Doing my morning work this morning, a change of market weather is apparent. My strategies have been going through a period of super performance, so any change is unlikely to be for the better, and it is interesting that Scalpius (non correlated alpha) has switched into super performance mode.
The EURUSD has made a classic bear flag and then FAILED to go down. This market is ripe for a short squeeze. Also, if you look carefully, you will note the increased size of the candles towards the end of the strong trend. This is an increase in volatility, indicative of a fear of missing out of the move, also a classic sign of the end of a long running move. I would not want to be short EURUSD at this point. A short squeeze after a year of trend is going to be sharp and violent.
The Yen weekly shows (for those wave wankers in the audience) a classic completed 5 wave move and a completed A-B of the next move. Now, this by itself doesn’t mean shit, but there are times when wave theory plays out correctly (just not enough of the time to get an edge). What I am particularly interested in is that after 7 months of sideways action from November through March, we could only limp up to fresh highs. Then after making fresh highs we tested the old highs with 6 weeks of down/sideways action. We SHOULD be shooting up on a fresh leg up by now. The fact that after 6 weeks we still have not recaptured the old highs is very very very stinky. Given that USDJPY is very affected by China’s joining the currency race to the bottom, this is the perfect macro event to provide a backdrop for change of trend. I’m actively looking for short setups here.
The DXY index has made a classic (but rare) double top, and instead of retesting the high is just falling off the plate to the downside.
AUDUSD is the pick of the actionable trades today, and I’m long here. Stop at the daily lows is a very nice place, well protected by a sideways flat bollinger band. Again we have a long running downtrend which stopped going down cleanly, indicating that two sided price action is in the game again, and a bear flag which failed to send the market down. This is a particularly nice setup, though I wouldn’t be surprised if it takes some heat before taking off.
Be careful in the current treacherous environment.
The Fed is pretty much running out of options at this point. Their current modus operandi is to continue pretending that they want to raise rates but without real intentions of doing it anytime soon. Every month we are being served another paltry excuse as to why they’re still hesitant or that they’ll assess their timing based on the economic data. Perhaps next time it’s the humidity or waiting for the moon’s phase to line up properly.
Which means that among the few tools remaining in their arsenal to to keep equities afloat is to stomp on the Dollar once it approaches escape velocity. And given the Greek drama the timing couldn’t be any better to stick it to those dreaded Dollar bulls. And that’s going to be our theme of the day. Not because I say so but because quite a few USD related Forex symbols have moved into sync over the past few hours.
For starters I’m grabbing a long here on the EUR/USD with a stop below the recent spike low. If the 100-hour can’t be held then we’re going to see quite a bit more sideways churn or perhaps even a revisit of the recent lows.
AUD/USD is looking pretty juicy here as well and I’m long with a stop below its recent spike low. Also nice to see the daily far outside the 100-day BB. Now it’s still early days here but if this thing bounces it’s high time – if it doesn’t manage a reversal here it may fall off the plate and turn into a trend trade to the short side. So short positions on a stop out may be possible here.
The E-Mini isn’t among my favorite charts right now but if I don’t talk about it you guys are most likely to ride me out of the lair on a rail. So here you go – a possible long setup on the spoos if it drops to 2050. May not do it though so don’t chase it.
More goodies below the fold for my intrepid subs:
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Late last year when posting my Christmas wishes I opined that 2015 would most likely be a difficult year for stocks. As we are now beyond the half year mark it unfortunately seems that my inkling back then may be proven right. No reason to sugar coat this – for equity traders and long term investors the pas six months have been a very difficult period with little signs of a reprieve on the horizon.
Just looking at the daily/weekly panels above should make it evident this is not the same type of market we’ve come to enjoy over the past few years (or not if you happen to be a perma-bear). I have made that point on several occasions in recent months and at the same time have encouraged you all to familiarize yourself with other market verticals, in particular of course forex and the futures. Not easier markets in their own right but much more diverse and most importantly permitting you to be nimble and adjust/abandon positions at any ungodly hour if you feel the heat coming around the corner.
As a sidenote, that scene was shot at Kate Mantilini in Beverly Hills – a place I was frequenting quite a bit ‘back in my Hollywood days’. Unfortunately the place closed down last year, adding to a long list of iconic hangouts that have been dropping off the map since I left Los Angeles for Spain in early 2012. Things change – don’t ever get too attached to the little world you have created for yourself or you may find yourself very disappointed as events starting passing you by.
Which brings me to the topic at hand. I have been pretty busy working on my systems over the past few weeks but I’m certain that there is a lot of excitement oozing out of various bearish watering holes right now. By all definitions equities look very much like they’re about to fall off the plate here. And perhaps the conclusion of the great Greek train wreck will serve as the catalyst that finally breaks the back of one of the most ferocious bull markets we are most likely will have experienced during our lifetime. Perhaps the bears will finally get a chance to inflict their big revenge. But then again, what bears are we talking about? Anyone who had real skin in the game back in 2008 has long been forced to the sidelines – I really don’t want to drop any names but I’m sure you know a few.
