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November 30, 2013

Long the Cable and Bullish the GBP

Filed under: Forex General — Tags: , , — admin @ 5:34 pm

Finally!! As predicted throughout the month of November we finally have seen a successful close above the downward sloping trend line that began back in August 2009. Here’s how the weekly chart closed up:

Cable finally breaks through long-term resistance.

Cable finally breaks through long-term resistance.

The only “speed bump” areas that are likely to cause problems with the Cable going further north will be the previous peaks formed on 2nd August 2009 at 1.70421, 24th April 2011 at 1.67444 and 30th December 2012 at 1.63794. So while the potential for blue sky is ahead we may experience a little turbulence before moving north of 1.7050.

Conservative initial stops would be placed at the previous swing low formed a few weeks ago at 1.58532. Moderate initial stops would be placed at the low of this week’s breakout candle being 1.61322. A high risk initial stop placed would be placed at the trend line’s point at 1.6218. And a very high risk initial stop would be placed at the 50% mark of the breakout candle being (1.63837+1.61322)/2 = 1.625795.

While I’m certainly keen to enter the Cable I’d like to hang back just to see how it handles resistance around 1.63794 – I’ve noticed that the GBPCHF reacted to it’s previous resistance zone and I have a funny feeling that the Cable might be a little tentative too.

And speaking of the GBPCHF we’ve finally *started* to break through the resistance zone at 1.4820 – it hasn’t quite “cleanly” gone through it yet, but will be interesting to watch again this week for an entry point:

GBPCHF starting to break through resistance area at 1.4820.

GBPCHF starting to break through resistance area at 1.4820.

The only GBP cross which appears to be lagging behind the rest is the GBPNZD. However, the current congestion formed by the GBPNZD over the last 6 months has seen this week’s close break out from its resistance zones of 2.00512 (formed 16th June 2013) and 2.00700 (formed 25th Aug 2013), as seen here:

GBPNZD breaks out of it's 6-month congestion and looks to move ~270 pips.

GBPNZD breaks out of it’s 6-month congestion and looks to move ~2350 pips.

The potential move from this breakout could see it extend 2350 pips as demonstrated by the movement prior to the congestion. This would mean a conservative target would be 2.15081 (1.91581 [last swing low] + 0.2350).

A conservative initial stop loss could be placed at the last swing low formed within the congestion being 1.91581. A moderate initial stop loss could be placed at the low of the breakout candle being 1.95520. A high risk initial stop would be placed at the 50% mark of the breakout candle being (2.02341 + 1.95520)/2 = 1.989305. And a very high risk initial stop would be placed at the previous resistance (now new support zone) at 2.0050 (only 67 pips away!).

As evidenced by these charts it appears that it’s time to be long the GBP and hopefully we can make some pips on the eventual bullish movements to ensue over the next few months.

The post Long the Cable and Bullish the GBP appeared first on Currency Secrets.

November 26, 2013

Watch USD Breakouts This Week

Filed under: Forex General — Tags: , , , — admin @ 5:34 pm

There appears to be a growing number of USD crosses that are nearing areas of resistance this week. We have the USDCAD as shown by the following chart:

USDCAD breaks through down trend, but does it have enough to keep going?

USDCAD breaks through down trend, but does it have enough to keep going?

Notice that we’ve now passed through a cluster of downward trending trend lines, but the area I’m most interested in is the flat resistance area around ~1.0600, we have several hits around this area lately and this will be my long term entry point.

Another interesting USD pair is the USDCHF, as we can see in the following chart we have a flat area of support which has been pierced before, and price seems to be heading back down into this area. We’ll be looking for a break of not only the trend line, but also the low of the last pierced point:

Will the USDCHF bounce or break the blue support zone?

Will the USDCHF bounce or break the blue support zone?

The GBPUSD has finally broken through the long awaited downward sloping trend line, but still has a few things to break before entry. Here’s the latest chart:

GBPUSD finally breaks, but now has to show that it can continue by breaking near-term resistance at  ~1.6350.

GBPUSD finally breaks, but now has to show that it can continue by breaking near-term resistance at ~1.6350.

We can see that there are a few wicks that have happened over the last few months which have caused resistance points and these would need to be cleared before I would look at entry. We’ll keep an eye on it this week!

Patience is key.

The post Watch USD Breakouts This Week appeared first on Currency Secrets.

