Margin Rich

The Best Part of Waking Up

Posted on July 22, 2021 by Margin Rich

Wow, what an ignition for coffee. This all-important soft has shot up a rough 20% in three days as of today. That’s smoking momentum.

Props to those who are grabbing or grabbed a piece of that squeeze.

However, capital is nervous these days. One can feel it across multiple asset classes and sectors. That general nervousness could cause capital to quickly shift out of coffee and into some other asset bearing a superior portfolio correlation. The move this week feels like a firework as opposed to a rocket headed to the moon.

FinViz Daily Chart

And fireworks fizzle out. Now maybe this is a legitimate breakout. Destination? Moon. I don’t identify as a commodity market expert in any futures category so there are definitely legitimate fundamentals factors that I’ve spent zero time assessing.

In fact, I don’t identify as an expert in anything. I just like to surf the swells of extreme price action across various sectors and assets classes. Simple as that. Sometimes I win big. Most times I lose small. Just trying to net higher and higher.

Let’s zoom out to a monthly chart of coffee (FinViz Monthly with COT). The blue circles below show every time the big-money, savvy traders get a bit out over their skis against the smart-money commercials.

Over the last 16 years, it would’ve paid to heed this signal more often that not. In 2010, it was a total bust during that commodity super bull coming out of the GFC. But other than that, futures and options would’ve paid out nicely betting on a sharp change in trend.

I’m a simple man. Simple mind. Simple life. Simple trading tactics, and Puts on the JO ETF could provide a solid reward to risk if a reversal is essentially imminent.

The spreads suck, but there’s enough liquidity. If coffee is to see holders start grabbing profits just as fast as they’ve made them, then the zone highlighted in yellow below looks like a logical place to explore opportunities.

Ideally, we’d like to see profit taking tomorrow (Friday 7/23/2021), in order to add a wick to the top of the current weekly candle.

Again, beware of that price action in 2010. And the Great Mother asks you to kindly stop brewing your morning drug with single-use plastic pods.

Bitcoin – A Quick Technical Read

Posted on July 16, 2021 by Margin Rich

So the last time, I tried to seriously interpret BTC action in a public setting was 2017. Right before BTC decided to offer speculators a nifty little 10x return in less than a year. And I was not on the right side of that 10x.

Like many, I’ve significantly increased my education in the blockchain. I see and agree with the future of the potential. Not necessarily in agreement with the anarcho techno-extremists, but clearly an enormous amount of innovation in the space is going to go mainstream in the coming years. It’s like Pandora’s Box. Can’t be closed again.

Because of it’s ability to attract those looking for an easy score coupled with everyone being a “Market Wizard” thanks to the internet (including A-holes like me), some action appears to be setting up in BTC. Observe.

Or maybe it’s a “vomiting camel.” Look at the most current weekly candle on the right of the chart. See how it’s breaking down through the shoulder-line. I suspect that cheap bit of technical analysis will cause a relatively quick descent into the $20k area; anywhere between $21k and $29k.

This will be the result of whales and algos drawing in the suckers, who arrived to the party far too late, to puke. I hypothesize, with zero quantitative support, that the $20k-ish price range in the gold oval above will draw in big money establishing a floor for the next move in BTC.

And I believe these moves will be hard and fast. A consolidation could then occur allowing time for new positioning, but I don’t think BTC goes sub-$20k.

This will in turn cause a selloff in all crypto-assets. And I think Ethereum could get sold off all the way down to $1200 but probably find strong support at $1400. Institutional support for the future of smart-contract based applications may set the floor at that $1200 to $1400 range in ETH.

Headlines from a few days ago like the following help to anecdotally support the thesis.

That bullish analyst quoted in the article was Kate Stockton of Fairlead Strategies. Have a read of her bio. About as accomplished as you can get for being a chartist.

I can only trade my beliefs about the markets within the edge that I’ve cultivated. I don’t see a bullish breakout yet. I see a falsely bearish breakdown, consolidation, and the beginning of the next leg of the advance. Handicapping future outcomes ain’t easy and trading imaginary patterns is typically a fast way to Lossville, so the price action is always the final arbiter.

Diamond hands and laser eyes aside, if you got some play-money then a better buying opportunity may well be on its way in cryptos.

