Back to Research

It has been a year since the last post, and before that time, I’ve worked at a trading firm, learned, and left to start the new stage of my career. I have also passed all 3 levels of my CMT exams, and even though I certainly like the novelty of Point and Figure’s boxes, catapults and more, its obscurity (especially in FX) goes against an important tenet of the markets: it may be a self-fulfilling prophecy (if enough people are looking at the same thing).

So what have I learned? Follow the trend, Digested in these few simple points, which has simplified my charting.

1. Trade breakouts. Follow quiet markets, and get in when it breaks

2. There is no too high of a price to buy, or too low of a price to sell (that’s from Livermore). Especially true with all these extremes in FX and indices.

3. Use simple indicators, especially the ones that everyone is following. Hence my use of only 10-200 MAs, and now on hourly charts because that creates more opportunities.

Follow this trade on TradingView!

To the best of good buys.

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And that’s a lot of resistance hits – asset? Your choice.

Wow, that holiday rally was quite robust on Friday. It hit all of my PTs (gold, pound, but I’ve also closed my Bund trade), but more importantly, almost all risk assets have come up to major resistances. That confluence of resistances, especially amplified through so many assets, is what our PFTQ tech trader running the high Sharpe RSI 2 package.

The indicator package still shows holding short, as it hasn’t rallied back to major MAs.

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The best way to structure this would be through: Ichimoku hits, trendline hits, fib hits and finally candlestick patterns. Confidence decreases in this order too, so it’s more or less simple arithmetic to find the best asset to trade this decline.

Ichimoku hits:

Gold, the big one. Actually had my long position from 1710 limited out with that last spike up to 1753. Wiped candle at the end of the day doesn’t do good with momentum either. Additionally, all tests of a blue cloud from underneath has ended (hit, not close above) with the Span A (top line) providing a reversal point, regardless of other indicators. Price target of this one would be first the span B again at 1690, with an even lower one at 1660 (but run a probability analyzer on that).

A large cloud in this case, courtesy of QE3 speculation also gives enough room for scalping. Unless gold closes above 1753, the immediate bias will be negative.

Also look how similar to the DAX30 the technical positioning looks. More importantly if we have a reversal here, both gold and indices will have put in a local top.

 

The other big daddy: EURUSD. Looking for a capitulation on EURUSD, permabears? This might be your opportunity (well, the first relatively confident one so far). That Span A hit has been a powerful line of resistance, as no upward test has broken it within a week’s trading (as in, the reversal isn’t that fast), in 4/5 times this has happened (the only time it didn’t was in mid-September 2010). However, do please use stops at breakeven, or set very near price targets.

 

EURSEK: Don’t have much to say on this support hit, though a break of the Span A has been rejected before (remember not to confuse low liquidity gaps with actual breaks today!). Also, USDSEK has broken below that thin cloud and will likely target 6.5000 (technically). Small position? Why not.

 

Trendline hits:

The Nikkei 225, which has been following that channel since forever. Can’t say I’ve gotten into too many of these even though the lines have been drawn since the 2nd peak. Yes, the top line has been broken, but the fib provides quite robust resistance, especially since it was a very substantial support during April and May of this year. Plus, the bottoms haven’t picked up enough to show a true reversal, so trading this channel is still quite safe by my standards.

Also, this last run was completely caused by USDJPY. The US economy is improving, but treasury yields have exploded these past months, which naturally brings in more FOMC trading, and – not to forget – possible risk aversion due to a lame duck congress (what great timing!). Even though apparently this last drop in bond prices have been caused by foreign dumping, all sources of possible risk (remember that Greece still hasn’t received its bailout tranche even though its “rolled-over” bonds from November 16th will have to be paid on Dec 7th and 14th.)

This, along with a short USDJPY (yes, redundant and a bit dangerous) are my current trades.

 

AUDUSD: a bit dangerous but including it in this section as well. This pair is being wedged in, but close enough to the top line that would make a trade have slightly over 1. I still wouldn’t trade it as the range has been oddly thin over the last months, and for a similar long-dollar trade, there’s a few that give much better positioning (as in, why not EURUSD at around 1.3150?)

Fib hits:

Bunds, which I closed out after this post as momentum just died. This has stopped at a fib range rather than an actual line in the sand, as previous trading shows the actual resistance has actually been around 142.10 and 141.85. Will actually wait for a conclusive break of that range to re-target 140.40 or so (the Span A cloud bottom).

EURJPY: which has led a coordinated recovery (the Euro and the yen) back to hit the 76.4% reversal line. RSI has reached overbought area, and the HA candles are flattening. Confident? I think so.

