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By Jason Pearce

A Yen for a Bull Market

Currencies can be ideal markets for trend followers. The macro fundamentals that move the currencies tend to persist for long periods of time. This gives traders plenty of time to get on board and a plethora of setups for getting in and out of trades. One great example of this is the Japanese yen.

From the 2007 bottom, the yen rallied for nearly four and a half years. As Japan kept sinking further and further into deflationary quicksand, the currency advanced like a skilled Samurai warrior of old. Consider how the events unfolded:

The Nikkei (Japan’s stock market) peaked in 2007. This pushed investors back into cash and propped up the yen. This was the beginning of a “risk off” environment.

The financial crisis rocked the world a year later in 2008. This sent stocks and commodities spiraling downward while cash and Treasuries went to the moon. Although stocks and commodities bottomed in Q1 of 2009, the economy stayed sluggish. This continued to lend support to the currency.

Two years later, the world watched in horror as Japan was rocked with a 9.0 magnitude earthquake on March 11, 2011. The resulting tsunami killed tens of thousands of people and caused the infamous Fukushima disaster at the nuclear power plant. Volatility in the yen surged as the currency rocketed higher for five days and touched a multi-year high, reversed and went into a freefall for three weeks as it sank to a multi-month low, then finally bottomed out in the first week of April. From there the yen began another multi-month push to new record highs.

The Japanese yen finally established its historic peak on Halloween of 2011 and the Nikkei reached its nadir a few weeks later. This marked the end of the multi-year bear market for the currency. It was one heck of a run. The yen posted annual gains of 6.8% in 2007 and 22.5% in 2008, a modest loss of 2.2% in 2009 (although it still made a higher high and a higher low than the prior year), and then more gains of 14.6% in 2010 and 5.3% in 2011. From the 2007 to the 2011 peak, the currency gained a whopping 64%.

Slice Like a Ninja, Cut Like a Razor Blade

Once the final high was established, there was no bell rang to announce the start of a new bear market. Just like the ninjas in the movies that sneak into the village at night, the new bear market in the yen started in stealth mode as the currency chopped around in a sideways fashion for a few months. But the trap was being set. Here’s what transpired in the current bear market:

After a few months of directionless trading, the Japanese yen started to crater in February of 2012. The Bank of Japan surprised everyone on Valentine’s Day when they stepped up their economic stimulus measures and expanded their asset-purchase program by 50%. This caused the yen to close below its widely-watched 200-day moving average for the first time in twenty-two months and trigger program-selling.

It would not be surprising to learn someday that the BOJ timed the announcement with the break of the 200-day MA in order to maximize their effect. That would be a pretty shrewd move. The world may never know.

After bottoming in mid-March, the yen underwent a rally into September. However, it never did get back up to the February highs. The damage was already done. The fourth quarter was an onslaught of three straight losing months with the year ending at a new twenty-eight month low.

Shinzō Abe was put back into place as the Prime Minister of Japan in late December 2012. His policies of fiscal stimulus, monetary easing and structural reforms continued to crush the yen. The BOJ announced its quantitative easing program in April 2013 where they would buy ¥60 to ¥70 trillion of bonds a year. On Halloween of 2014 the BOJ bumped it up a bit to ¥80 trillion of bonds a year.

The bear market in the yen certainly had its benefits. The economy improved and the stock market soared from late 2012 thru mid-2015, so the currency decline in Japan was never challenged. How can you complain about that?

Revenge of the Samurai

The Japanese yen lost 11% in 2012, 17.7% in 2013, 12.1% in 2014, and 0.4% in 2015. The four consecutive down years is the longest annual losing streak since 1972. This is an established bear market.

There are two important rules to bear (pun intended) in mind here. First, trends in the yen can persist. This is obvious as the prior bull market lasted over four years and the current bear market has been in play for over four years as well.

Secondly, trends in the yen eventually change. Traders seem to have a harder time remembering this rule. It’s an important one to learn, though. Continuing to short the yen after the bear market has run its course will be financial hara–kiri. There is nothing honorable or profitable about this in the trading world, so don’t do it.

