Back To Basics

Increased price volatility, especially on an intra-day basis, produces noise which isn’t just difficult to navigate as a trader but also leads to mental confusion and emotional exhaustion. As an analyst I need to be very cautious at this stage as it’s very easy to trip over your own ego or personal ambitions. This in particular spells true when one is lucky enough to command a growing audience looking for guidance.

What I have learned over the years however is that it’s best to relax and remain calm when everyone else is running around with their hair on fire. A course of action, which is sometimes difficult to appreciate by info-addicted contemporaries bombarded constantly with attention grabbing headlines, rumors, clickbait, and juicy sound bites.

Trading this week was difficult with various campaigns stopping out or ending at break/even. There were a few small winners which made up for the losses but there is a warning here to be heeded. Clearly markets across the board are becoming more volatile and unpredictable. What used to be a high probability BTFD moment is now increasingly ending up as a bull trap. We have fared exceptionally well throughout all the hubbub however we should take note that the effervescent market regime we have enjoyed over the past decade is coming to an end.

Simply observe the formation shown above on the daily E-Mini panel. Now project forward in either direction – up or down. Even if we push back up from right here we need to embrace the fact that bull markets do not move like this. There is still a chance that this resolves into new all time highs, sure – but ask yourself how many would have been able to ride it higher? Confidence is slowly waning and let’s not keep in mind that the Fed’s eternal put is in the process of expiring.

Of course market tops take their merry time and predicting them is nearly impossible. What now looks like a very bearish formation could easily turn into a bullish one again today. We are still within the inflection point range in which the bulls are fighting off the big grizzly waiting to emerge from a decade long hibernation.

Of course what drives much of what is happening in equities is decided implicitly by the U.S. Dollar. Which is very tough to read right now and I quite frankly don’t want to force the issue either. What we currently have on the daily panel is an attempt to establish a low but let’s not forget that the weekly panel is still pointing downward on all fronts. As much as I would like to see a strengthening in the Dollar it looks like this may take a while.

If we disconnect ourselves from all the daily drama and the eternal chatter of the pundits we should realize that the trend still favors the Euro and not the Dollar, at least for now. Once the pendulum swings back it’ll undoubtedly turn into a short squeeze of massive proportions. But until then it seems that short of a civil war in Europe very little seems to impede the advances of the EUR/USD.

Unless the USD/JPY finds a strong bid and that soon the target range of ~100 seems probable. Over the past few months it’s been attempting to gain strength in a sideways range but if even bullish soundbites by the newly coined Fed chairman can’t produce a push higher then we may be looking at another sell off phase. As the old saying goes: you snooze, you lose.

Bonds on the other hand seem to be back en vogue but color me a bit skeptical, given what’s going on with the Dollar. It’s way too early to make a determination and the same perspective as stated above with the Dollar applies: until we see technical evidence we are still in a downtrending market here.

Bitcoin seems to have been a good entry thus far and I’m moving my stop to break/even. But just like equities the crypto space is still recovering from a massive spurt in volatility plus increasing talks of regulations out of the U.S. have kept a lid on the usual bullish exuberance. Plus with rising transaction fees and constant volatility (recently to the downside) many merchants are waking up from a bit of a hangover and are asking themselves if they want to continue supporting or adopting bitcoin.

Mind you, this is a healthy and much needed transition which should have been clear to everyone, as we won’t be able to exchange a government controlled fiat system for one that’s only held up by hopes, dreams, lofty ambitions, and source code. Reality is a wonderful testing ground for new ideas and what comes next in the crypto space most likely will be type of consolidation the nascent auto industry went through in first two decades of the 20th century.

Call me a crusty Luddite but I simply do not see a future for tens of thousands of circulating crypto currencies. There simply won’t be enough liquidity or long term interest to support them. Consolidation is not just needed but a necessity for the crypto space to be taken seriously and to survive over the long term. Of course that comes with the disadvantage of exposing a handful of high value targets to be manipulated or to be bent into submission by various interest groups, may those be government or privately supported. Which is why the current phase is needed and mainly serves for laying the ground work for a globally accepted, sufficiently regulated, and less volatile crypto currency system. Blockchain as a global ledger system of course is another story for another day.

Bottom Line

There are easy and difficult periods in every market vertical and almost all across the board we are currently traversing the latter. The exception being soybeans and a few other grains, otherwise everything is moving in sudden spurts and mostly reactive in response to some breaking news. The only way of surviving crappy market periods is by hunkering down and observing. Instead of attempting to project forward let’s just observe and wait until we once again enter easy time, no matter if it entails green or red candles.