November 25, 2013

Watchlist This Week – AUDNZD & EURCAD

Filed under: Forex General — Tags: , , , , — admin @ 5:34 pm

A couple of new currencies have exhibited some interesting formations this week.

Firstly we have the AUDNZD which has been forming a nice flat bearish flag:

AUDNZD forming a bearish flag. AUD set to weaken and NZD to strengthen.

AUDNZD forming a bearish flag. AUD set to weaken and NZD to strengthen.

Looking for a break below 1.1180 to see continuation of the bearish trend that has been in power for over a year.

The other currency I’m keeping an eye on this week is the EURCAD as it approaches a popular resistance point around ~1.4350. As seen in the following chart it looked good for a break a month ago, but quickly reversed:

EURCAD looking to take another jab at the popular resistance zone around 1.4350

EURCAD looking to take another jab at the popular resistance zone around 1.4350

Keep an eye on this over the next couple of weeks to see how the resistance line eventuates.

The post Watchlist This Week – AUDNZD & EURCAD appeared first on Currency Secrets.

November 18, 2013

GBPCHF Stalls & Bounces Back

Filed under: Forex General — Tags: , , , — admin @ 5:35 pm

Last week I mentioned that the GBPCHF had finally broken through a long-term downward sloping resistance area and that there was an immediate area of minor resistance which would likely stall any further continuation in the breakout move.

As seen by the following DAILY chart of the GBPCHF this was realised during this week with the GBPCHF failing to continue breaking through areas of resistance. However, last week’s price action has showed that it is still seeking to continue north as price reversed the weeks’ early retracement.

GBPCHF fails to continue the previous weeks' weekly breakout, but looks promising to continue north next week.

GBPCHF fails to continue the previous weeks’ weekly breakout, but looks promising to continue north next week.

So eyes this week will still remain on the GBPCHF, especially around 1.4820.

The post GBPCHF Stalls & Bounces Back appeared first on Currency Secrets.

Is That Really a Reason To Be Bearish?

Filed under: Forex Strategies — Tags: , , — admin @ 4:43 pm

Calling asset prices a bubble explicitly, or implicitly as a function of the Fed’s large balance sheet, is fairly popular these days. Market commentary projecting a “melt-up” driven by “excess liquidity” seems to be common. So whilst TMM do believe this to be a factor we would like to go one stage further and posit that DM equities are not expensive relative to other asset classes.

Now we realize this is a pretty hairy topic, mainly because there are a lot of ways to look at this asset class and hence a lot of ways to claim that they are rich or cheap. So instead of then trying to ‘prove’ that they are cheap (when we have just said the diversity of cheap/rich measures makes results inconclusive), we will go over the more popularly cited reasons for why they are expensive and follow with some counter points as to why they are not.

Yields are excessively low. Hence the high Equity Risk Premium is a mirage.

The Fed, along with a majority of market economists, pegs LT nominal GDP growth at 4%. 30y Treasury yields are not far from that level at all.

Short Term yields are unlikely to move a great deal relative to the size of the ERP. Even if the Fed hikes a year earlier than anticipated, (let’s say Sept 2014, and then at the 100bps / year pace that it has projected) fair value for 5y yields would be ~2.10%, vs ~1.5% now, a difference of ~60bps. This compares to an ERP of 225bps, using 30y yields, or ~350bps using 10y yields, both of which are historically very high.

Size of Fed Balance Sheet is huge. By implication, the money the Fed has printed is finding its way into stocks.

For this theory to hold, the private sector will have needed take the cash it has received from the Fed from selling bonds and used the cash to purchase stocks. Now, a balance sheet of all major entities in financial markets is hard to come by, but this story does NOT hold water based on retail flows. 377bn has been taken OUT of equities since 2007: (This conclusion was also recently reached by a McKinsey study)

Earnings as a percentage of GDP are too high. They will revert back to the long term mean, which means substantially lower profits.

That is only true if you look at TOTAL earnings. DOMESTIC earnings are NOT excessively high as a percentage of GDP. Much of the recent earnings growth over the past decade has actually come from abroad:

CAPE10 (Cyclically Adjusted Price to Earnings average over the past 10 years) is too high. The chart looks something like this one. This metric has always mean reverted, so stocks are bound to come down.

This cyclical adjustment process basically deflates earnings over the past 10 years by the CPI, and then takes the average. This process means that the adjusted earnings measure assumes the surge in profits from overseas over the past decade will revert. It also assumes that the financial crisis that we’ve had will recur every 10 years. Neither assumption seems especially probable.