Candlestick patterns:

Well, just the one really on USDJPY. RSI, HA and CMF (accumulation or deaccumulation) are showing weakness in the upwards run, and the last few candles (and if today’s is included), should restart the reversal pattern back to the low 79s. Hence, this is the reason for my Nikkei 225 trade, as the timing does match with the Nikkei’s channels. We do have the election coming up, but based on history (as Prime Ministers come and go), there isn’t expected to be a large change. Looks like there’s going to be something troubling in Greece again.

To the best of good buys.

 

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The pound is dead. Long live the pound!

Closed out my pound trade from this post after hitting the span B. Momentum wasn’t too strong on part of FX, even with the equities sell-off, and thus the BFTD bias still remains on currencies (and gold… maybe…)

The next week’s hold is largely based on data coming post-Olympics. The current estimates are still quite conservative (1-2% higher YoY only – and mind you the comparison was to a Britain entering recession), and from what GDP showed, promises to surprise to the upside again.

That’s it really, and based on Friday’s SPX close, that massive doji signals a reversal, of at least up to 1430 again (bounce between the kijun towards the span B).

The GBPUSD pair seems to be a good pair,  though there is still additional room for the dollar to come back. Though RSI is at its local low (on such a quiet pair), an entry should be placed at the 200DMA which is at 1.5850 and so. We also have Fed minutes coming this week. Though it didn’t cause immediate volatility, the dollar has strengthened – with the exception of Gold, which is again bouncing on the speculation of the Fed either printing until unemployment hits 6% or some kind of stopgap to prevent the fiscal cliff from taking out the economy again.

And mind you, the government’s not going to do anything during the lame duck period. So expect dangerous complacency until the start of December.

I’m going to use the GBPJPY pair – which gives a much more robust resistance – the combination of a 50 fib and the span B. Though the pair is sitting at a rising trendline from early August to mid-October, current yen volatility (especially after the GDP report – because Japanese data are having an effect right now) could very well push it to 125.00 – my entry point – before a robust complacency-driven bounce back to 131+. Also, the price has broken the 50DMA, 200DMA (a long time ago) and the upper span A line. Next major resistance is lower.

Europe? It’s OK. The Germans will pay for the 16th. The next risk point has been delayed to the end of the month. And if Spain requests, it’s risk-positive… for some reason. Zenious.

To the best of good buys.

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Massive Evening Star on GBPUSD

ハイ、以上。

取引で善かれと思う。

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Three assets, two signals, one way down

My prayers for those who were severely affected by Hurricane Sandy. Hope the recovery will be swift so everyone can get back to their places as soon as possible. But on the bright side for all the groveling New Yorkers, at least the subway will be cleaner after 7 days of soak.

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Right so, that does mean US markets will be back online to the joy of traders everywhere. Although these past few days may have brought a welcomed break, where it has left us as far as positioning is precarious, and very advantageous.

What we have here are three risk-correlated assets (in different degrees), GBPUSD, the Dax30 futures, and Spanish IBEX35 futures. All three have entered the cloud, and these few days of inactivity have led them to re-test, but fail the Span A (upper) resistance. With the current low volume-higher risk complacency trading atmosphere, a large return of volume tomorrow could start pushing risk lower.

Secondly, RSI14 have dropped below 50 on all three assets. There may be a retest above, but overall sentiment has turned negative (which hasn’t been seen in quite some time), and trend is expected to return to the oversold region again. 50 has proved a strong support resistance (depending on direction of test) for all three, and shouldn’t be discounted this time.

Risk-reward is excellent, with a stop around 0.250% above the span A and first limit (of whichever is first) at the cloud bottom. This gives around 10:1 in about a month. Second limit would be the equal to the Span B line minus the SpanA-SpanB gap.

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The Sterling: see that breakout candle on the second day? That was because of the GDP-induced productivity. Same thing happened for the Kiwi during the Rugby World Cup, so I’ll definitely be closing out before the next CPI report on Nov 11th (also mind you there’s a BoE decision, the second to last by Governor King) and looking for another short entry on this or GBPAUD, depending on position at the time.

HA doesn’t give as good as a signal due to the extreme chop. This should be used as a confirmation or rejection in the days to come. Stop is a daily close above 1.6140.

 

The DAX30 and IBEX35 are following the same drivers: topping at current range, HA turning moderately negative (which gives a bit more confidence than the pound). Additionally, the markets are still waiting for Spain’s final request. Even though that is a catch-22 with yields being brought down greatly due to the promise to purchase, Spain would be admitting they can’t really pay back all that debt at these rates. Nevertheless, anything short of a request will not restore confidence in the European markets, and will pressure the indices lower. Again, stops should be placed at daily closes above 20% of the span A top.

 

Remember to maintain enough margins! To the best of good buys.

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GBPAUD: Position closed on morning star, looking to re-enter at fib, resistances

Closed out the trade I had a few days ago – looking for a re-entry unless to sell at 1.56349 and continue with the bearish bias… unless something awful happens.

