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!

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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. 

Dollar rally? Watch precious metals

The past few weeks has seen the dollar rise as stocks and Treasury yields moved higher. However, recently the dollar appreciated even though equities and Treasury yield moved lower. Many traders and investors will now be bullish on the dollar based on its strengthening in a pessimistic and optimistic market. Even PIMCO, one of the world's largest bond holders and asset management companies, is now a short term bull of the dollar. Interestingly, they were bearish only 3 months ago. Maybe they want us to go long on the dollar so they can offload some of their positions? How else do the big boys offload decent size at a decent price? Nonetheless, we are technical based traders by nature and follow what price action is telling.

 If the dollar does continue to rally and there are strong reasons why (Greece may be out of the spotlight but what about Portugal, Italy, Ireland and Spain?, China has experienced a significant slowdown which has already had an effect on AUD and NZD, JPY and CHF are weakening due to its high appreciation), so where would you go for growth?

One chart that looks interesting is Platinum: The base chart is Platinum futures and the red line is the Dollar Index, you can see the inverse correlation it has. As the dollar rises, Platinum falls. What is also interesting is that we are in a head and shoulders pattern, therefore many traders will be looking for a break of the neckline to the downside at 1606.4. A potential target could be the 61.8% retracement at 1496.9 which coincides with the heigh of the head [of the head and shoulders pattern].

Trader Psychology New Post - Cognitive Theory & Frustration

NZDCHF - Whilst we are technically in a head and shoulders pattern, which may indicate some further downside, we are also trading at a strong level of support. So what do we do? Wait for the break or trade the bounce? It's all about the entry you get. My entry was based on the 60m chart, so I have already scaled out at 2:1 and moved stop to break even. This is a method I like to employ when uncertain about overall trend.....it will only effect the management of my trade. So now I have a small stake running which I will leave over the 2 weeks as it is essentially a risk free trade and I've banked my profit already.

Crude Oil - Still looking for longs on retracements

EURJPY - Are we potentially beginning a wave 5 according to Elliott Wave Theory? If so, look for a run up  towards last October's high around 111.60

RISK WARNING: FX trading carries a high level of risk that may not be suitable for all investors. Leverage creates additional risk and loss exposure. Beware you could lose some or all of your initial investment. 

What's the driver behind the recent sell off in Equities?


Whilst all the headlines are focusing on Greece, there seems to be a bigger problem in the background. Global growth is weakening: Brazil, the sixth largest economy is slowing; Australia's economy is slowing (which relies heavily on China, 50% of Oz exports go to China), China have a vast amount of problems itself; Europe is contracting and Greece are holding its bondholders to ransom. This 'risk off' mentality was clearly seen at the beginning of the week with money flowing out of speculative assets such as Equities, AUD and EUR.

As I discussed in previous posts, Oil, is the one to be watching right now. This time last year light crude was at $90, now even with the recent sell off it is $105. Whilst the sell off has been down to reopened negotiations with Tehran, how long will this last? The question from Israel and USA is not if they will invade Iran but when, after the elections or before?

So how does this help us as traders? Whilst I am a predominantly technical based trader it's important to understand some of the major economic themes as this how you can potentially get into strong moves early on as well as capture a strong trend. All we've seen so far, is just short covering based on investors coming out of risky assets due to concerning global growth. This provides us with decent opportunities to trade retracements, but of course you need to follow your OWN trading plan and style.

I will post up some charts in the next post on things I am looking at or are in. As I am away for 2 weeks, you won't be receiving any updates (I'm sure you don't want to know about me in 35degree Jamaican and Mexican weather!).

All the best traders....

Reality check: I am good at what I do, I work hard and am doing everything right. So, WHERE IS THE MONEY?

Let's face it most people are interesting in dreaming than working. The truth is you need to manage your own expectations about what you can achieve now, in 3 months, 6 months, 1 year and so on. Nothing is impossible, however, people start to live the life because they're doing something to change their life. Get the results first, be the best you can be and the rewards will follow to those who persevere with a single-minded, focused attitude.

The reality is you're probably not working hard enough or you're spending time working on the wrong things, or maybe both. I did this a lot during my beginning days of trading and trying to set up new businesses. Everything was planned to perfection and I had everything ready but the execution was poor. You need to have a plan (trading, business, life) but execution of that plan is the most important factor.

"Vision without execution is hallucination" - Thomas Edison

Execution comes down to being inspired, motivated, hard working and a commitment to never ever stop to reach what you want.

As we are coming into March, the last part to the end of the first quarter it's always good to look back at what you have achieved in that quarter, we only get 4 a year remember!

Crude Oil has finally broken out of its 3 month consolidated pattern. Seasonally this is a bullish period for crude which further supports the price action on this chart. The break gapped away as most likely many traders were eyeing this trade. Bullish re-tests and retracements are the only ways to now get in to this trade. If this momentum continues we will see crude around 2010 highs of $114, this also coincides with a 2.0 fib extension of the consolidation breakout. Watch out for news announcements on CNN on the price of oil, the Iranian sanctions on UK and France oil exports will also have a major bearing on this continuing to the upside.

Greenback rallies against all major currencies on back of Bernanke's testimony. Precious metals also fell of aggressively. Fed Chairman Ben Bernanke's comments appeared to be less dovish than the market expected, suggesting no QE3. 

The technical picture of the US Dollar Index also provided a level of support around it's 50% retracement level from November's low to January's high, 200dma and most indicators diverging showing lack of momentum to the downside. 

Is this the beginning the downslide in Euro? Well the technical picture and fundamental picture supports the case but it relies on risk appetite from investors and their search for ROI. Look for clear direction and be patient. 

Patience is one of the most important traits for a trader. If the market is telling you to wait and do nothing, then you must listen and sit on your hands, prepare yourself for the next trading opportunity and maintain a focus on what to do next. 

Whilst the FX markets have been ranging, waiting for some clear trend direction now that the Eurozone news isn't in the limelight, the commodity markets have been the one to watch. As you see from the chart of spot Silver below, it is potentially ready for a clear breakout out of its range. Given that price action made such a shallow retracement before the level of upper resistance, the market looks ready to breakout of that resistance level.

However, watch for key news announcements out later in the week.