Here is an alternative way to look at this metric: The current CAPE10 is ~24.8. The inflation adjusted trailing 12m P/E (CAPE1) is ~16.7. The S&P price is the same in both calculations, so the difference is purely in the adjusted earnings measure. The 1y inflation adjusted EPS is 104.6. The 10y inflation adjusted EPS is 71.3 – a discount of 32%. So you have to ask yourself – do you believe that a third of S&P earnings unsustainable and will eventually disappear? Keep in mind that 25% of earnings are from foreign sources.

Commodities are not going up with stocks. Hence, the growth isn’t ‘real’.

Equity Bull markets in conjunction with commodity bear markets are not uncommon. The previous such instance lasted from 1980’s to the late 90’s.

What is more, we see the increase in supply of metals and the drive to gas, which are keeping prices low, as a benefit. This time around commodity prices damped by increases in supply won’t be a tax on growth.

Consumer confidence and employment are not going up as quickly as stocks. Hence, the growth isn’t ‘real’.

Higher profitability seems to be one RESULT of the weak employment growth. The jury is still out, but one line of thinking is that technology has increasingly replaced humans in low value added roles, with the cost differential going to corporate owners. The chart below from Blackrock illustrates this, and highlights a trend that seems to be over a decade in the making. Furthermore, we have not heard of a good reason to believe that this trend will reverse.

It’s all PE expansion, not earnings growth. Hence it is not sustainable.

Historically, PE’s expand during growth periods. Growth = more earnings and more savings = higher equity prices. This tendency is pretty common, sustainable and usually only interrupted by a recession or sharp slowdown.

Equity market capitalization as a percent of GDP is too high. Hence, it has to mean revert.

A higher share of earnings from overseas should mean a higher market cap to domestic GDP ratio. Globalization means more foreign companies may list in the US. Publicly traded companies also have financing advantages, and fewer large companies are remaining private. Companies like Berkshire Hathaway buying up private businesses also increase the market cap to GDP ratio, but arguably does not destabilize anything.

Demographics imply lower PE. The rising number of baby boomer retirees implies strong demand for fixed income and weak demand for equities, which should lower equity valuations.

Arguably, this should only affect the valuation differential between fixed income and equities. In other words, perhaps the Equity Risk Premium could remain higher than average until this demographic effect fades. But as we noted above, with LT yields appearing reasonably fair, the ERP remains very high, and arguably would still be high if treasury yields were 100bps higher.

With those general points covered we can move on to a topical specific.

Hussman Funds recently published another piece on why stocks are too high and though we don’t want to single them out, we do want to address their piece because there are similar claims popping up all the time. (And hence our rebuttal would also apply)

HF Claim: Without reviewing every detail, recall that this model partitions market conditions based on whether the S&P 500 is above or below its 39-week smoothing (MA39) and whether the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is above or below 18. When MA39 is positive and the Shiller P/E is above 18, conditions are further partitioned based on whether or not advisory sentiment (based on Investors Intelligence figures) has featured more than 47% bulls and fewer than 27% bears during the most recent 4-week period. Investment exposure is set in proportion to the average return/risk profile associated with a given set of conditions (technically we use the “Sharpe ratio” – the expected market return in excess of T-bill yields, divided by the standard deviation of returns). While a simple trend-following approach using MA39 alone (similar to following the 200-day moving average) has actually slightly underperformed the S&P 500 over time, that trend-following approach has had a fraction of the downside risk of a buy-and-hold strategy, with a maximum loss of about 25%, versus a maximum loss of 55% for a buy-and-hold. By contrast, the very simple Sharpe ratio strategy here has clearly outpaced a pure trend-following approach, with much smaller periodic drawdowns.

Let’s see… 39 week moving average, CAPE10 below 18, 47% bulls vs 27% bears over the past 4 weeks. Why pick those numbers, except that they make the results look good? If there isn’t much more of a reason, then ladies and gentlemen, please see this Wikipedia entry on overfitting. The point is that you can make the historical data say any you want. As a rule, we are skeptical of any claim using numbers alone.

HF Claim: I should also note that overvalued, overbought, overbullish conditions have been entirely ignored by the markets since late-2011… With no need for further stress-testing in future cycles, and every expectation that overvalued, overbought, overbullish syndromes will continue to bite as sharply as they have in every other complete market cycle, I continue to believe that the future belongs to disciplined investors who adhere to historically-informed strategies.

