

I thought, this makes sense. And then, i also realise that reality is usually the opposite of the conventional wisdom, so i decide to dwell a little deeper into the matter.

Let's look at the 2 charts below to see how well this argument is being supported by data.

5 month chart of 10 yer and 2 year treasury note yield spread since 2016 election
5 month chart of 10 yer and 2 year treasury note yield spread since 2016 election

5 month chart of XLF ETF since 2016 election
5 month chart of XLF ETF since 2016 election

The yield spread chart, which is a standard measure for YCS (yield curve steepness), rises rapidly in the immediate aftermath of the election, tops in early December and declines steadily since. While XLF follows the steep rise of the YCS in the upwards direction, it doesn't really follow its downward move. In fact, while the steepness tops out in December 2016, XLF continues to rise until March 2017. The fall of XLF since March, one can argue is due to the general market correction.

Perhaps, one might also argue, the other 2 factors - tax cuts and Dodd-Frank repeal - keep XLF elevated relative to the YCS. After all, YCS isn't the only game in town for financials.

So these 2 charts above appears to suggest a good (and positive) correlation between the YCS and XLF, at least during Nov to Dec 2016. The correlation weakens after 12/2016.

I want to find more clues by looking at the longer time frame, to look at the relationship between XLF and yield curve steepness historically. Hopefully, these long term data shed some light.

 The Longer Term View 

The following 2 charts are simply the same 2 charts above with a longer time span from 1999 to 2017 (XLF data only goes back to 1999). We divide 6 distinct periods within the time span we study.

The numbered arrows (1 to 6) show the general trends in the corresponding 6 periods in both charts.

Yield curve steepness from 1998 to March 2017
Yield Curve Steepness (YCS) from 1998 to March 2017
Each arrow indicates a general trend direction for a given period

XLF from 1999 to March 2017
XLF from 1999 to March 2017
Each arrow indicates a general trend for a given period (that's corresponded to the YCS chart above)

The revelation of these 2 charts is suggesting something counter-intuitive and more complicated (as one should expect from life or financial market. There's never a simple correlation that works all the time. E.g. gold falls when DXY rises and vice versa. E.g. just look at a large drop in both DXY and gold price on the same day on 24/04/2017. Sometimes they do, sometimes they don't).

When we look at the falling trends of arrows 2 and 6 in YCS chart, they correspond to rising trends in XLF in the same period. It's the exact opposite to what i said above to the short period of Nov to Dec 2016.

Likewise, arrows 1 and 3 in YCS chart indicates rising trends while the same arrows 1 and 3 in XLF chart show the exact polar opposite trends, once again.

But the picture is more complicated with arrows in 4 and 5, where in both charts they seem to point to the same direction in both charts rather in the opposite.

Actually if we combine the two periods of 4 and 5 in both charts and consider them as one period (let's called this period 4A), then the trend in period 4A is negative in YCS chart, and positive in the XLF chart. Of course, i could just as well combine the periods 4, 5 and 6 into one period, and label this combined arrow 4B (the whole period 5 can be considered just a counter trend of the combined downtrend). In this case, 4B is in the general downtrend in YCS chart, and uptrend in XLF chart.

Problem solved.

Am i trying to change the data in order to fit my conclusion? Let's consider the following reasoning before you accuse me of data fiddling.

I think the reason why the periods 4 to 6 is somewhat troublesome compare to periods 1 to 3 is that the YCS trend is somewhat messy in periods 4 to 6 while the YCS trends in periods 1 to 3 are clean and pronounced. Because of the cleanness of the trends in periods 1 to 3, i tend to rely it more for the conclusion, which is a negative correlation between YCS and XLF.

More importantly, in periods 1 to 3, the arrows either start from the bottom of the chart (near 0%) to the top of the chart (just under 3%), or vice versa. In other words, the arrows always start from one end of the chart (top or bottom) to the opposite end (bottom or top) in YCS chart. The maximum spreads between 2 and 10 years bond yields seems to be kept under 3% since 1999.

You could say period 4B (which starts near the top of the chart) is still being played out to its final conclusion as it moved from the top to the current level and eventually come down to the bottom with 0% (flat yield curve) or negative (inverted yield curve).