Fundamentally, it is possible that the trend for the yen is now changing. Remember how the yen spiked during the August stock market correction? The currency tipped its hand that it was a “risk off” benefactor. It’s been happening again since the start of the year with the yen climbing in response to a spike in Middle East tensions, collapsing oil prices, and a sharp break in stock markets around the world. Several stock markets have already dipped into bear market territory. Buying the currency of a nation with an account surplus is certainly a safer alternative than holding the currency of a nation that’s running up an unsustainable tab when the ‘you-know-what’ finally hits the fan. And thanks to the currency collapse in the fourth-largest export economy in the world, Japan now has an account surplus. If the current US stock market correction turns into a full-blown bear market the yen should continue to benefit.

Here’s where the plot thickens: Last week, the Bank of Japan caught everyone off guard when they not only stuck to their ¥80 trillion ($666 million) bond-buying target, but they introduced a negative interest rate policy as well. As one would expect, this initially hammered the yen on ideas that Abenomics is not over yet. However, the yen recovered all of the losses and then some just a few days later. Chalk that one up to weaker-than-expected economic data in the US causing an abrupt downward adjustment in the probabilities of more US rate hikes in the pipeline for this year. In December, the markets had the odds of a 2016 rate hike set at 93%. After last week’s price adjustment, though, the odds have now dropped below 50%. Because of this, the greenback experienced its worst two-day break since last March and the yen is poised to finish the week with its biggest weekly gain since 2009. If this trend continues, 2016 could be the year that the Land of the Rising Sun becomes the Land of the Rising Yen.

Price Observations

Fundamentals aside, looking at the price of the Japanese yen on its own is quite revealing. First of all, the Japanese yen plunged as much as 5,269 basis-points from the 2011 record high. This is close in size to the 1995-1998 bear market decline of 5,632 basis-points, which is the largest decline in the last four decades.

Furthermore, the current bear market has lasted for 3 years and nearly 8 months from the Halloween 2011 record high to the June 5, 2015 low. This is just a bit longer than the 1995-1998 bear market that lasted 3 years and nearly 4 months. Based on the symmetry of price and time, the bear market could be complete.

Another interesting point is that the Japanese yen did not go into meltdown-mode after it undercut major price support at the 2007 bear market low in May and then the psychological 8000 mark in June. Instead of accelerating lower, the yen went into consolidation. If the market is no longer declining during a bear market, one has to wonder if that’s the end of the ride. If anything, it’s a good reason to start covering short positions.

Test of the 2007 Low

Test of the 2007 Low

Back in August, the yen made a huge ‘outside bar’ with an upward reversal on the monthly timeframe when it dropped to a two-month low in the first half of the month and then exploded to a six and a half month high in the second half of the month. Then yen was then trapped inside the August price range for the rest of the year. A breakout above the August price range occurred in January. Despite the sharp pullback, the yen is once again back above the August high. This confirmed the upside reversal signal that occurred that month and is a sign of strong demand.

Additionally, the 2015 price range was the smallest annual price range (in percentage terms) in nearly forty years. This low volatility after several years of declining price is another strong clue that the bearish trend is coming to an end. A breakout above last year’s high of .008629 would confirm it. That almost happened last month.

Yin or Yang? Bull or Bear?

I’ll share a great trend identification signal with you that investors and traders can confidently use to determine whether to be bullish or bearish on the Japanese yen. It’s extremely simple. So simple, I’m almost embarrassed to tell you what it is. But it certainly is effective. As a matter of fact, it works so well that you can probably get away with skipping the fundamental work altogether and just use this tool on its own.

Drum roll, please…

If the cash Japanese yen makes a month-end close (minimum of 25 basis-points) above the monthly 20-bar Moving Average, be bullish and be long. The currency is in an uptrend.

If the cash Japanese yen makes a month-end close (minimum of 25 basis-points) below the monthly 20-bar Moving Average, be bearish and be short. The currency is in a downtrend.