Ironically, this is a claim that is not backed by numbers, and furthermore, relies on very subjective assessments.

Overvalued? Most people think markets are fairly valued here, and TMM actually thinks they are cheap. Problems with the CAPE10 metric have already been noted.

Overbought? What does that even mean? If it means being above a moving average, then as they noted themselves, being long equities when equities are above a long term average has done pretty well. In that case, being overbought is a BULLISH indicator.

Over-bullish? Again what does that mean? Look again at the chart of mutual fund flows at the beginning of the post, that shows 377bn taken OUT of equities since 2007 – a trend that only stabilized at the beginning of the year. That suggests over-BEARISH to us.

We are pretty sure we haven’t covered all the ‘evidence’ that equities are overly rich, but hopefully this does at least cover most of the quantifiable ones. Claims that the stock market is in a bubble because of Twitter’s crazy IPO or other anecdotes are pretty hard to either prove or disprove, so they are not included here.

November 17, 2013

USDJPY Breaks From Bullish Pennant – Now What?

Filed under: Forex General — Tags: , , , , — admin @ 5:32 pm

Over the last several months I’ve been keeping a close eye on the USDJPY. Finally, with last weeks’ price action we have seen a successful breakout from the USDJPY as shown in the chart below:

USDJPY finally breaks from bullish pennant.

USDJPY finally breaks from bullish pennant.

Now we need to know how to trade this breakout successfully.

Firstly, it should be noted that while we do have a nice breakout, pennant breakouts tend to be fraught with danger as price needs to continue breaking through resistance areas that were formed inside the pennant. If we note these previous peak points we will have the following list:

  • Last minor peak @ 8th Sept 2013 where price hit 100.60 (rounded)
  • Previous to that we had a peak @ 30th June 2013 where price hit 101.50 (rounded)
  • With initial peak formed @ 19th May 2013 where price hit 103.70 (rounded)

So while price has cleared the downward sloping trend line and should continue “theoretically” to move the distance of the pennant formation’s as the “flag pole” that started back on 23rd Sept 2012 (@ 77.40) to 19th May 2013 (@ 103.70) a distance of ~2600 pips – we do need to be mindful that it will not necessarily make that distance in one week or in a nice straight sloping line.

As each of the previous resistance peaks have really only had one touch I wouldn’t deem them as much of a threat as the GBPCHF resistance areas, therefore, it’s important to note that they *could* be sticky areas, but should only be for a day or two before price continues to push higher.

While I don’t have any qualms then jumping in LONG into the USDJPY the next question I need to ask to help determine position size is:

Where am I going to get out?

A conservative initial stop loss would be placed below the upward trending trend line around 97.35, a less conservative initial stop loss would be placed around the low of the breakout candle (being 98.90), whereas a high risk initial stop loss could be placed at the mid-point of the breakout candle (100.40 + 98.90 = 199.3 / 2 = being 99.65).

Either way it will certainly make for an interesting end to 2013 to see how the USDJPY fares with its bullish pennant breakout.

The post USDJPY Breaks From Bullish Pennant – Now What? appeared first on Currency Secrets.

November 16, 2013

Cable Looking to Break This Week?

Filed under: Forex General — Tags: , , , , — admin @ 5:33 pm

Another currency that I’ve been continually keeping an eye on has been the GBPUSD. I have been noticing that throughout the last few weeks it has been quietly forming a bullish flag pattern that may help to heighten the eventual break through resistance.

The current weekly chart of the GBPUSD. Continually hitting its head against resistance.

The current weekly chart of the GBPUSD. Continually hitting its head against resistance.

So by zooming into the chart I’ve noticed that it has been winding up ever so quietly:

Is the GBPUSD winding up within a flag formation?

Is the GBPUSD winding up within a flag formation?

It certainly may need all the help it can get as it appears that once it does break the downward sloping trend lines formed at around 1.6190 it has more resistance to face at around 1.6300 (very similar to our breakout alert on the GBPCHF).

Anyway, continue to watch the Cable to see if she will break this week!

The post Cable Looking to Break This Week? appeared first on Currency Secrets.

November 10, 2013

Identifying Weakest & Strongest Currencies – Measuring Trend

Filed under: Forex General — Tags: , , , , , — admin @ 5:34 pm

Over a decade ago I undertook a small job in a small boutique investment firm in Subiaco where I had to do the role of the main forex trader. The forex trader was seeking leave due to getting married and I had done some other jobs for the organisation in the past and they entrusted me to do this role. While the job was a little stressful due to the manual placement and management of their trades the system that generated the signals was quite complex.

