US-China relations and their implications for stocks and the US dollar

In view of the above headline and keeping things succinct, I am of the view that Trumps diplomatic incompetencies and thus his seemingly constant and deliberate faux pas, not to mention his proposed foreign policy on trade with China and Mexico can mean only one thing and that is much higher costs for American businesses. As a result, I believe that the bull market in stocks which, inconsiderate of corrections, since 2008, has had its day and will begin to correct seriously in this quarter, if not then in the next quarter. This is just a view I am forming, it in no way constitutes investment advice or even education, this is a blog, not a bank.

However, in light of the above view I will be looking for significant technical reversal signs in stocks. I received Fidelity‘s 2017 outlook this week and that is bullish on equities, bearish on bonds for the whole of 2017. I guess only one of us can be right on this!

Also, like Jimmy Young, I am now bearish on the US dollar. Dollar rallies are showing a significant possibility of having had their run most major currencies, barring perhaps the loonie (US dollar, Canadian dollar pair) could offer short term opportunities as of next week, in my view, to sell the US dollar.

Here are some possible strategies for trading based on the technical assumptions below each graph and the talking down of the dollar from Trump’s words of last week.

Australian dollar US dollar

Here is the aussie dollar vs US dollar

Been in a strong uptrend for about three weeks now, the aussie gaining ground agains the US dollar and has broken and taken out stops above the most recent swing high on the daily chart. I do not like the fact the stochastic oscillators are overbough at the moment, although I do see the 60% and 100% extensions of the most recent swing down as potential targets. Friday finished indecisive. The only strategy on offer to me, is to either buy on a dip, or wait for a breakout of Friday’s high, so there’s nothing immediate to me there. The bias is long though.

Oil (WTI CFD)

Oil has had a volatile run up from 43.65 early November and is topping out at around 55.80. A stronger close on Friday, but did no close above Wednesday’s high, although penetrated above it during the day. It has nicely ‘turned up’ its 8 simple moving average, and the 20 moving average will continue to turn up on a higher close. There is also a series of higher lows over the last two weeks. I would certainly consider buying the 50% retracement of Friday’s candle, particularly because it is confluent with the 8 SMA. A stop below Friday’s low would require a clear break of the 20SMA to work, similarly a stop below the low of either last week, or the week before. The problem with the wider stops is that for decent risk to reward, that would require taking out the last two major highs of early December (the candle after the gap) and the one mentioned earler.  Clearly oil is making significant swings up and down, I don’t fancy taking a direction on it, except to look at the possible entry mentioned, possibly with a tighter stop based on a lower timeframe.

Great British Pound vs US Dollar (Cable)

Huge day on Tuesday with May’s confident Brexit speech which sounded softer at first with its talk of integration and community in my view. Huge gains were to be made on both this pair and the cross pair pound-yen (GBPJPY) below. There is a bit more steam and room left on the oscillators. The pair was also boosted by Trump’s dollar weakening statements and the inaugural speech which seem to make investors flee the dollar on immediate reaction (and buy anything including gold, euro and pound). Again, I think there is room for a further leg up, but nothing screaming at me right now to buy the pair, mainly due to those looming averages the 40 and 50 SMA in turquoise. A clear break of the high of the Brexit speech day (Tuesday) leaves the upper Bollinger band to contend with and the 200 SMA, technically on this chart, but it would be a new swing upmove clearly in play. Certainly one to watch and again, long bias against the dollar. A possible high risk buy on a break of the two averages and the high 3 weeks ago or so. Not too appetising for me though.

Here is the:

S&P500 index

Here’s where I am thinking the stock market hasn’t much left in it. This view gets annihilated as soon as there is a break higher of course, but it has been flat for about 2 weeks after a limp attempt to go higher, then was attempting to breakdown a few weeks ago. Plenty of bearish divergence on the two oscillators. I won’t sell the index, but given gold’s ascent, I think that stocks ought to follow in the reverse direction, with the start, potentially of a major bear market.