How It All Went Down…and Up

Over the last three decades, this trend identification signal has been highly accurate for the Japanese yen. It is simple, yet elegant. A month-end close above/below the 20-bar Moving Average waves the checkered flag to tell you that the race has started and which direction you should be heading. Take a look at the trend change signals over the last three decades and what transpired afterward:

July 1985: The yen made a month-end close (minimum of 25 basis-points) above the 20-bar Moving Average for the first time in over a year. It rallied another +4,085 basis-points (nearly 97%) into the 1988 peak.

Yen monthly 1984-1990

Yen monthly 1984-1990

March 1989: The yen made a month-end close (minimum of 25 basis-points) below the 20-bar Moving Average for the first time in three and three-quarters of a year. It dropped another -1,291 basis-points (nearly 18%) into the 1990 low.

Yen monthly 1988-1991

Yen monthly 1988-1991

September 1990: The yen made a month-end close (minimum of 25 basis-points) above the 20-bar Moving Average for the first time in about a year and a half. It rallied another +5,200 basis-points (72%) into the 1995 historic peak.

Yen monthly 1990-1995

Yen monthly 1990-1995

August 1995: The yen made a month-end close (minimum of 25 basis-points) below the 20-bar Moving Average for the first time in five years. It dropped another -3,480 basis-points (nearly 34%) into the 1998 low.

Yen monthly 1995-1998

Yen monthly 1995-1998

October 1998: The yen made a month-end close (minimum of 25 basis-points) above the 20-bar Moving Average for the first time in three and one-quarter of a year. It rallied another +1,260 basis-points (nearly 15%) into the 1999 peak.

Yen monthly 1995-2000

Yen monthly 1995-2000

November 2000: The yen made a month-end close (minimum of 25 basis-points) below the 20-bar Moving Average for the first time in just over two years. It dropped another -1,684 basis-points (nearly 19%) into the 2002 low.

Yen monthly 2000 -2002

Yen monthly 2000 -2002

June 2002: The yen made a month-end close (minimum of 25 basis-points) above the 20-bar Moving Average for the first time in more than a year and a half. It rallied another +1,445 basis-points (17%) into the 2005 peak.

Yen monthly 2002 -2005

Yen monthly 2002 -2005

May 2005: The yen made a month-end close (minimum of 25 basis-points) below the 20-bar Moving Average for the first time in three years. It dropped another -1,160 basis-points (nearly 13%) into the 2007 low.

Yen monthly 2005 -2007

Yen monthly 2005 -2007

August 2007: The yen made a month-end close (minimum of 25 basis-points) above the 20-bar Moving Average for the first time in over two years. It rallied another +4,584 basis-points (53%) into the 2011 peak.

Yen monthly 2007 -2011

Yen monthly 2007 -2011

February 2012: The yen made a month-end close (minimum of 25 basis-points) below the 20-bar Moving Average for the first time in four and a half years. It dropped another -420 basis-points (a little over 3%) into the following month’s low.

May 2012: The yen made a month-end close (minimum of 25 basis-points) above the 20-bar Moving Average for the first time since January. It rallied another +140 basis-points (1%) into the September high.

October 2012: The yen made a month-end close (minimum of 25 basis-points) below the 20-bar Moving Average for the first time since March. It dropped as much as another -4,579 basis-points (nearly 37%) into the 2015 low.

Yen monthly 2011 - 2015

Yen monthly 2011 – 2015

As you can see, the trend identification signals were mostly correct. The Japanese yen usually ran for several months or even years in the direction of the trend change signal. Traders had plenty of time afterwards to get involved and take advantage of the trend.

What It Is Not

Keep in mind that this trend identification signal does not tell you where the tops and the bottoms are. It simply tell you when the yen has moved in a particular direction far enough to identify it as a trend on the macro timeframe. While we’re at it, here are a few other things this signal does not do:

It does not tell you what price the yen should go to. It’s a lagging indicator that tells you the direction.