This makes a lot of sense as we're heading into recession from economic growth in the next few years. This is perhaps, to me, provides an explanation for this negative correlations between YCS and XLF because economic expansion typically ends with a gradual flattening of yield curve to an inverted one, which typically corresponds with a peak in XLF as the stock market exhausts its bullish run. In this light, one is almost forced to conclude that decreasing YCS down to zero or negative should occur as XLF and the general bull market proceeds towards its eventual peak (just as it did in 2007 in the time span of our study).

This period 4B is considerably longer than its previous periods, but this current economic expansion is also one of the longest (could turn out to be the longest in US history, but not very long in world history. E.g. Australia's current economic expansion is 25.4 years old, and we don't know when it will end anytime soon. Netherlands' record is 103 years. Let's end another sacred mantra, "US economy should be in recession after 7 years". I'm not saying the next US recession won't occur for another 100 years. I'm just saying there's no fixed end days for economic recession. And 10 years isn't a long time for an economic cycle in world standard. My gut feeling - never rely on gut feel, mine or yours - tells me that this current US economic expansion would end in 2020 - 2021. Perhaps because i'm thinking that YCS is nowhere near zero. It's in fact, roughly half way between the top of 2.9% and the bottom of -0.5%. The median of these 2 points is 1.2%, and the current YCS is 1.04%, a little below the median).

Side note: I should simply have 4 periods to start with. I analyse the data while i wrote, and so i ended up writing down all my thinking process, instead of just the result. My apology (for i'm too lazy to do a complete rewrite). I write so that i can gain an understanding for myself, first and foremost (and as a bonus, share those analysis with the like-minded. Hence, the occasional messiness).


In short, falling YCS leads to rising XLF, there's a negative correlation between YCS and XLF,  for longer time span (measured in years). In the short term, such as the period between Nov to Dec 2016, the correlation between YCS and XLF is positive (measured in weeks). This short term relationship is probably transient phenomena.

If the YCS continues to fall from here and now, we should hold onto the financials because this is a positive signal for financials. We've already seeing this being played out in the last few months. As YCS continues to fall since January this year, we don't see the same percentage drop in XLF.

The rise in YCS in the immediate aftermath of Trump election is but a blip in the general downtrend in YCS in period 6 (using market jargon, it's just a relief rally in a bear market of YCS). And one is tempted to project that as YCS goes to zero, XLF would peak as it did in 2007.

In other words, if YCS (if there's such a ETF) is in bear market, then XLF is in bull market.

Am i wrong in drawing this conclusion because the time span i covered isn't long enough? I.e. only since 1999. Maybe. At the very least, we can debunk the seemingly sacred mantra that i heard in the mainstream media, "XLF goes up when YCS goes up" or "XLF falls when the yield curve flattens". That's just not evident in general. That mantras is dangerous for the long term investors as they would afraid to hold financials after constantly hearing and seeing a flattening yield curve being repeated in the media. At best, it confuses the viewers-investors. Maybe we should have a new mantra, "when yield curve is flattening, time to load up financials." This mantra doesn't hold true in the extreme. I.e. it holds true when it's flattening, not when it's flat as a pancake. Or a more intuitive mantra, "When TNX is rising, time to load up financials." And forget the whole business of YCS, which confuses us than helps us. Of course, YCS is more helpful for timing recession than TNX.

So what's that business about the financials need high YCS to be profitable? I don't know. The data since 1999 simply don't support that conclusion for extended period. Perhaps, the 10 year treasury yield (TNX, not YCS) that has a positive correlation with XLF. Let's have a look at that.

Here's a chart showing these 2 curves from 1999.

XLF vs TNX performance from 1999 to April 2017
XLF vs TNX performance from 1999 to April 2017

A couple of observations we could make.

1.  XLF outperforms TNX during period of rising TNX over the long term. We know that TNX has been in the bear market since early 1980s, and yet XLF is managed to outperform TNX with ever wider margins. The gaps between the 2 curves widen as TNX falls further towards zero. The financials may make less money with lower TNX, but they've managed to make more money as per TNX (by being more efficient, i imagine).

2.  This chart shows good positive correlation between the 2 curves (XLF and TNX), except for the relatively short period of 1 year or so (out of 18 years) between 12/2013 and 01/2015. The starting point of this brief negative correlation period coincides exactly with the starting point of period 6. I don't know the significance of this. Is it just a coincidence?