 

USDCAD

This is the best chart of the lot in my view. It is a weekly chart. Taking the trend to be the upward channel for now, there has been a clear break from zone 4 into zone 3 this week using zone channel analysis and a strong bullish reversal candle. Therefore, looking for opportunities to re-enter a long dollar, short Canadian trade on a 30%, 40% or 50% retracement of last week’s candle is a thought, but bearing in mind this is a weekly chart, position sizing managed accordingly to give a stop below the weekly low, or look for something on the daily or H4 chart to work with in this regard.

The second chart shows the retracement levels for entry, namely the 40%, 50% or 60%. It is worth noticing the zone 3 line as well. The lower the retracement chosen, the lower the risk in point terms, yet the lower the chance of actually getting a retrace that far, to that level.

 

 

 

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2 bar reversal

This post follows part 1 of the series on 1,2 and 3 bar reversal patterns.

Of course, we could say that the a 2 bar reversal means a break lower than the low of the previous bar, after two consecutively higher lows, higher highs and higher closes. This is one definition of a 2 bar reversal (indeed it will be the definition of a 3 bar reversal in the next post in this series – in case you can’t wait).

However, we will make it quicker to define a 2 bar reversal.

Very simply, in an upmove, a 2 bar reversal means the price goes below the close of the bar before the previous in a situation of 2 higher highs and higher closes.

In a downmove, a 2 bar reversal means the price goes above the close of the bar before the previous in a situation of two lower lows and lower closes.

Simple and effective rule.  I will add some images later.

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Gold and Aussie updates

Both Gold and Aussie have reached their targets with not much sign of abating. Here are the update charts.

These relate to this post on trading the Aussie dollar and this post on gold trading.

Firstly the Aussie dollar you will recall the entry from this post on entry signal for Aussie dollar US dollar.

This outcome has been powerful following that trend and from buying a new entry into zone 3 (NB the zones have been marked slightly off, the numbers in the chart – 1,2,3,4 should be LOWER down within the respective channel).

Follow up to channel trading Aussie

We will go through each part as a summary.

Firstly, we were looking at waiting for a retrace into zone 4, followed by a strong reversal back into zone 3. This occurred 21 candles from the right, counting left (see the first image – I have redrawn the channel lines so they may be slightly different).

We said it is worth waiting for a 40, 50 or 60% retrace of such an entry candle and this occurred during the next candle, giving us our entry.

A possible first target then becomes the top of zone 2.

Note, there are other possibilities for targets. For instance, you could use the level of ZONE 2’s top and ZONE 1’s top AT THE TIME OF ENTRY for alternative (and more conservative targets.

The stop marked on image 2 is a sensible position to put the stop, underneath the most recent swing low. It could also follow a break of say 10-15 pips below the channel bottom. I prefer the swing low stop, because sometimes the market will spike below a channel, but then close back inside the channel to and the channel may remain valid.

Target 2 is the level of the top of zone 1.

It can easily be seen that the risk:reward ratio for this trade no matter which target is outstanding. Getting it right only 40% of the time if aiming for target 2, would yield a profitable result if consistently maintained over the long term.

The stop loss: 35 pips (30+2 spread+3 slippage)

The take profit at each target and risk:reward ratio

T1: 55 points profit vs. 35 pips potential loss. = 1:1.5 risk reward

T2: 100 points profit vs 35 pips potential loss. 1:2.85 risk reward

100 trades at 1:2.85 risk reward, with 60 incorrect (40% success rate)

= -1(35 x 60) + 1(100×40)

= -2100 + 4000

= 1900 pips (net profit).

As for the gold trade, this has also reached the extension target mentioned in the earlier post.

Here was intial trade call – NB I was sick over Christmas, hence the use of a mobile app image.

Daily gold chart – buy on the close of the day after the first retrace day of a strong upmove

Here was the first follow up image, including a target area for the extension.

Gold Daily – has followed though from Quantisi Ltd’s entry.

And here is the result, I am delighted to present:

Let’s go through this post-analysis.

