Friday wrap...

The market opened this week in response to the Spanish bank bailout which was agreed on Saturday 9 June. However, it was a typical 'buy the rumour, sell the fact'. Whilst the news provided a short term positive reaction, the fact is that Spain is a bigger problem than Greece. Central bank borrowing levels for Spain and Italy are the highest they have been since the inception of the Euro which are unsustainable. Bank of Japan kept rates steady this week but reaffirmed current levels of the Yen are not reflective of the Japanese economy. Major news has been light this week and most currencies have seen a short covering squeeze as everyone exits their positions going into a potentially volatile weekend with the Greek election. 


All eyes are now on Sunday's Greek election. The two parties, New Democracy and Syriza, have opposing views on whether to stay in the Euro. Many predict a New Democracy/PASOK coalition but it is better to wait for the rumour to settle and then trade the fact. Most brokers and banks are expecting very high levels of volatility so traders may want to consider the effect of holding any trades over the weekend. The market could gap aggressively, as it did last week, so please bear this in mind. 

The Spanish bailout....

Yesterday, Spain finally asked for a rescue package from the EU. Maybe they want to get in first because they fear the worst at the Greek elections? 

Regardless, the opening of next weeks markets will probably be buy the rumour, sell the fact. We have been seeing slight short covering rallies on Friday's before the weekend. Most funds reporting do not want to hold any positions over the weekend due to news announcements like yesterday's. 

A very interesting article on how Spain is the new Greece and is actually a much bigger problem: http://www.zerohedge.com/news/spain-greece-after-all-here-are-main-outstanding-items

Friday wrap....

Last week ended with disappointing US jobs data which further added to the prospect of QE3. Subsequently, the week opened with all major currencies falling against the Greenback as well as further selling in the Yen due to its new status as a funding currency. The risk-on mode continued throughout the week with positive data coming out of the UK and stronger than expected GDP numbers form Australia and New Zealand. However, traders were cautious as given the extreme levels seen in the Commitment of Traders report this could have just been a round of short covering. All eyes were on the central banks this week as many were speaking regarding their rate statements and the economic outlook. The Bank of England on Thursday did not disappoint traders, as economists and investment banks widely expected an additional £50bln for QE. Whilst action was not taken this time round, comments hinted at the prospect of an increase to QE sometime in the near future; subsequently the British Pound rallied on the back of the news. Comments from the Fed chairman Ben Bernanke disappointed traders as no commitment was made to additional stimulus in response to the disappointing employment number last week. However, Bernanke expressed their commitment to more quantitative easing if necessary; precious metals fell and the US Dollar rallied on the back of this. 


Today's rate announcement from the Bank of Canada is widely anticipated to be left as is due to weakening Chinese growth and uncertainty around the Euro but they are known to surprise the market. All eyes have know turned to Spain as the Greek election is now closes with results to be released on 17 June. Fears of Spain asking for a bailout from the ECB and IMF, as well as their banks asking for a national bailout will all weigh on the Euro in the coming weeks. Watch the bond auctions for further market direction. Many hedge funds are employing polling agencies to forecast what the Greek vote shall be. Given the fact the two running parties of opposing views on the Euro, watch price action for a leading indicator in the run up to this. 

Swing divergence setups triggered....watch the catalyst

The trades posted last week http://qitrading.blogspot.co.uk/2012/06/swing-divergence-setups.html have all triggered in. The risk-on Asian session was the catalyst with talks of a Chinese rate cut, more Fed QE and stronger than expected Australian and New Zealand GDP. However, the data from Australia was the biggest catalyst as they are the biggest exporters to China. Therefore, if the Chinese economy is still growing it is seen as positive for global growth and hence risk on for traders. However, tomorrow's Australian jobs report will be widely looked at for continued risk on sentiment rather than just stop loss hunting which may have been the case after two days of low volume trading (as the biggest FX market, London, celebrated two public holiday's for the Queen's Jubilee).

Key news announcements coming up....Interest Rates/Polls

This week we announcements from key central banks: Bank of Canada today, ECB and Bank of England Thursday. We also have Bernanke speaking on Thursday.

The majority of economists and investment banks are forecasting that the BOE will have increase their quantitative easing by another £50bln on the back of very poor PMI data last week. Whilst this is unlikely to happen this week, the comments may cause some volatility.

BOC are widely expected to leave rates alone due to the weak economic outlook globally. Whilst their economy is doing very well it makes little sense considering the backdrop with weakening Chinese growth and uncertainty around the Euro.

Why are interest rates important? Only fundamental economic shifts in central bank policy can change trend. Controlling rates is their way of controlling the growth of the economy. As traders, looking to profit from economic/technical themes or intra-day moves, how do we use this?....