To the best of good buys.

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GBPAUD is nearing its pivot, again.

This pair, which has the best trends I have seen (other than the Nikkei) is running out of upward momentum. From the outperformance of the pound on Eurozone matters (Spain asking for money),risk-diverging from the continued dovish rhetoric of Mr. Stevens (again, on China and the deterioration of RIO and BHP) during the past few weeks, GBPAUD has run up once again to a point of near exhaustion.

So the trades…

Aggressive: short anywhere now, stop at a daily close above 1.5860 (20 pips above the nearest resistance fib, where there were 2 recent attempts). Targeting LT break of cloud and finally at 1.4850 or so. Close out if price bounces off the tenkan-sen (upper boundary of cloud) and goes past the 1.54580 fib.

Conservative: wait for a daily close below 1.5600 (what I did… though timing was wrong), red HA candle, half a position. If HA breaks its trend (which will also mean a similar break on price candles), add the rest of the position. First target at cloud top of 1.5360, with the rest at the 76.4% fib at 1.5080 (intraday limit order).

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Technicals: about to complete its 4th pivot and nearing a breakout in a few days. HA has stagnated and flatness bodes not well, especially since we are at a fib resistance on the HA chart. Negative RSI divergence may once again target bottom of RSI range. Tenkan-sen nearing current positioning, will lead to large break lower if GBPAUD does not bounce above the 76.4% at 1.5830 (where the stop is).

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The fundamental reasons are quite bullish in general, and many of what to follow could be applied to EURUSD or AUDUSD as well. However, GBPAUD gives the best long-term positioning in my view. Overall, Spain will most likely request aid this weekend at the EU summit (I mean, what does it cost right now, even though the fear will come later?), but we have a few other things as well.

The positive case for the Aussie doesn’t originate in Australia, but once again the favorite promoter, China. Plenty of risk events coming out in the next few months, all around the November 8th announcement of the leadership change. We know who’s going to take over, but it’s the data leading up to that date that will drive overall risk and especially the Aussie. This week’s actually quite heavy in data…

Inflation is the key data in China because everyone feels it. And if inflation is not quite to the people’s appetite (meaning high), the government is once again caught between stopping overheating and allowing the economy to bring prosperity to everyone. The government’s magic machine churned out 1.9% YoY this Monday, but even more importantly, USDCNY dropped to 6.2600. The fact that the government allowed the band to appreciate that much is to offset the impacts of new stimulus (eyeball some charts and you’ll see 1wk change before stimulus rumors is negative). And oh huh… Q3 GDP is expected at 7.4%, below the government’s 7.5% target (no matter how soft that is…). And GDP data joins the entire host of other leading data that shows the manufacturing sector is slowing (though strength is shifting to tertiaries).

Secondly for the antipodean nation, though slightly weaker, is spillover effects from South Africa. No more metals from ZA? Australia’s got your back… from some metals (copper most importantly, though ZA is PGMs and precious… hmm…) Last time I ran the correlations Australia was slightly positive… need to look at the trend again…

Also look up: CESIICNY (Citi’s inflation surprise index, still a bit more lower to go, meaning lower inflation likely) and CESICNY (overall Chinese surprise index)

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And for the UK, other than the fact that they are in another stall, Scottish independence and a general slowdown caused by austerity, there’s the speculation over who’s going to be the new King (governor of the Old Lady). There’s Tucker, who though dovish, is more known for the impending wave of finance controls. Other than that, we don’t really know what his polices are.

But there’s a second gentleman in the running: Lord Turner. This gentleman is basically the Janet Yellen in the British banking world, who said that QE is not enough, and there needs to be more unconventional forms of easing. One can speculate about his “new ideas” but from his tenure on the FSA, he’s noted that banks simply need more credit to restart the lending cycle. They’ve made progress, but there needs to be the one last big push to ensure the road to recovery. Whatever it is, there’s probably going to be quite strong easing from Turner’s tenure. Watch the announcements on December 5th, 2012. This might be a bit too long for this trade, but I’m watching Paddy Power as the odds develop.
So to recap, for this trade of around 1 month or so: China’s easing, Britain continues to be in a dire situation, and Draghi will simply pound the buy button as long as inflation is below 5% in Germany.
To the best of good buys.

 

And also… my current uridashi (though short term) trade. Targeting 3 yen up! HA good! …pls close above 42.620…

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ECB Meeting… technicals say risk-positive, but from a rate cut?