This positive correlation also nicely explains that why when YCS tops out in 12/2016 and yet XLF continues to move higher and tops out in 03/2017, this is because TNX also tops out in 03/2017. Actually we have something like a double tops in TNX between 12/2016 and 03/2017.

 In Summary 

TNX is indeed more important to financial profitability than YCS, which presents us with a counter-intuitive relationship.

 As i said before, YCS isn't the only game in town. There's also TNX. The more important game in town. Rising TNX signal inflation and therefore economic growth, hence financials' rising profitability because of higher loan growths. Therefore, loan growth trumps YCS. Falling YCS signals that economic growth is occurring (good for financials and stock market in general) and it's heading towards the monetary tightening that would result in an increasingly likelihood of an economic contraction.

Even when YCS are flattened or inverted, it could be year(s) before reaching the final peak of the stock market. In fact, the YCS can steepen (after inverted) before the top of the market, leading investors to think that things have returned to normal. Signals from yield curve isn't always straight forward (no pun intended). Bond market is made up of human players, so they could send the wrong signals, at least in the short period. Perhaps, the brief period of 2014 where the correlation between XLF and TNX being negative is just bond market getting it wrong?

Tuesday, 25 April 2017

WFM Takeover Talk is Heating Up Prices

After i wrote this article "WFM, RH, CMG: Bathtub Pattern Developing" on 21/04/2017 (2 trading days ago) about the interesting technical that's developing in Whole Foods Market (WFM), and also its takeover talk.

I decided to enter a trade not just because of the technical, but because of the takeover talk.

In the article, i mentioned name like Kroger and Amazon who maybe interested in acquiring WFM. Yesterday (24/04/2017), WFM prices was pretty flat all morning while the rest of the market popped on French Election relief rally. In fact, it drifted lower all morning. A momentary regret of entering this trade flitted through my impatient mind (a common disease that plagues many traders). I decided to take my eyes off the market completely at 12:30pm and went to watch Roald Dahl's The Tales of the Unexpected (1979 - 1988).

Unexpectedly, at 1:24pm, the WFM spiked higher, reaching $37.26 in the day's high. It appears that FT published an article that Albertsons Cos (a private-equity group that acquired Safeway previously) is considering acquiring WFM. All this happened during my nostalgic viewing of the episode of Lamb to the Slaughter (S1, Ep4). I only find out the news today, after a reasonably good night sleep.

Whole Foods Market (WFM) price chart

It closed at $36.46, which is just a few pennies higher than the lower price gap created on 30/07/2015. Whether it's takeover talk or simply technical gap-fill action that i mentioned in the article, the 1st target is logically $40.50. And the next upper gap price is $47. Credit Suisse reckons they should pay $40 - $45 for the acquisition of WFM.

Also, volumes have been large in all the recent price spikes.

Interesting price action coming up...all aboard!

Saturday, 22 April 2017

Thought of the Day 27: Bread and Rice

Rice bowl with rye bread slices

"Man shall not live by bread alone."    - Old and New Testament

At least half live by rice (while others by maize and taro).

Friday, 21 April 2017

WFM, RH, CMG: Bathtub Pattern Developing

I don't know if this is the official name for the technical pattern being played out in these 3 stocks. Going from the left sides and the bases of these 3 stock charts, one is compelled to think that, for symmetrical reason, the right sides of the bathtubs are developing once they break out of the bases.

Restoration Hardware (RH) Chart as of 21-4-2017
Restoration Hardware (RH) Chart as of 21-4-2017

Chipotle Mexican Grill (CMG) Chart as of 21-4-2017
Chipotle Mexican Grill (CMG) Chart as of 21-4-2017

Whole Foods Market (WFM) Chart as of 21-4-2017

 Traders, Mind the Gaps ! 

Of the 3 charts, CMG and RH are more similar in terms of the duration of their basing development (from 06/2016 to 03/2017), and starting point. WFM, on the other hand, is considerably longer (from 08/2015 to 04/2017).