FX basics - If a country decreases interest rates, sell the currency. If a country increases interest rates, buy the currency. For example look at the Australian Dollar (AUD) on the 30 April 2012 where they cut interest rates a quarter basis point to 3.75%....it started the one directional downward move throughout May.

The key news announcement will be on 17 June where the decision on the Greek vote will be released. Considering the opposing views of the two political parties running, on the issue on whether or not stay in the Euro, this could start the beginning of a long term trend and theme which has been lacking this year so far.

Happy trading!

Swing divergence setups...

Last week ended with weaker than expected US jobs data which added more prospect to more QE3. Subsequently the US dollar fell on the back of the news and was further strengthened from end of week short covering. However, the US stock market, which is a good barometer of market sentiment (due to it being classed as a risk based asset), such as the S&P500 has put in a swing divergence setup. This is also the case with the Euro; we now have a key reversal day (also known as an engulfing bar) with divergence on various oscillators on the 1.272 Fib extension (which is a common reversal area). Whilst there are many pairs at potentially strong reversal levels with divergence it is important to think about portfolio risk and always know how much you would lose if you get stopped on all your trades. This discipline is imperative to become a long term successful trader. It is also important to distinguish between a trend reversal or a short covering retracement. The results of the closed Greek elections on 17 June could be a game changer. Some interesting charts I'm looking at:

Has the short covering begun?...Check the COT report

As discussed in one of my previous posts (http://qitrading.blogspot.co.uk/2012/05/watch-short-coveringsugar-now-in-play.html) the market was heavily overweight, as you can see from the recent strong directional moves in currencies against the greenback. Therefore, the small rallies we have seen this morning on the back of positive news coming out of Europe, has led to some short covering to bank some profits. Things to look out for: - Today is a France/Germany and US holiday - Check the COT report (http://www.cftc.gov/dea/futures/deacmelf.htm) to see what's happening in the bigger picture - Large specs are showing a 5:1 short ratio on Euro Currencies to look at: The commodity currencies and their crosses are always one to watch when trading risk sentiment (risk on/risk off) which is the current market condition considering the Eurozone issue. There have been technical setups on NZDUSD, EURAUD, GBPNZD which have all come to fruition. I will endeavour to post some charts up later this week.

A must read! - 'Hedge Fund Market Wizards' Jack D. Schwager's new book

'Market Wizards' and 'New Market Wizards' by Jack D. Schwager are probably the two best trading books ever written. They are a must read for any trader at any level. They are a collection of interviews of America's best traders, some have turned thousands of dollars into millions.&nbsp;<div>

Now, Jack D. Schwager is releasing his new book 'Hedge Fund Market Wizards' next week. Although, I'm reading five books right now, this is the first on my list to read and will be finished the first!!

Check it out now:

Watch the short covering/Sugar now in play...

Hi readers! So I'm back in the UK and what a period we've had in the markets!! If you are an intra-day trend based trader or a break out trader then you've probably done very well since the beginning of last week; if you are contrarian counter-trend trader then you should have been disciplined and patient whilst the markets broke out and ran. If you do both then well done!

Now the markets have broken out key support and resistance levels, look for re-tests of these levels. EURUSD, USDCHF, EURGBP, Gold Spot are some of the key ones to be looking at. However, this relief rally is more to do with short covering than any improved news. The Commitment of Traders report showed extreme shorts on risk based currencies on extreme longs on the greenback. Therefore, we may just be pulling back due to some profit taking. The obvious news announcements out this week - the informal European summit on Wednesday and the G8 meetings will be key.

It's best to be patient and wait for a strong theme to present itself. Last week we had negative data coming out of just about every single country, the US, EU, China, etc... However, there have been some decent trading opportunities and the trade discussed in my April post http://qitrading.blogspot.co.uk/2012/04/dollar-index-lacking-momentumwheres.html on Sugar is now in play.

Looking at the Japanese Yen...

The Japanese Yen futures market has pull backed to a resistance level that previously acted as as strong level of support. It is also sitting on the first test of the weekly 50ema since it broke through the moving average in the second week of February 2012. This may lead to further Yen weaknesses. Matching strengths and weaknesses will be a good trading approach. Commodity currencies such as CAD and AUD may benefit due to its historic seasonal strength. Considering, USDCAD looks weak on the current daily chart; if this triggers we may see further CAD strength. Coupled with the oversold readings on Crude Oil, CADJPY or AUDJPY doesn't seem like too bad a play.

As I'm currently away, posts may be a little light but I will endeavour to do my best.