I remember having to input the major pairs’ end-of-day values into a spreadsheet and seeing columns analyse the areas of placing limit entry orders with stop loss and target entries.

For obvious reasons I was never shown the inner mechanics of how the spreadsheet fired it’s buy and sell price points, however, as time passed I was able to continue doing other jobs for the organisation, one in particular being the ability to code a small handful of their systems into Wealth-Lab Developer (which I was using a lot of at the time).

In the majority of the systems I coded I found that there was a common “trendiness” indicator which they used, it certainly wasn’t the ONLY indicator they used, but I found it coming up quite a lot throughout their systems (at least the ones I was able to code – I know that I wasn’t their only programmer).

And this indicator I still use today, but only as a cursory glance on how “trendy” a currency pair is and how strong or weak a currency is against all others. Unfortunately though measuring trend really comes down to personal preference and even this indicator can further be refined to meet your disposition and risk profile. I mean, have a look at the following chart of the GBPNZD:

What is the trend of the GBPNZD currently?

What is the trend of the GBPNZD currently?

Did you know that in my little mind that I deem this trend to be down, but I also know that there are those who would deem the trend of the GBPNZD to be sideways or up! It really comes down to your perspective. I have obtained my perception on the trend of this currency by looking at where the chart starts and where it ends and what generally happens in between, but there are others who would be looking at the last pair of peaks and troughs and only using that as their trend.

Everyone is different and that’s what makes the market interesting!

So therefore as we look at this indicator we need to be aware that it can be tweaked and utilised on your favourite time frame to suit your personality and it should also go without saying that there is no such thing as the perfect trend indicator. Gauging trend requires us to look into the past and whenever we look into the past it can give us a GOOD indication of what will likely happen, but it’s NEVER certain.

So with all this in mind let’s have a look at the main principles behind this “trendiness indicator” as I’ll call it (it was never given a name when I was told to add it to their system and if anyone happens to know the name of this indicator please let me know as I’m sure it’s public domain and wasn’t designed by the boutique investment firm).

Firstly, what is a simple way of gauging trend? I know there a bazillion answers to this question, but this one works well with our second component of gauging the strength of the trend.

As we have just discussed we gauge trend by looking back in the past. One very simple way is by simply comparing the price of now with the price of X periods ago. However, the problem with this method is that it doesn’t take into consideration what price did between the price of now and the price of X periods ago, so to help account for all prices between now and X bars ago we will look at obtaining an average of price between the two periods.

So our first aspect of this indicator is to get a moving average of price covering the distance between now and X bars ago. As I like working with weekly charts let’s assume we’re measuring the trend of the last 52 weeks (1 year). So, our indicator starts looking like this in MQL4 code:

iMA( Symbol(), 0, 52, 0, MODE_SMA, PRICE_CLOSE, 0 ) - iMA( Symbol(), 0, 52, 0, MODE_SMA, PRICE_CLOSE, 52 )

Again, the reason we obtain the difference is to see how far the moving average has come from since 52 weeks ago. If the resulting number from this calculation is greater than 0 then we can assert that the majority of price over the last 52 weeks was higher than that of price 52 weeks prior.

Now that we have an indication of how far price has moved since a year ago, it takes us to our second and final aspect of this simple trendiness indicator.

How can we now gauge whether the movement is “strong”?

See, the problem we now have is that I might have a value of 500 pips for one currency and 2000 for another and yet the one that moved 500 pips may have well shown that it is in a stronger trend. An indicator that is now applied to our makeshift trendiness indicator is to apply an ATR to it – and what this means is that if a currency can move 300 pips on average in a week then we should expect its iMA difference to be greater than of a currency that on average only moves 50 pips per week.