So… it is currently 0600 or so GMT, more than a few hours away from the ECB rate decision at 1145GMT that’s supposed to bring in the new coming of unlimited bond purchases, some new flavor of SMP and additional commentary about easing. However, positioning of EUR crosses have stopped at an interesting junction – technicals of EUR-safe pairs show EUR upside, but EUR-carry have all stopped at important resistances. An OMR cut generally means lower EUR across the board, but other risk-positive decisions mean outperformance of major regional carry counterparts. Thus from EUR-safe/EUR-carry positioning, I think there’s a low chance of a rate cut, but something will give a risk a final run before what happens in Germany as September chugs along. 

Including the fact that German inflation data has been stable and the deterioration of peripheral sovereigns have paused over the summer months (along with a rise in Bund prices), an actual ECB cut seems unlikely. Rate cutting is one of the remaining monetary policy tools that doesn’t anger the Germans that much on the scale of what Draghi can do to piss in their coffee, but there is a zero-bound. And the problem isn’t really deflation (at least in the majority of countries) but borrowing costs faced by the governments of the peripherals. What Draghi is doing, is using a scalpel to attempt to remove the tumor, rather than a pistol. At least he has the right tool.

An ECB cut will most likely mean lower EURUSD and EURJPY. However non-cut, new SMP is risk-on. As both EURUSD and EURJPY has crossed into no-man’s land with upwards momentum, it is most likely that the trend will continue to the next major fib (a wick is enough). However for the more fun EUR crosses, extinguished candles at resistances point to generally a risk-on reaction, ie downward EURxxx.

Or I could be wrong and they clear the cloud in one stodgy go.

Selling 10 USDCHF to cover my exposure especially for 25 EURCAD short and a bit of EURHUF. Stopping USDCHF at .9600. But I shall be scalping… including XAUUSD.

So no rate cut? … surely there’s a way to trade this with Bund, BTP or Oblo calls, right? …

To the best of good buys.

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EURUSD and EURJPY – targets of 1.2720 and 100.50~. Not as good as Stolper’s target but still offers a few hundred pips. Also note the 1:1 positioning for EURUSD. Higher upper reward for EURJPY… but that might be due to yen effects.

EURSEK… of course there are questions of why there’s been a massive run up (look at SE yields, definitely seems to be some Riksbank purchasing here), but it has hit the bottom of a thin cloud. A 1.2% move upwards could take it out. After that, it’s back to the old ranges.

EURPLN… a bit more dangerous as it wicked up to the fib and now sitting at the bottom of the cloud. Expectations for NBP cuts (also today) may be driving this more than the ECB.

EURHUF… I still like this one… it’s sitting at a fib (the first resistance) as well as the bottom of a cloud. Major event risk for Hungary ain’t for a couple of weeks.

EURCAD… the pair that I’m using as an alternative for EURUSD. This has become my LT EUR carry as EURPLN clarity isn’t that good yet.

These positions are still a bit NG for my taste… but they’ve all gotten to a point where I’m absolutely comfortable selling them…

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The Last Trading Post Until 8/19/2012

This will be my last trading post until the end of summer as I will start employment with a bank’s fixed income desk very soon. I really don’t want to get tied up in conflicts of interest, dissemination of company property and then angry letters from HR. Slowly winding this account with around 26% profit since January and keeping it as a JPY play only.

Sooo a few notes, I use soft stops, ie when there’s a daily close that invalidates channels, targets or lines I’ve previously drawn.

Timing should be that the AUDNZD trade closes first tomorrow evening, then AUDUSD should be stopped out (though this trade is a hedge against both a dovish RBNZ and fall in risk sentiment because nothing in Spain has been solved yet… and they’ve woken the Italians). CADJPY I can hold (after everything has been closed) for a couple of years.

Going to open an Hong Kong account in the next few days so I can trade NDFs and CFDs. GOLD AND SILVERRRRRRR!

USDSEK has reached its first target after a week. Good trade, eh? I wouldn’t look to buy again until it reaches 6.9000. But, volatility is high so a bad position won’t hurt that bad.

To the best of good buys.

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No new stimulus?

Well, Uncle Ben didn’t seem to mention any in his testimony to congress. The entire market has been waiting for something like this for the past ~3 days.  I think quite a few will be unhappy that the only new money is coming from China, rather than another blowout deal from the US. Seems like fedspeak does build up – other members preview what the Ben says.

The USDSEK positioning remains valid, though I now seem to doubt a daily close below the channel at around 7.1100/7.0900, which was the confirmation for a short entry. However, a commendable effort to those who captured the leg down.

Currently watching EURJPY again. As of right now (1.5hrs in) risk appears to be peeling off. If this candle closes red hammer down, I will be adding more to the position. EURUSD has failed to pass the former low of 1.26000 (also a fib from 1.18754 to 1.49485 – retest of 91.0% at 1.21520?…)

But nothing wrong with selling Euros – though selling it against USD, CAD or NZD seems to make more sense… will see how EURJPY does… Will probably throw it away if it’s not positive by today’s US close.

To the best of good buys.

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