Japanese Yen Futures:

AUDJPY:

CADJPY:

FTSE 100 Gartley pattern....but watch the US markets and NFP

The chart below of the FTSE 100 is setting up for a potential Gartley short at 5888-5900, this also coincides with a previous swing high and round number. This may be a trigger area for a short position into a potentially seasonally bearish period. However, the DJIA cash market has taken out its highest high point for the past 5 years, the S&P has yet to follow. Not many analysts have a strong and clear directional bias on the equity market, so any trading decision will be discretionary and according to your rule book. One thing is for sure, when investing it always pays to buy and hold rather than convert to cash. Many retail investors are being sent reports to bank profits of the rally we have had in April. This is down to positive US data but weak Chinese and Euro data. 

Happy trading on NFP week and the UK bank holiday :)

RBA cuts interest rates by 50bps to 3.75%

The RBA have cut interest rates in answer to a very weak domestic economy. Most of the growth in Australia and hence the AUD comes from sovereign demand. We've seen similar sell-offs in previous rate cuts but yet the trend has continued. With slightly positive data coming out of China, many fundamentalists are calling for the trend to continue to the upside in AUD. However technically, we need to wait for the correct price action to confirm this. As the currency is heavily traded on external factors, such as sovereign demand....a better way to play AUD will be looking at EURAUD. If sovereign demand is weak towards the AUD then we will likely see a rally in EURAUD as most sovereigns would rather have Euros than the US Dollar due to their QE3 policy and huge deficit. Also, most sovereign nations, currently, have a greater interest in European exports than the US.

Dollar Index lacking momentum....where's the next trade? Silver and Sugar look interesting

As highlighted in my previous blog, the Dollar Index was, and still is, in a consolidated wedge. Although it broke through the bottom of the range, as suggested the bias was due to the previous lower high, it has lacked momentum to the downside and may come back within the range. The FOMC statement, even though slightly dovish, had no real impact. To end the week traders were looking to the BOJ meetings for some liquidity and momentum but the market already priced in the announcement of a net QE increase of 5 trillion, however, Shirakwa's cautious comments may not help USDJPY bull's.

However, even though the majority of major and minor pairs have been ranging and choppy, the cross pairs have provided decent trading opportunities.

The commodity sector right now looks to be providing some potentially decent trading opportunities. Two trades I am currently looking at is spot Silver and Sugar Futures.

The chart below of Silver shows a significant retracement to the 61.8% Fib level, 1.618 Fib ext of the smaller previous wave and a previous support level. Various oscillators are diverging over the longer term and shorter term. If the week ends as it is then we may see a weekly low test which adds to the case of taking a long position.

The chart below of Sugar futures (11), shows price action moving towards a Fib extension of 1.618 which coincides with its lowest low for 2 years. Technically there is a strong reason for a price correction and some profit taking due to its oversold nature. Fundamentally, whilst the downtrend is attributed to a sugar surplus, many analysts are predicting a smaller harvest from Brazil, this coupled with increase in quota for low-tariff sugar in the US may add to the technical reasons for a trade long.

Have a great weekend!

New Post Email Alerts

Hi readers! I am aware some of you subscribed to receive notifications of new posts. Sorry if you haven't received any by email but I have been blogging away!! This should now be fixed but you should have received an asking you click on a link to activate your subscription. If not, please re-subscribe or let me know by email: traderfocus@qitrading.com Thanks

All eyes on UK GDP....are we in a recession or not?

Cable has been very choppy this morning with volume only picking up on the European open, after a lacklustre Asian session. If Q1 GDP comes out negative for another quarter....we are technically in a recession. This will create some volatility depending on the number. However, with resounding fears from the Eurozone and FOMC statement tonight, it's a good time to sit and your hands and wait what happens. As Deutsche Bank stated in my last post, currencies will soon start trending aggressively very soon.

Interesting Times Coming For Currencies say Deutsche Bank

Deutsche Bank strategists say the range-bound trading in the currency markets could be ending.

The currency markets have seen extremely low volatility lately despite a spate of political events and economic reports - but the strategists at Deutsche Bank say we are about to live in interesting times once again.

"Looking back over the last 12 years, there have only been five episodes where a lack of trend across all 42 G-10 crosses has persisted for more than the current period," they wrote in a note to clients. And just in case you've been lulled into thinking that this time is different, the strategists point out that "central banks are coming back into play" and indicating clear direction shifts, like the Bank of Canada's increased hawkishness and the potential for easing from the Reserve Bank of Australia. Also, emerging market currencies seem to follow a pattern, they say: "May and June both tend to provide above-average returns for trend-following strategies."