It does not tell you where you should enter and exit your positions. You should have your own rules for that.

It does not tell you how big of a position you should have. That’s where your risk management plan comes in.

Clues to Watch For

A month-end close (minimum of 25 basis-points) above the 20-bar Moving Average (currently around .008506) for the first time since September of 2012 would signal a bullish trend change. As we demonstrated earlier, this is a highly accurate trend change signal.

A breakout above the 2015 high of .008629 would also be a bullish event. Since the record high was posted in 2011, the yen has made lower annual highs and lower annual lows for four consecutive years. Therefore, a breakout above a prior year’s high would alter the price structure on the macro timeframe.

Japanese Yen Monthly

Japanese Yen Monthly

If you see either of these events materialize, you will know that it’s finally time to get back on the long side of the yen again. To be forewarned is to be forearmed. We just forewarned you. Now it is your responsibility to get your trading plan lined up so that you are forearmed and ready to capitalize on the opportunity.

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Nassim N. Taleb, author of Fooled by Randomness, The Black Swan, and Antifragile

“Flavia’s work provides valuable insights into the role of intuition in decision-making under uncertainty. It helps crystallize how theory and instinct work together.”

George Soros, Soros Fund Management

Unlocking Gut-level Intelligence

Consistently making good decisions is difficult. Information is imperfect, but so is our understanding of how decisions are really made. Most people believe that good decision-making is highly rational, but this view obscures a more complex reality where the body with its instincts and emotions plays a direct role in almost all the decisions we make.

Most of us have had the experience of working on a hunch—a deep, gut knowing that transcends the intellect. These gut feelings can be enormously powerful, but for most of us, they come and go when we don’t expect them.

What if you could access this deeper sense of knowing anytime you wanted? What if you knew whether or not to trust a particular gut feeling? What if you could make better, more confident decisions in every aspect of your life? What if you could reduce your stress around difficult decisions and maintain a sense of clarity even in high-pressure situations?

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by Andrew Hecht

Commodity Report for the Opening of markets on December 28, 2015

Summary

We are now in the final trading week of 2015. This year markets the fourth straight year of bear market conditions in raw material markets. Prices peaked in 2011 and 2012 and have been making lower highs and lower lows since.

Last week we saw some price recovery in energy and metal markets. It is likely that this action was position covering for year-end. We are likely to see the same for the final sessions of the year this week.

Highlights

Precious Metals – Gold and silver rebounded on a week-on-week basis. Silver closed last week at the $14.38 level, 30 cents higher than the previous week’s close. February COMEX gold finished $10.20 higher on the week at the $1075.80 level. Meanwhile, platinum group metals also moved higher on the week. Platinum closed the week at $884.30 per ounce up $24.80 on the week. Palladium was up $1.15 last week, closing at $560 per ounce.

Divergences continue in precious metals. However, the silver-gold ratio moved lower and is now at the 74.6:1. The platinum-gold spread closed at $191– platinum under gold. The changes in the spread reflect the relative strength on a week-on-week basis in industrial metals over gold, which was a continuation of the prior week’s trend.

Precious metals have been in a bear market since 2011. I do not expect much from these markets in the coming week, we will have to wait until 2016 to see if they continue making lower highs and lower lows.

Energy – Crude oil closed the week at $38.10 per barrel, recovering slightly from the previous week’s new multiyear lows on the active month NYMEX February futures contract. Processing spreads continued to diverge with weakness in heating oil and moderate strength in gasoline for this time of year. Term structure in crude oil remains wide with contango on the February 2016 versus February 2017 spreads in WTI and Brent continuing to trade above the 20% level.

The Brent premium over NYMEX crude has disappeared and now Brent is trading at a discount to WTI on the February contract. The move lower reflects a decrease in the political premium of Middle Eastern crude oil which could come back to bite the market in the future. Crude oil fundamentals and technicals are bearish but the political premium on crude continues to decrease with the prospects for increasing Iranian sales and exports from the U.S.