There's one more important difference - one that TA would say doesn't matter - is that WFM has a worse multiples or fundamentals than CMG and RH. This is why i'm already holding RH (2 weeks ago) and CMG (last week), but is still thinking about WFM. There's a large gap that created on 28/07/2015 from $36 - $40. It's quite tempting to enter into the possibility of this gap-fill trade that's coming up really soon. We're less than 50 cents from the gap. So the $36 could be used as stop-loss for a well defined trade with the upside target of $40. The breakout volume is quite strong. Can the rumour mill that it might be a target by Kroger or Amazon might just take it to $40, which happens to be Credit Suisse's target price for the stock?

The takeover talk alone is worth the trade in WFM.

If you look at RH chart, it had just finished its gap-fill move (that was created in 03/2016) and had reached its upper target and so we have the corresponding sideways move in the last few weeks. WFM should play out like that. Of course, no guarantee. Just have stop in place.

There're actually 2 gaps in WFM. So once the lower gaps is filled, it would do some consolidation before attacking the upper gap. Let's deal with one gap at a time.

Whether the right side of these 3 bathtubs are going to be played out fully, meaning symmetrically, is remained to be seen. For now, the break out out of the bases alone warrant my trades in these companies. So far, so good.

Thursday, 13 April 2017

Funny Caption 46: Of Bear and Maiden

bear statue holding a female

Following captions come from closing lines of classic movies,

"Stella !"   --- A Streetcar Named Desire (1951)

"Damn you all to hell !"   --- Planet of the Apes (1968)

"Huuurrrgrrrhowlhgrrhhhhohhhhh..."   --- Invasion of the Body Snatchers (1978)

Monday, 10 April 2017

Funny Caption 45: Joe Meets Hilary at the Airport

"Stop Joe! I'm ticklish! Please stop!"

"Did you lose weight ?"

"Sorry for the body frisk. Standard airport procedure, you understand."

"Joe, I think you do the Heimlich maneuver all wrong !"

"I know...I'm bad at goodbye too, Joe..."

"Let me show you how I make a coin appear from your armpit."

Gold Developing Inverse Head and Shoulders, Again?

Gold is at it again, repeating last year's song and dance (it's break dance as it involves inverse head and shoulders).

b-boy, break dance, head spin
Head spin: an Inverse head and shoulders move
Let have a look what i mean.

Maybe it's seasonality, there's some interesting parallels in the gold price developments in the chart in the 2 consecutive years (2016 - 2017).

First, in both instances, gold prices bottomed in late December, and then rallied strongly into January - February. Or some may say, in both cases, it occurred after Fed's rate hikes. This should at least give investors some pause that rate hike is always bad for gold prices. Fed rate hike indicates inflation, and inflation is good for gold because it's often used as an inflation hedge.

Spot gold chart showing 2 inverse head and shoulders formations back to back
Spot gold chart showing 2 inverse head and shoulders formations back to back.
(Click chart to enlarge)

The Inverse H&S development in 2016 failed in early May (as indicated in the chart) as it couldn't break out of the neckline. It had a few attempts at challenging the neckline. And in July, it broke through the neckline, but only quickly rejected by the strong long-term downtrend resistance line. It had a few more attempts at the long-term downtrend resistance line, and eventually failed, and plunged to $1120 where gold finds its bottom. (I have written 2 articles regarding the critcal importance of this long-term downtrend resistance line). The price of gold has never been on the right hand side of this long-term downtrend resistance line, ever. I'd like to call it the Great Wall of Gold.

But gold isn't about to give up its fight yet, and once again, in 2017, gold comes back with its same old break dancing of Inverse H&S. This time, it fares better because it has actually crossed above the neckline at the right shoulder, unlike previous year when it had never done so (the false breakout of the neckline occurred quite sometimes after the right shoulder).

Having learnt that lesson of 2016, one needs to be careful that one isn't jumping the gun this time and say we now have a successful development of an Inverse H&S. For a confirmation of the Inverse H&S pattern to play out, at the very least, the price needs to move above the Feb high of $1260-1265. The gold price is going sideways lately because moving above this $1260-1265 is challenging because this level isn't just the Feb's high (or YTD high), the 50d MA also comes into play. To avoid a repeat of 2016 of a head fake / bull trap, the price needs to break out of the long-term downtrend resistance line. Alternatively, it rises to test the downtrend line, comes back down to test the neck line or $1260-1265 level, and then make a final break out of the downtrend line. We can then declare gold is now truly, without question, in the full-fledged bull market. At the very least, this break out will draw more players that have been sitting on the sideline waiting for this event into the gold market. The bullish momentum itself will then carry it higher.