Oil Taking Its Breather…Finally

Posted on July 7, 2021 by Margin Rich

For traders who’ve been waiting oh so patiently, it genuinely appears an oil sell-off has begun. Discretionary trading requires sound, subjective judgement which comes through diligent research and a practiced hand. Do I have any of that? It’s certainly questionable, but you’re here reading so let’s get to the squiggly lines.

There’s a massive confluence of moving averages, Bollinger Bands, and indicators on a weekly chart signaling a sell-off could have some legs, at least temporarily. Have a look at the monthly chart of West Texas Intermediate (LC). That horizontal yellow line represents a very good stopping point should momentum build to the downside as H1 P&L’s get protected.

A 20% correction in oil would not surprise me. This coincides with action and positioning in the US dollar. For event-traders, OPEC+ activity has definitely raised hackles so I suspect stops have been pulled up pretty tightly which can exacerbate a move to the downside.

On the monthly chart above, since the bottom of that negative-price move in April 2020, hi-to-lo oil is up 1000% in 15 months. It’s up 350% using closing prices, and hell, it’s up 135% since November.

We did get a 15% correction starting in March that began a little consolidation period from which oil has recently broken out.

I suspect that June breakout drew in a bit of newer capital that failed to position earlier and could be chasing in addition to pyramiding by existing position holders. Feels like a false breakout from that wedge. Commodities across the complex have all been taking breaks, but not the King of Commodities. Consolidation yes, but no true breaks.

I’m of the persuasion that a commodity super bull has legitimately begun. But that thesis ran so white hot with nary a breather, that now it’s time for the granddaddy of the commodity complex to kick up its legs for a minute. Any multitude of ways to go short.

One of the methods I like is Puts on the XLE. Vast liquidity with excess positioning will allow for a potent ROI on a well-timed swing.

That horizontal yellow line on the weekly XLE chart also represents another good confluence of moving averages, bands, volume@price, etc. Use any spread methodology desired within the options complex, but $45 looks like as good a point as any for a possible bottom and a consolidation to begin.

As usual, I’m handicapping here. This is a personal bet just for me and no others using my own proprietary methodologies that have consistently given me an edge. Risk management is always the key to a successful trade. I use a mix of technicals, fundamentals, and anecdotals that all get swirled around the noggin until the organic computer kicks out a trade suggestion just for me. Then I write about it on a site nobody reads anyways to help me flesh out and think about the theses a bit more.

If you’re somehow reading this content, it’s not a trade or investment recommendation. I’m just thinking out loud.

Commodities and stocks have just been on a tear in 2021. Performance as such for both the S&P 500 and BCOM has occurred a handful of other times in financial history. It tended not to bode too well for commodities over the next couple of months. Observe the following chart from SentimenTrader.

Sample size not withstanding, with oil and natty combined being the largest component of the BCOM, a short thesis just might profit.

Beware the Secular Trend’s Potential Short-term Counter Move

Posted on December 28, 2020 by Margin Rich

Right now the markets are at extremes. Essentially all of them. Current price action across a broad swath of sectors and assets classes strongly reminds me of the end of 2019 and beginning of 2020.

My gut tells me that a fear-event is near. And my gut is being primarily led by current action in the US dollar. Short positioning in the buck is extraordinary.

Yeah, yeah, macro-top-down, commodity bull, central bank largesse, and all that in regards to the USD but this is egregiously exaggerated. Not that it can’t get more extreme, but consider the following charts.

Seasonality, courtesy of SentimenTrader, tends to be pretty strong in January for the buck.

With currencies, large fast moves in a short period are atypical but we live in a time of atypical. Pairs always have to be acknowledged and the anti-correlation to the euro is at a bit of an extreme. In the last decade, every time the Euro to USD line (white-monthly) has approached 2 standard deviations above the 25-month MA, then it’s been go-time for a USD rally (green).

Does this mean a reversal is imminent? Nope. Does it mean additional portfolio hedging here is warranted? I’d say it’s a prudent use of capital.

The long-term case for the dollar’s demise is well documented. Goldbugs have been the longstanding voice of fiat destruction, but more recently, Ray Dalio has picked up the baton. Sam Zell has now officially thrown his name in the dollar-destruction ring with this recent quip.