Natural gas made new decade and a half lows on January futures when they traded down to lows of $1.684 two weeks ago. This past week, this combustible commodity recovered with a rally of more than 20% off the lows. Support now stands at the 1998/1999 lows of just over $1.60 per mmbtu. Natural gas closed on December 24 at just above the $2, albeit it with dramatically lower volume than the prior week. Inventories reported by the EIA fell by 32 bcf last week and there continues to be enough natural gas stockpiles to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market.

Temperatures across the United States remain unseasonably warm for this time of the year, which is a bearish sign for demand for heating commodities, natural gas and heating oil. Natural gas open interest fell by around 13,000 contracts, which is likely a sign that shorts took profits during the deluge in prices and that traders are taking risk off the table for the end of the year. The contango narrowed over the past week with February futures trading at a 5.2 cent premium to January futures, 4.4 cents lower than last week reflecting the big price recovery that took place over the week.

Base Metals – We saw a continuation of mixed results in the performance of nonferrous metals on the LME. Over the past week, copper, aluminum, lead and zinc moved higher. Nickel and tin posted losses. The moves in all metals were marginal. On COMEX, the price of active month March copper futures rose in subdued trading closing at the $2.1215 per pound level on Christmas Eve.

Grains- Grains continue to be volatile. January soybean prices fell from the $8.92 per bushel level to around $8.75 while March corn was fell 10 cents to $3.645 per bushel. Wheat moved a lower on the week to settle just under $4.6725 per bushel, close to key support. All eyes will be on the progress of the South American crop and whether El Nino has any effect on these agricultural markets.

Soft Commodities – Trading was fairly quiet in the soft commodity sector last week. The FCOJ futures market rallied by just under 4 cents to the $1.48 per pound level. Sugar moved marginally lower over the week and closed at 15.06 cents per pound, resistance is at 15.85 cents. The March-May 2016 sugar spread, closed at a 39-point backwardation unchanged from the prior week. Cocoa futures moved lower in a continuation of end of year profit taking and position squaring closing the week at $3210 per ton down $42 on the week. Coffee moved marginally higher closing at $1.1970 per pound on December 24. Cotton did not change much on the week closing at 63.66 cents per pound on the active month March futures contract.

Animal Proteins – Meat markets diverged as cattle aggressively added to gains and hogs moved higher to a lesser extent on the active month February futures contracts. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. The spread in February is at the 2.33:1 level — the spread moved 0.11 higher from last week’s level.

Final Comments

The most interesting divergences in markets remain in the precious metals and energy sectors. Industrial precious metals continue to show weakness relative to gold on a historical basis. The XLE continues to be strong relative to the price of crude oil.

I would like to take this opportunity to wish you all a happy and healthy New Year and all the best for 2016. There will be plenty of opportunities for profits in 2016 in the commodity sector. Many of these opportunities will present themselves in the market structure or spreads within the commodities markets.

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By Andrew Hecht

MartinKronicle: Commodity Report
Report for the Opening of markets on December 21, 2015

Summary

Last week we saw two major events that affected markets. The U.S. Federal Reserve Open Market Committee raised interest rates for the first time in nine years and energy markets continued to plummet. The price of crude oil fell to lows of $34.29 per barrel on the soon to expire January contract. Crude oil is now approaching key support at the December 2008 lows of $32.48 per barrel. Meanwhile, natural gas traded to the lowest level in fifteen years.

Higher interest rates in the U.S. have been supportive for the dollar and a negative for equity and commodity prices on a historical level. While the Fed only raised the Fed Funds rate by 25 basis points in a move that was widely expected, the central bank said that they would be sensitive to data in 2016 but if all goes to plan we can expect 3-4 more hikes in the coming year.

Highlights

Precious Metals- Gold and silver diverged on a week-on-week basis. Silver traded to the lowest level since August 2009 at $13.62 per ounce early in the week but recovered to close at the $14.08 level, 19 cents higher than the previous week’s close. February COMEX gold finished down $8.10 on the week at the $1065.60 level. Meanwhile, platinum group metals also moved lower on the week. Platinum closed the week at $859.50 per ounce up $18.70 on the week. Palladium was up $16.55 last week, closing at $558.95 per ounce.