Firstly, we’ve been through the entry several times, I suggest going back over the previous posts on gold for the entry.

I’ve added into this chart the possible options for stops we could have used. I opted on a discretionary basis for the option 2 stop or thereabouts, essentially in case of a nasty spike down at a higher level, which did not occur. Therefore, I had to scale down position sizing in order to be able to reasonably accept the potential loss of the stop, unfortunately, but that is the nature of discretionary decision making.

Stop options 1a, 1b, and 1c would have meant that the market had to take out the low of the day prior, the day prior to that, or 3 days prior to the entry candle, again all reasonable and increasingly liberal places to put a hard stop and effectively, accept a loss.

None of these stops would have been hit.

Target 1 is not an unreasonable first target to aim for because it is a hit of the top Bollinger Band. These bands are simply an extension above and below the 20 day simple moving average. The distance from the moving average above and below the bands are 2 standard deviations of the price during that 20 day period. These are the standard settings. Assuming normally distributed prices around the moving mean (the simple moving average), the price ought to stay within the bands approximately 95% of the time. Therefore, when the price hits or exceeds above or below the bands, it can be a time to look for reversals. There are notable exceptions to this, just as there are notable reasons one might consider ‘obeying’ the Bollinger Bands. We’ll go through this in another post.

As can be seen, yesterday and today, the extension target (2) has been hit at 1200. Although there are chances of gold going much higher, I will be coming back to gold later now this trade cycle has completed itself.

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GBP trade failed, Aussie working out well

GBP failed to plug its gap last night, disappointingly, falling throughout the Asia session and most of the UK session, finding a bottom during the US morning at around 1.2120, bouncing back to about 1.2160 from the open of the week at around 1.2260, a 140 point gain for the greenback against the pound. Thanks to the 25 point stop loss, risk was contained to only 25 points.

Going back to the Australian US Dollar posted on Friday. Here is how that one is working out – a great trade to demonstrate here in fact and one that can be repeated often.

Firstly, the channels were drawn in and a plan was made to enter on a powerful re-entry into zone 3. This occured overnight and it is often worth waiting, as discussed here, for a pullback of 40%, 50% or 60% of an entry candle, to get a better price.

This occurred, with an entry at the 50% line (actually the market retraced a perfect 60% of the candle as can be seen. I normally take the 40% or 50% because they are more common – I would rather pay a bit more to actually get in on the trade. It is still a ‘bargain’ compared to buying at the close of the entry candle. See this post on gold trading strategy for another example of this kind of SIGNAL – PULLBACK – ENTRY setup.

The overnight Asia session trade offered the entry signal, the next four hourly candle the pullback (buy) and you can see a couple of extensions which are good to go for – the first of which has been hit – a repeat of the first move (the length of the entry candle) x 60%, the second target being 100% of that move, before we might reasonably expect another retrace and follow through type setup, provided we have not hit a very important resistance (note the most recent highs with the triple top are undoubtedly a place where short stops will have been placed.

Stops can follow each candle’s low, or even a few pips below the 60% retracement of each successful bullish candle if something tighter is desired.

Right now, the price is bouncing off the 100 day SMA, has already reached 60% of the entry candle, which actually offers a profit of 110% the length of the entry candle, because our actual entry was 50% BELOW the entry candle’s high. It has gone on to hit the 100% So a very satisfactory trade already, meeting the 1:1.5 risk reward target.

To reach the 100% extension line above, we had to contend with the triple top from last week. I would argue that some profit ought to be taken now for sure, perhaps as much as 1/2 or 2/3 of the position and the trade turned into risk free (move the stop above break even), allowing the rest to run. So I will turn the stop to around 10 pips below the triple top high.

It is hard to tell right now whether the momentum is sufficient to carry the trade through onto new highs in zone 1, but the trade is now a swing breakout as well, so it is looking auspicious indeed for the commodity curency.

Nice trade and caught nice and early, you’ll agree from the previous post on it.