Read more here: http://www.cnbc.com/id/47146265

New Psychology Post: Want to get ahead? Use 3D... Drive, Determination and Direction

http://qitrading.blogspot.co.uk/p/trader-pyschology.html

Watch FOMC and Dollar Index for direction....

We finally had the sell off in USDCAD, as posted last week (http://qitrading.blogspot.co.uk/2012/04/using-correlations-and-seasonals.html). Whilst it stalled at the lower support level of the range, it resulted in a decent profitable trade and is still in play for more downside momentum.

However, we have to look at the FOMC statement on Wednesday for more a clear direction of the US Dollar. In recent weeks the Fed's and Ben Bernanke's comments have been mixed about QE3. The positive data from the US, with negative data from the Eurozone and issues over USA/Canada refusing to help the IMF for a Euro bailout fund has been weighing on the markets and which is why most markets have been consolidating. The best recent trades have been the cross pairs, matching strength and weakness, like GBPJPY for example.

The chart below of the Dollar Index, shows we are clearly in a wedge and hence in a consolidating market. If we get a significant break through the downside support level then we will most likely see rallies in risk based currencies such as EUR, GBP and AUD. However, if price bounces off then look for the next resistance level to be hit and the markets to stay consolidated. The bias is a break to the downside, as the most recent high was lower than the previous high, however, only a break through the previous low will be a confirmation of this.

Many traders I have spoken to recently have been trying to trade aggressively in these type of markets and have given back months of hard earned profits. The most important aspect of trading is to have an objective focus and patience and discipline in waiting for it to play out. This week's focus is apparent, wait for clear direction and match strength and weaknesses, just like last week.

In the next week look out for my psychology and commodity trading posts.

Happy Trading!

Using Inter-Market Correlations and Seasonals...

So, we had the Index/Equity market sell off as mentioned in the previous post regarding the VIX Index. This accelerated further on weak US jobs data. The fact it is an election year further supports more of a sell off. So how could we use this to our advantage? Firstly, it is important to note the general correlations in the market (these are the normal correlations we see in trending markets; these can obviously change):


Stocks move in the OPPOSITE direction to Bonds
Stocks move in the OPPOSITE direction to Commodities
Stocks move in the SAME direction as US Dollar
Bonds move in the OPPOSITE direction as Commodities
Bonds move in the SAME direction as US Dollar
Commodities move in the OPPOSITE direction as US Dollar


We have seen Bonds moving up in the recent week on risk aversion, which supports the equity sell off. Therefore, matching strength and weaknesses one could look at a commodity moving higher and the US Dollar selling off, in line with the correlations. If we take this one step further and look at the seasonal bias, USDCAD seems quite interesting as this has an inverse relationship to oil prices. As USDCAD strengthens, Oil falls and vice versa. USDCAD has fallen 8 out of the past 10 years and is seasonally a bearish period. 


Looking at the USDCAD chart below shows a potential level of horizontal resistance and the 38.2 retracement, however you need to follow your own trading rules on potential entries/exits as all of the above is just a potential bias. Now the chart is clearly going sideways and isn't the best pair to trade, however, the bias is to the short side. This is nullified if we get a significant break through the resistance level. 

Using the same analysis above, AUDUSD also looks like a potential long opportunity:

Watch the VIX Index a.k.a the Fear Index...

This week we have the FOMC and NFP news announcements so it's a great time to spend doing deeper market analysis. Currently, we are seeing some interesting levels reached on the VIX Index (Volatility Index) which is essentially a market breadth indicator also known as the Fear Index. When the index is at high levels, fear is in the market and is usually found at market lows and therefore represent good buying opportunities. When the index is a low levels, over confidence and complacency are in the market and is usually found at market tops. 

Below is a chart of the S&P 500 cash market, with the VIX Index (blue line) overlapped. You'll notice it is essentially a mirror image. Nevertheless, the key level is the horizontal line I have drew in on the bottom. 

When the VIX reached this level in April 2010 we had an immediate sell off. Then when the VIX was at the same level during December 2010-February 2011, the market rallied and then sold off aggressively. The VIX Index breached the line again a year later in April 2011 and we had an aggressive sell off. We are now at a similar level which has been breached, indicating over confidence and potential complacency in the market. However, the market is still bullish and this is not a timing indicator. I personally only trade at technical levels so a good place to look for potential shorting opportunities is the potentially 1457.21-1432.75, which also may fall in line with an Elliott Wave 3, as below:

The market is and has been bullish and has provided many decent trading opportunities on pull backs. Look out for the levels above, news announcements this week may give an indication of trend and it being a US election year where the stock market typically performs badly during mid-terms may further highlight what we are seeing on the VIX Index.