Divergences continue in precious metals. However, the silver-gold ratio moved lower and is now at the 75.3:1. The platinum-gold spread closed at $205– platinum under gold. The changes in the spread reflect the relative strength on a week-on-week basis in industrial metals over gold.

Precious metals have been in a bear market since 2011. As we now are in the holiday season, it is likely that liquidity will decrease in these markets as the end of the year approaches.

Energy – Crude oil closed the week at $36.06 per barrel, new multiyear lows on the active month NYMEX February futures contract. Processing spreads continued to diverge with weakness in heating oil and strength in gasoline. Term structure in crude oil remained wide with contango on the February 2016 versus February 2017 spreads in WTI and Brent above the 20% level. The Brent premium over NYMEX crude moved lower to under $1 premium for Brent over WTI. The move lower reflects a decrease in the political premium of Middle Eastern crude oil which could come back to bite the market in the future. Crude oil fundamentals and technicals are bearish but the political premium on crude remains very low considering that over half the world’s reserves are located in the Middle East.

Natural gas made new decade and a half lows on January futures when they traded down to lows of $1.684 last Friday. Support now stands at the 1998/1999 lows of just over $1.60 per mmbtu. Natural gas closed on December 18 at $1.765 with the market reeling from negative price action last week. Inventories reported by the EIA fell by 34 bcf last week but there are enough natural gas stockpiles at this point to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market. Temperatures across the United States remain unseasonably warm for this time of the year, which is a bearish sign for demand for heating commodities, natural gas and heating oil. Natural gas open interest fell by around 28,000 contracts, which is likely a sign that shorts took profits during the deluge in prices. The contango remains high with February futures trading at a 9.6 cent premium to January futures, 3.6 cents higher than last week reflecting that demand will rise this winter and that there are ample stocks.

Base Metals – We saw mixed results in the performance of nonferrous metals on the LME. Over the past week, aluminum, nickel and tin moved higher. Copper, lead and zinc posted losses. The moves in all metals were marginal. On COMEX, the price of active month March copper futures marginally lower closing at the $2.1080 per pound level last Friday.

Grains – Grains continue to be volatile. January soybean prices fell rose from the $8.70 per bushel level to around $8.92 while March corn was little changes at $3.745 per bushel. Wheat moved a touch lower on the week to settle just under $4.87 per bushel last Friday. All eyes will be on the progress of the South American crop and whether El Nino has any effect on these agricultural markets.

Soft Commodities – Last week was a continuation of volatility and bullish action in the soft commodity sector. While the FCOJ futures market dipped by around 6 cents to the $1.44 per pound level. Sugar moved higher over the week and closed at 15.10 cents per pound, resistance is at 15.85 cents. The March-May 2016 sugar spread, closed at a 39-point backwardation up two ticks from the prior week. Cocoa futures moved lower in end of year profit taking and position squaring closing the week at $3252 per ton down $101 on the week. Coffee moved lower closing at $1.1900 per pound on Friday December 18. Cotton did not change much on the week closing at 63.69 cents per pound on the active month March futures contract.

Animal Proteins – Meat markets diverged as cattle were steady and hogs moved lower on the active month February futures contracts. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. The spread in February is at the 2.22:1 level — the spread moved 0.12 higher from last week’s level.

Final Comments

The Fed has spoke and interest rates have moved higher. This is likely to be supportive for the dollar. The inverse relationship between the dollar and commodity prices is likely to keep pressure on the raw material asset class as we move into 2016. Meanwhile, energy prices continue to plunge and the divergence between crude oil, natural gas and the XLE is worth watching. There will be plenty of opportunities for profits in 2016 in the commodity sector. Many of these opportunities will present themselves in the market structure or spreads within the commodities markets.

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