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GBPUSD gap

Cable was expected to open with a gap today and has, after PM May interviewed with Sky news today (Sunday). The normal play is to trade the filling of the gap, so a purchase of pound against dollar, stop several pips below the open and due to the small size of the gap, it has to be for a 1:1 risk reward of about 15-20 pips risk for 15-20 pips profit, factoring in also a slightly wider spread due to thinner liquidity at these hours. Quite tight to do, but one has to trade what one sees, and the pattern of gaps filling is not generally one to trade against. If it does not fill overnight, it will probably fill some time next week, so a good target level to reach for any buy trades this week (1.2272 or so) if the market does trade lower and take out stops over night.

I have actually gone for a more ambitious play having seen that the gap only exists on lower timeframes like the M30, M5 and M1. I have actually gone for a 25 pip stop and a take profit of 115 pips, a play I will take again later if it doesn’t work out. Second or third time lucky is fine with such a high risk to reward.

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Channel Analysis for AUDUSD

A possible trade on the Australia dollar vs US dollar pair could set itself up next week. It would require the intraday momentum of Friday to SLOW in the downmove in the pair and a reversal to set itself in motion. This reversal would need to keep intact the channel in the image below.

The ideal scenario would be a spike down into the ‘bounce zone’ marked green, followed by a clear 1 bar reversal, or some other potential reversal pattern, including 2 bar reversal or an outside bar (these will be covered in later posts).

In terms of explanation, the spike off the topmost channel (zone 1) line set in place that channel line and the bottom channel line is drawn in from Bank Holiday Monday 2 January.

The first thing to note is that the pair on this chart (H4) is in a clear uptrend, therefore, using this channel methodology, I’m only looking for opportunities to buy.

I’ve marked the buy zone clearly, and we’re coming into the bounce zone now.

Note the price has bounced off the 20 simple moving average (dotted line), and this line is pointing nicely upwards still, although the 8 simple moving average, as I have mentioned, a crucial indicator of the current chart’s trend, is beginning to turn down.

A strong reversal back into the 3rd zone might indicate a buy. Better yet, a test and hold of the bottom zone (zone 4) and a reversal back into the 3rd zone would confirm the channel is still a good play.

At the moment there is a clear break of the strong uptrend in play, both the triple top and a trend line break (as such a sell), so it will be a case of patiently waiting to see whether the channel is able to contain the downmove, and looking for a strong sign that the uptrend will continue, or seek its previous highs.

Further opportunities to rejoin the uptrend, or enjoy a bounce exist lower down and are marked by the retracement % levels and the orange dot.

The 200 SMA (purple) is still pointing down but has lost some momentum, similarly, the 100 SMA is pretty much flat, so if we do get momentum upside, I don’t see a big problem with breaking the 100 SMA (pink) on the next attempt. The 50 SMA (turquoise) is pointing up, hence its being marked as support.

The trade(s!!).

Buy. On the upside, looking either for a reversal back into the buyzone from here, or preferably the market dipping lower, then reversing back into the buyzone for a buy, stop will then go 10 pips below the bottom channel line (probably by this point, this will helpfully also take the stop below the 40% retracement area and aiming for 1:1, or the 100SMA, or beyond on the assumption of the trend continuing.

Sell. Having talked about the buy trade, the most obvious immediate trade is simply join the downmove for now (sell), with a short term stop above the high of the current candle, perhaps aiming for 100% of the length current candle, for a 1:2 risk reward, or just under that. This would mean the price going down to the low of the current candle, and extending a further 50% of the length of the current candle.

To contend with are: the 20SMA already mentioned, and the 40% retracement area marked. The price might struggle with the 20SMA as it already has acted as support. Possibly one to use half the normal number of lots, due to the trend being an upward one in terms of the most recent sustained strength.

 

 

 

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USD Index has fallen as predicted – the opportunity to buy currencies against the USD

The post on 16 December suggested a corrective USD index and to watch for opportunities to sell the dollar against major currencies.

Referring to the above mentioned post and this graphic:

This played out as follows.