While the long-term downtrend resistance line is quite a pain in the butt for gold bulls, the upside (no pun intended) of this downtrend is that as time goes on, the price to break out of this downtrend is ever so lower. In early July 2016, when gold tested this downtrend resistance for the 1st time since 2012, the price was $1375. Gold only needs to rise above $1285 (preferably $1300) in the next few weeks (or $1290 in the next few days) to break out this final technical resistance of the gold bear market. So the bar (no pun intended) for gold bulls has lowered by $90.

Overall, gold looks more promising than last year (the bottom in 2017, so far, is higher than the bottom in 2016 - aka higher low - indicating medium term bullishness). The next few weeks is very critical, and will determine if we're repeating 2016, or something more bullish. It's important that it won't fall back into the neckline to avoid the repeat of 2016 price action.

(Inverse) Footnote: The break dancer for this year seems to be a lot slimmer than the one from last year.

Thursday, 6 April 2017

Is the Trump Rally Over? Part 2

This is a follow-up of Part 1 of Is the Trump Rally Over?, especially expanding on the last 2 paragraphs of that article. I.e. speculating what's the most likely target if this pullback continues.

TNX, 10 Year Treasury Note yield chart
TNX, 10 Year Treasury Note yield chart
(click to enlarge)

Since the election on 7/11/2017, the Trump Rally euphoria propelled the TNX by a staggering 80 bps from 1.82% to 2.61% in less than 6 weeks ! An impressive run. Since mid Dec 2016, it has been range bound between 2.30% to 2.60%. The quick run-up was due to Trumpflation, or the anticipation of it. Now, the market is digesting the Trumpflation Trade.

Lately it has problem even trying to reach the upper bound, implying - actually influencing - the direction of the equity market. In fact, it has problem even challenging the 50d MA. If it continues to languish below the 50d MA, or worse, drops below the lower bound of 2.30%, the equity market will follow it southwards rapidly (gold should benefit from it). TNX might tempt to fill in some of the gaps in its gap-up run.

SPY ETF, S&P500 chart

The SPY has been in the downtrend since its top of 240 at the start of the month of March. Unless it breaks out of this downtrend, its path of least resistance is heading lower until proven otherwise.

One likely scenario is that SPY would pullback to ~225. This is a logical as well as a strong support because this is the confluence of 3 pivots,

1.   The lower bound of this rising channel (in light purple). This SPY lower bound is delineated by Feb 2016 low and election eve low.
2.  200d MA. Note how closely is the 200d MA hugging the lower channel bound since election day.
3.  23.6% Fib retracement level. This is the 1st Fib retracement level taken from the lowest price point in this rally (11 Feb 2016) to the highest price point of this rally (1 March 2017).

This drop from the top of 240 to 225 represents a ~6% pullback, which seems like a typical number from the past records.

Of course, it doesn't have to fall this low. I'm not saying it will play out this way. Nobody knows. Just saying this is a WORST case scenario as this support is quite strong because of its triple pivots. There're plenty of supports above 225. If - a big if - it drops below this, then the whole rally will change in character. If it rebounds from or before ~225 level, this rally continues with a healthy correction.

As a way of trapping the bears, it's entirely possible that it would drop below ~225 for a day or two to suck in short sellers, just for fun. In bull market, bear traps are everywhere. Watch out!

There're certainly plenty of news coming up to rattle the market: Trump-Xi meeting, Brexit, French election, nuclear rattling from the ruler of Kim dynasty of the Hermit Kingdom, etc. Not to mention Fed's Open Mouth operation from Minute to Minute. Earning report is coming up. It's better not disappoint.

Update 7 April
April is a strong month. With a reversal of falling crude, the above scenario would be more likely to play out in May when crude price peaks or at least has a good run up. As the adage says, "Sell in May and go away". If during this strong month, SPY can't make a break out of the existing downtrend with earning releases occurring, the chance of a accelerated downside is increased in May. If there's a correction, Nasdaq should be the sector to correct the most. You wouldn't want to chase techs if you're longer term investors. If you're short term traders, be nimble.