Therefore our indicator has appended the following aspect:

double maDiff = iMA( Symbol(), 0, 52, 0, MODE_SMA, PRICE_CLOSE, 0 ) - iMA( Symbol(), 0, 52, 0, MODE_SMA, PRICE_CLOSE, 52 );
double strength = maDiff / iATR( Symbol(), 0, 52, 0);

The final application I do to this indicator is to convert every pip into my account’s currency as some currencies have much larger pip values than others which can further enhance their indicator value, so my final code is wrapped in a function like so:

I then loop through each currency pair and by using MetaTrader’s StringSubstr( sym, 0, 3 ) to get the quote currency name and then StringSubstr( sym, 3, 3 ) to get the base currency name I then add up the strength of a currency against all others:

quoteCcy = StringSubstr( sym, 0, 3 );
baseCcy = StringSubstr( sym, 3, 3 );
if ( quoteCcy == "AUD" ) {
audatr += trendiness;
} else if ( baseCcy == "AUD" ) {
audatr += -trendiness;
}
if ( quoteCcy == "CAD" ) {
cadatr += trendiness;
} else if ( baseCcy == "CAD" ) {
cadatr += -trendiness;
}
if ( quoteCcy == "CHF" ) {
chfatr += trendiness;
} else if ( baseCcy == "CHF" ) {
chfatr += -trendiness;
}
if ( quoteCcy == "EUR" ) {
euratr += trendiness;
} else if ( baseCcy == "EUR" ) {
euratr += -trendiness;
}
if ( quoteCcy == "GBP" ) {
gbpatr += trendiness;
} else if ( baseCcy == "GBP" ) {
gbpatr += -trendiness;
}
if ( quoteCcy == "JPY" ) {
jpyatr += trendiness;
} else if ( baseCcy == "JPY" ) {
jpyatr += -trendiness;
}
if ( quoteCcy == "NZD" ) {
nzdatr += trendiness;
} else if ( baseCcy == "NZD" ) {
nzdatr += -trendiness;
}
if ( quoteCcy == "USD" ) {
usdatr += trendiness;
} else if ( baseCcy == "USD" ) {
usdatr += -trendiness;
}

Where trendiness is a variable that I’ve assigned from looping through an array containing all the 28 currency pair combinations.

Anyway, hopefully this has helped in showing ONE method of obtaining the strength of a trend for your currencies and how you can gauge which currency is the strongest and weakest to trade for the week ahead.

The post Identifying Weakest & Strongest Currencies – Measuring Trend appeared first on Currency Secrets.

November 9, 2013

GBPCHF Finally Breaks Trend Line – Now What?

Filed under: Forex General — Tags: , , , , — admin @ 5:35 pm

Last week we finally had the GBPCHF break through its downward sloping trend as shown in the following snapshot below:

GBPCHF breaks an almost 4-year downward trending line

GBPCHF breaks an almost 4-year downward trending line

The trend line which had it’s first peak back in January 2010 and it’s connecting peak in July 2012 has had 5 nice touches throughout it’s life time. With last week’s action the GBPCHF solidly continued through the trend line and moved above its price point at ~1.4630.

The only aspect of concern now is the immediate previous peaks that have been formed throughout 2013 as shown with our drawn trend line:

Need to be mindful of the immediate minor resistance that has formed throughout 2013 for the GBPCHF.

Need to be mindful of the immediate minor resistance that has formed throughout 2013 for the GBPCHF.

The first peak formed on the week starting 12 May 2013 at 1.48187, whereas the second peak formed on the week starting 8 September 2013 at 1.48108. Last week’s high went to 1.48184 which shows that there could be some minor resistance around this area to be mindful of before entering into the currency. Interestingly the highest point made in 2013 was in the second week of 2013 where price hit 1.50003 (could be a little bump in the way up) – nice round number resistance!

MY STRATEGY

I would be looking for entry once price has confirmed its break above the immediate resistance area and could see entry around 1.4830-1.4850 zone with initial stop loss at either the previous low of the breakout candle (1.45127 – most conservative) OR the down ward sloping trend line point at ~1.4630 (somewhat conservative) OR at the mid-point of the breakout candle at 1.48184 + 1.45127 / 2 = 1.46655 (mildly risky) OR a VERY high risk strategy could be to hold stops at 1.4810 once break of minor resistance occurs. Obviously each stop placement is dependent upon the position outlook and whether you’re seeking a short-term or long-term position.

Again, be mindful that just because price has moved BEYOND a line drawn on its chart, doesn’t always mean that it is going to go where you intend it to go. The only fact that we can state about a trend line break is that the slope of the trend line that has been broken is no longer in effect. Another trend line with a similar slope may certainly resume.

However, besides the downward sloping trend line I do like the candle’s “breakout” look as well as the fact that there’s a flatter trend line to break to continue the momentum north (I always prefer broken flat trend lines).

The post GBPCHF Finally Breaks Trend Line – Now What? appeared first on Currency Secrets.