As can be seen, the index did go lower, not quite reaching the point of the triangle drawn in, and not without a spike higher, however, the time the price took to go down ‘pulled’ the triangle rightward, and the price did end up following the line of the third quadrant line from the first image.

The USD then provided several tests of the high to the left of the orange and pink square in the above chart, exceeding the price, but not following through, finally this week the USD index giving ‘cross board’ dollar weakness and really strong performances of currencies vs. the USD (see below)

forex currency pairs daily charts
Various currencies and the USD Index. Click the image to enlarge.

As can be seen above, yesterday showed strength and there was no indication on any of the pairs (or the index) of a reversal, and today followed through. In future, I will try to catch these kind of moves before they happen and post a prediction in advance of the trade.

It can be seen that after the correction from the first two images, there were actually three further highs, a sort of ‘quadruple’ top pattern which is unusal (double and triple tops are more common). What happened in dollar index was probably a kind of variant ‘triple top’, or two double tops, then the first day sell off of the dollar (yesterday) and the second day sell off (today) can be seen clearly as a big red candle, followed by a gap and another big red candle.

Tomorrow is Non-farm payroll day which can create short term volatility havoc and even be trend changing. It is unlikely we will trade tomorrow, rather let the volatility traders do their thing and work out a strategy for Monday over the weekend.

There are no immediate signs of this USD selloffs abating particularly, but there are resistance and support offered by the lines on the charts above, and the market will, with little doubt’ be revisiting the mid-points or the 40%, 50%, 60% retracement levels of the daily candles that can be clearly seen – a tip I learned (as I owe a great many of these insights to) from Phil Storer of the commodity trading firm Dillon Gage in Dallas, Texas who wrote this excellent book a few years ago.

So I am not expecting much follow through tomorrow, probably quietness until the non-farm payroll, in which case we could see a tremendous completion of this dollar selling pattern (a third big daily candle on each of the pairs), or a correction day, or very little if the numbers are as expected.

If I had to take a direction, I would favour the continuation, but prior to the news and during the news, it is a casino gamble as to what will happen tomorrow, therefore, staying flat (no trade) is a way to protect capital and achieve long term growth.

In such times I am reluctant to join currency moves that have been missed and rather wait out for clearer opportunities.

In the words of Phil Storer (mentioned above) – there are an infinite number of trading opportunities but a finite amount of capital  -protect the capital!

 

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Gold has followed through nicely

This post about buying gold is due a follow up now that three trading days have passed and we are into day 4 of the trade. The trade went in favour of the analysis posted and the entry point of Friday’s close.

The market did behave with great volatility on Monday evening and Tuesday morning (Monday was a bank holiday so the market opened only at around 6PM Eastern time on Monday 2nd January).

Thankfully the wide stop mentioned in the previous post meant that volatility did no harm and the move has since followed through in a majestic fashion, hitting the 1:1 risk reward target with relative ease and looking at the chart below, I would argue bringing a stop now up to the low of today (a few ticks below that), taking profit, or bringing the stop to break even for a ‘risk free trade’. after banking 1/2 to 2/3 of the trade.

1187.75 of so is the 1:1.5 target.

1200.00 is the 1:2 target.

I initially figured 1:1.5 is the one to go for, and I think it is reasonable, but want to lock in much of what has been gained so far as well now 1:1 has been hit, a discretionary decision I may regret.

The ‘extension target’ is only the first target upwards, it is by no means a limit on how far gold could go.

Harry Dent’s gold analysis I found a little alarming on this matter, perhaps why I have erred towards caution throughout on this. It is important to think independently though.

I have added potential further targets, the entry and the initial stop to the chart below.

Gold Daily – has followed though from Quantisi Ltd’s entry.
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Investors bought gold for Christmas.

Buy gold?

Straight answer. In terms of Quantisi Funds’ books – yes – but this is educational and not investment advice, please note.

Daily gold chart

We have looked at the USD weighted currency basket index, some currency pairs like USDJPY and now let’s take our first look at the commodity gold, ever popular as a place of safety and growing value for investors.