Why Most Bears Lose In Bear Markets
But if you’re still pining for that big monster correction out then my advice to you would be this: Be careful what you wish for as you just may get it. Just look at the chart I posted above – if you think that one represents difficult tape then think again. Not many people are skilled enough to negotiate gaps like these unscathed without having their stops run in overnight action (Skynard is a rare exception). Yesterday’s session actually may serve as a great example. If you managed to ride the tape higher off the lows banking some green on the way up then I hope that you closed out last night as the spoos dipped back down overnight to revisit the lower 100-hour BB. And are now running back up – so if you were short off the highs then you had better been nimble as well.
And that’s a rather mild example of what I expect to happen in equities should we be in the process of rolling into new market phase this year. Volatility can be a trader’s best friend but in my experience too much of it serves as a purveyor of ruin in most cases. Let me be honest – many of you reading this very post were unsuccessful riding the big bad bull higher over the past few years. I have heard all the excuses in the book since I started this blog but it all boils down to a general inability to properly plan a trade and then to trade that plan. Emotion for some reason always gets in the way. Now throw in a VIX at 30 or above with 50+ S&P handles swings in one session and then tell me honestly how you think you would be faring.
For some reason the 2008 correction has in its wake created this romantic notion of bearish revenge trading. It’s a psychological affliction that has shown to be difficult to cure and perhaps is rooted in the frustration felt over almost blatant corruption and lack of oversight prevalent in the financial industry. Which is completely understandable but one needs to draw a clear line between your personal beliefs and any activities related to extracting profits from trading the markets.
Don’t get me wrong – I enjoy a bit of volatility myself as fast moves to the downside can be extremely profitable. And any good trader worth his/her salt doesn’t care which way the tape swings. But taking advantage of technical short setups is different from constantly pining for a big correction. For one they rarely happen and probably account for under 1% of overall market activity (disclaimer – I haven’t run the stats on that and if you have please post them here). Secondly you cannot predict when they happen and perhaps the past six months testify to that fact. How many times have you thought ‘hell – this is it’ only to watch equities recover late in the session or overnight?
I’ll tell you how this is most likely going to play out: One day the tape is suddenly going to fall 100+ S&P handles and not look back. If you were lucky enough to be short that very day or the day before then you’ll most likely take a big portion of your position off the table expecting a bounce. Except that it won’t happen – dip buyers will be heading for the hills as fear and confusion takes over. As there was very little accumulated short interest in the months ahead there won’t be any bears taking profits (i.e. buying back) either. So the tape falls and falls until we find ourselves several hundred handles lower and the Feds announce some emergency measures (again). All the while you have kept hoping for a bounce to short the tape. Of course once you finally get one the bulk of the big correction will have played out. And that was it – the bear market you’ve been dreaming of in the past seven years. I certainly hope you picked the top to bulk up on shorts and held it all the way down. But wait – the top may already have printed. See how that goes? 😉
There Is Always A Bull Market Somewhere
So again, be careful what you wish for. Or better yet – stay away altogether. Just because equities may be heading into a volatile phase doesn’t mean you cannot be active as a trader. There is a long list of futures and forex symbols on the roster which offer you ample opportunity to be active. I myself post pertinent setups on a daily basis but for some unknown reason most of the chatter I see in the comment section continues to revolve around equities. Which would be understandable if it was the biggest market out there, but bonds alone are double the size of all equities combined. So is Forex with a volume over $5 Trillion traded per day! Plenty of opportunity to play the swings at your heart’s content. If you like it rough pick the volatile Forex pairs, e.g. the Euro right now or the USD/JPY. If you’re an adrenaline junkie then Natgas may be just what you’ve always been hoping for.
But if you’re a trend trader then look no further than the Ozzie dollar or perhaps cable (a.k.a. GBP/USD) – beautiful moves there. And all of them are accessible 24×5 – allowing you to trade in any time zone with plenty of liquidity. With small spreads I may add – depending on your broker amounting to less than half a pip or one tick over on the futures. So now tell me again – why is everyone so enamored with equities? Why make make one’s life harder? Just because the stock market is where all the hype is doesn’t mean that’s where you have the best odds of being successful.
Most likely we’ll see little activity this morning ahead of the FOMC minutes at 2:00pm Eastern. Be prepared as the Fed may feed an already emotionally charged market.
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Disclaimer: The information provided on this website, while timely, colorful, and accurate, is not to be taken as financial, legal, tax, psychological or any type of advise. The purpose of this website is to track the progressions of human herd psychology as it is reflected through several financial markets. Any commentary on this page, however useful it may be, is used for illustration, and to inspire thought provoking discussion, and not to be taken as specific trade recommendations. We are not endorsing any site or service, nor are we promoting choice examples as real-life trades. If it sounds sarcastic, it probably is and if it offends you, just don't read it. There are tremendous inherent risks in attempting to trade any market using any vehicle, particularly if it is leverage. Please contact your broker to explain all risks involved in the vehicle you will be trading and any questions you may have. Please consult with your own financial advisor before you tempt fate by following our evil speculation.