The single greatest risk that we are dealing with today is the loss of the U.S. dollar as the reserve currency. If we keep doing what we are doing right now, I think it is 10 or 15 years away.

These investment legends are right. The USD will in all probability lose 30% to 40% of its reserve status this decade. And world markets as well as geopolitics will be volatile as a result.

Why do you think Bitcoin has jumped so hard? That’s institutional fear of central banking monetary policy, not retail FOMO driving Bitcoin. It’s palpable, but it’s ahead of itself in the USD and Bitcoin.

Nothing moves in a straight line and short-term counter spikes in any trend are as sure as sunrise. I’m not implying that a fear-event has to rival Covid’s March spikes or we’re at a long-term top in equities. Just saying that a short-term move to remove some excess is worth hedging at this point.

“It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.”

Posted on December 3, 2020 by Margin Rich

I return to this statement over and over as I play the markets. Mark Twain had unending wisdom. The speculating public, usually not so much. November’s stock market returns were a delightful 10% for the S&P 500 and an eye-watering 18% for the Russell 2000; thank you very much hard and fast sector rotation.

Despite this, ambiguity still reigns supreme currently. Context is critical. So does the ambiguity matter to long-term investors? No. But if you’re swing trading any asset classes in these markets then the ambiguity matters a whole lot.

Let’s use some simple, classic technical analysis to better illustrate how muddy the waters have become. We’ll start with the S&P 500. Depending on your trend-line bias, there’s a few different ways to perceive current action.

It looks like a very legitimate breakout. It’s been a hard chop since late July, but I thought we might see yet one more leg down to the high 3100s or low 3200s. The reason for this was the curious inter-market activity among various asset classes. Typical correlations weren’t holding up in November and the breakout just felt fake. But therein lies the problem of using “feel.” Obviously, I don’t just go with the gut when allocating capital but it has often paid to at least listen to it.

We know that one major, semi-new factor driving markets is option activity. Never before has one had to care so much about option Greeks to simply trade the underlying. Observe the enormous rise in single-equity options premiums as a result of the tidal wave of buying, most of that in Calls by retail and institutional.

Options activity has seen market makers make unparalleled purchases in the underlying stocks in order to hedge their Call sales books. As a result, volatility has chopped right along with the markets as moves have been fast and furious. So where is volatility possibly headed next? Again, the trend lines paint a couple of different pictures.

We have the current liquidity flood and more coming in 2021 to support fund flows into risk assets. There’s also the beginning of a sector rotational move into value. I don’t think that’s a done deal yet. I think growth i.e. tech still has legs left. I hypothesize that the bounce in energy and small caps is only the first strike of sector rotation, but the growth of SaaS and big tech will soon parry in 2021 which should stunt recent returns in energy and small caps…at least temporarily.

The one asset class that continues to dominate my thoughts is the US dollar. I’m reading tons of obituaries. They feel premature. A swift move up to the 95 area would not surprise me here; swift relative to its usual multi-month cadence. A “swift-ish” move in the USD would drop a hammer on commodities, which wouldn’t bode well for the recent rotation into energy.

The grains and sugar have been on an unfailing tear upwards. Typical COT activity would have already seen correlated reversals in these crops. I’ve seen insinuations that perhaps we’re in a regime change for those specific assets, but like the death of the dollar, that innuendo feels a bit premature.

For my own long-term portfolio of equities, I continue to evaluate the plays that many deem to have great forward looking prospects as not only technology evolves but society as well. They may seem obvious, but it’s hard to shake what a well chosen play can mean for the potential of a portfolio. This means gene-editing, cutting edge biotech, AI, data dissemination, and two of the oldest vices on the planet with tremendously long runways as a result of only barely being legitimized.

In the short-term, I think the commodity shorts present a most compelling current opportunity but so much rides on the USD’s anti-correlation.

If you really want to generate some returns with equities, consider after hours trading. This has been widely reported on for a few years now, but just look at a recent chart put out by Bespoke to truly illustrate the marked difference in strategies.

Of course, 2020 has flipped that on it’s head. See below, but after-hours is starting to reassert it’s dominance.

Stay sharp. Recent choppy action may not be over just yet. And with everyone predicting an amazing 2021, including myself, it might just take a little time to get the real momentum going next year.