My theory is as follows, and it could be completely wrong. This post does not constitute trading advice, investment advice or a recommendation. It is purely for educational purposes.

Based on what we have looked at so far, let’s look at the Daily chart for gold vs the US dollar over the last month or so, focusing in on what happened over Christmas week, and I will share my trade, before the result, and then we can see if I had the ‘Golden Finger’ on this one later.

Note that because of controlled risk management, it really does not matter a jot whether this trade works out, unless, e.g. a few billion tonnes of gold fall out the sky and the price of gold experiences such a terrific downfall that my stop order won’t get filled.

Why do I call long gold? The crystal ball bit first. Stocks have been rallying to all time highs since 2008 and particularly since Trump. Yet he is making diplomatic faux pas left, right and centre and suggesting policies that won’t be good for trade with China, a major trading partner for the US. Companies will suffer, so I am assuming some correction in stock markets in Q1 2017. This story supports my gold trade if economics and stock markets do follow this pattern as a bear market in stocks will see finance going into traditionally safer assets, like gold.

But for the most part this trade is technical and it is also strictly contrarian. Firstly, take a look at the chart above.

Clearly, since about September, gold has been in a strong downtrend. There was a spike up on US Election Day, but after Trump was elected, investors have continued to be selling gold (and buying stocks). We have now come to year end and clearly there has been some profit taking by speculators.

What I find particularly interesting is the fact that the last week (Christmas week) has been the strongest week in just over one month for gold.

Go all the way back to the spike and trade the price action forward and you won’t find a stronger series of days for gold than Monday to Thursday of last week.

There was also news out that a sizeable order (to the tune of around $3.5 billion) was placed at the close of play (10pm Eastern time) on Thursday.

It is quite likely that investors will have rushed in on that on Friday only to be disappointed by the lack of follow through on Friday.

Here is where patience could pay off – Quantisi Ltd placed a pending order at the 50% retracement of Thursdays candle.

If the price would have continued to run away, the trade would have been lost. In this instance, the market on Friday retraced almost to the tick, to 50% of Thursdays range.

The idea behind this trade is that there has undoubtedly been a strong move up. We’ve waited for a retrace but are expecting a continuation of that upmove, based mainly on the strength of the move last week, perhaps backed up by the very general crystal ball on stocks and the mysterious big order as well, but mainly the principle that the market tends to repeat itself and a move up may well be followed by another move up of a similar distance, for instance.

This is a contrarian trade, for sure though. All of the average lines on the chart pretty much are pointing down and the trend has clearly been down. But, crucially, the 8 simple moving average has certainly turned up it would appear and will undoubtedly offer support (the white line on the chart). The fact that recent price action has ‘turned this average up’ could well be a clue to a change in trend…

It is always risky ‘guessing bottoms’ on the other hand, but in some sense this guess is educated and one must take a risk in order to gain a reward.

Stop loss placement.

The first logical place to put a stop is below the low of Thursday’s candle, then Wednesday’s, etc.

I am confident of a follow through (else why take the trade) but not confident enough to risk more than is comfortable. At the same time I want to give the trade plenty of room, without giving it so much room as to absorb unnecessary losses when the idea has clearly failed.

I have therefore placed a stop below Monday’s low (the weekly low of last week) and am targeting 1.5 to 2 times the distance from my entry to that stop loss, to the upside, at least. I have had to scale down my position size accordingly.

If the trade really gathers steam though, I think with some volatility on the way up, it could see 1250.00 in an extended move, at least. For now though, I want a conservative 1:1.5 risk to reward to be hit and then I can consider options for scaling up, locking in profit, risk free trade and so on.

There is plenty of resistance above (pretty much all that spaghetti on the chart could act as resistance).

But, it is a New Year and last week has suggested renewed interest in the commodity. It should be interesting to see how this trade plays out, with any luck, highly profitably. To be continued…

An interesting article to go alongside this post is here:

link:

http://www.sputniknews.com/amp/business/201701021049196920-china-gold-market/

 

 

 

 

 

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