November 8, 2013

The Fed’s Bubble Solution.

Filed under: Forex Strategies — Tags: , , — admin @ 4:45 pm

So I buy an apple for a buck from you but I sell it back to you for 2 bucks. I Have 2 bucks and you have a 2 buck apple. You sell that to me for 4 bucks and you have 4 bucks and I have a four buck apple. 8 bucks, 16 bucks… We do this a few times until you have just bought a million+ buck apple from me and I can’t afford to buy it back for 2 million bucks. So you cut the price to 1.4m and sell me a 50% share in the apple for 700k. So we are now back flat on our cash positions but we both own a 700k share in the apple (example here). Wow. As we have that sort of wealth behind us we needn’t be so tight about buying that new Tesla now or that new home cinema or that holiday. So we go and spend some of our cash savings on STUFF. And when we do, that real money will stimulate the real economy.

It would be very topical to suggest that the Twitter IPO pricing is today’s apple but TMM’s broader concern is that the Fed think the apple scenario is a viable solution for creating growth where the stock market (or more generally risk assets, as we should include housing) is the apple. The Fed isn’t mandated to inflate asset prices but it would appear that this is exactly the effect that these academics with their models are prone to produce and those models tend to exclude the negative repercussions that have occured every other time a population ultimately had their quasi-wealth evaporate in front of their eyes (tech stock, property etc). It has been a disaster and more real money has had to be printed to replace its function.

Whereas a reduction in leverage is needed, the Fed is in effect encouraging it. Leveraging at the personal level was what got us into this mess in the first place and to create an environment that is doing nothing to quench credit demand whilst at the same time stifling credit supply through increased bank regulation and balance sheet restriction is similar (and probably as equally short sighted) as most government policies towards drug addiction. They do nothing to alleviate the reasons people crave the narcotic, instead they try to restrict supply. And the result? The addicts go underground and pay way over the odds for bad product and get into a worse predicament which causes yet another outcry. Underground dealers = payday loan companies. Wonga = Whoonga. It’s all self inflicted.

There is a huge hypocrisy in the demand for careful lending from banks and a demand for the provision of “social” lending. Perhaps, if governments are really that concerned they should take on the burden themselves. How about raising Fed funds or base rates to 1.5% and allowing the consumer direct access? But that means that the taxpayer is taking risk. Much easier to utilise the bank scapegoat as middleman and fine away excess profits. (It is interesting to note the lack of media noise about malpractice and the huge fines levied on the pharmaceutical industry recently compared to the noise about banks)

But back to this rally. There appears to be a lot of grumbling annoyance that equities are still grinding higher as they “aren’t supposed to”. If this follows the psychology of grief, we obviously haven’t reached the stage of “acceptance” yet which would imply there is a way to go yet.

We have read plenty of research talking about record longs in fund mangement positions together with minimum cash balances all presented with overlay price comparison charts of 1987 and 2000 crashes etc., but we are sceptical. It’s a pretty easy game to find visual fits for Price/time overlay charts (especially when you stretch scales) and only the winners tend to be waved as survivor bias results as proof. As for the positional data, though the normal sectors of fund management are captured in much of this data we wonder if the true extent of the flows of reserve managers are showing up. These behomoths of investment only have to swing small fractions of their huge portfolios from bonds to equities to see large responses in price. The big difference this time is the message from the CB’s (other than the Bundeathstar) is “go long, stay long”. So we will.

We would like to also thank our great friends the Benchmarks for helping us out further. Nothing worse for a fund manager than to under-perform your peers however right you may be in the long term. And nothing worse than under-performing the main equity indices as for some strange reason many consider them the risk free benchmark that you have to be an idiot not to outperform. So, break from the herd and the jackals of fund consultants will snap at your heels, which leaves you with the choice of rejoining the pack and going over the cliff with your peers later or being eaten by the jackals now.

So despite the Central Banks tilling the ground and sowing the seeds for one, we are still a way off this being a bubble. We are invoking our DTTVI (Day Time TV indicator) along with a few other indicators and all suggest this has a good way to run yet as it’s not a bubble until –

Daytime TV has shows running for the masses dedicated to running portfolios in it.
People give up normal jobs to trade in it.
People mortgage their houses to buy it.
And finally our old favourite.. the 25year old BMW 3 series drivers are bragging about their portfolios in it

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P.S. and the ECB have just added their dose of detergent to the bubble solution.

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