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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FOMC Projections & An interesting day for cable today.

Review of price action from a technical perspective with fundamental notes

I’ve noticed in intraday trade, the GBPUSD currency pair has been trading a trending move intraday, and almost invariably giving back more than 100% of that move in a given day. So the market might move up 40 pips in the morning, but by midday have gone down 60 pips. Or it might move down 35 pips in the  morning, only to go up 100 pips during the (UK) afternoon.

Today I captured the market behaviour with some technical studies, using a four hourly candlestick chart and a one hourly candlestick chart, some trendlines, which we will be calling a ‘quadrant’ and some moving average indicators.

Without referring to the news yet, I just want to look today at the price action and where it took the pound.

Figure 1, the 1 hour (H1) chart shows the price going up steadly, but in waves and correcting down to the bottom (dark) trendline, from the top (dark trendline).

The exchange rate has clearly ‘bounced’ off the bottom dark line, indicating a resumption of the upmove, if we take only this chart into account.

Figure 1 – H1 chart this morning

First, I noticed how strongly this channel bounced during the morning. This is a one hour chart.

If we broke it down to a half hour chart, we would see a ‘3 bar reversal’ for sure – that is that the newly formed candle has penetrated the highest high of the last three consequetively downmoving candles, a powerful reversal pattern.

If we imagine the trend channel divided further into 4 channels (rather than 2), by adding two more parallel lines at the half way point between the midline and the top and bottom of the channel, and from the top we label the ‘spaces’ quadrant 1, 2, 3 and 4, it is not hard to see that the price has entered into quadrant 3, from quadrant 4.

I have approximated these quadrants in figure 2, below.

Jimmy Young who runs a live trade room and daily trade review and ideas service, has previously taught that entering into quadrant 3 from quadrant 4, is effectively entering the ‘buyzone’. Likewise, coming down into quadrant 2 from quadrant 1, is effectively coming into the ‘sell zone’.

This makes sense intuitively, because if you imagine that the price is trading within these channels and are going from one channel to another in waves, a strong move from the bottom or top channel towards the middle is likely to be followed through from quadrant 2 into 3 (and perhaps down to the bottom of 4) or from quadrant 4 up to quadrant 3, and onwards and upwards into 2 (and perhaps to the top of 1).

Look at what happened by later on in the day…again this is in the H1 chart – I have redrawn in the trend channels roughly, including the two aforementioned lines. Now quadrants 1,2,3 and 4 can be seen clearly.

You can see that the market price for spot pound/dollar kept rising, up through quadrant 2 and then stalled about half way into quadrant 3. The price then collapsed (during an important set of (hawkish presumably) Federal Reserve announcements.

Figure 2 H1 chart by this evening

Could we have moderated for over-aggression using this H1 chart, and thereby been cautious about trying to reach the top of quadrants 3 or 4 in the long play on the H1?

The answer is yes, by considering the higher timeframe. In this case let’s look to the H4 chart.

NB. Jimmy Young taught this analysis method on the H4 chart – a first reason to be cautious of quadrant trading too expectantly on the H1 chart.

As can be seen, the trend and channel direction (slope) does not match that of the H1 chart displayed.

Although the overall trend seems to be up – and therefore, we would expect therefore that GBPUSD could continue to correct upwards (i.e. correcting mid-long term from the Brexit collapse move earlier this year) on this basis, on the H4 chart, we are clearly in a pattern right now of consolidation – of lower highs being posted, and lower lows. Again, the trend channel bears this out.

Over longer time periods, the trend is upwards on both charts according to moving average indicators, which perhaps gave the H1 some impetus for a bit of a run up the channel. The moving averages on the charts (figure 2 and 3) speak for the direction of the trend – apart from the short term average (blue), the dotted line, turquoise line, purple line and pink line in figure 3 are all travelling in an upward direction, although the turquoise has starte losing a bit of momentum (angle is getting weaker).

We have bounced off the top trend channel and are therefore heading DOWN in terms of the trend channel / quadrant though. Note how this is not confluent with what the H1 chart tells us. The longer term chart needs to steer the view in this instance, unless there is a clear ‘failure’ of the channel to the upside.

That blue line is key also. It is an 8 period moving average, and sets the near term trend and has started travelling down. This and the bounce off the trend channel, plus the fact that we are in quadrant 3 and heading down from quadrant 4 all serve as ‘connected dots’ to suggest that the GBPUSD pair is probably still consolidating.

Figure 3 H4 chart this morning

Figure 4 shows what happened during the news – FOMC economic projections and so on.

If you are interested in reading the statement, here is the 14 December FOMC statement

Clearly, the message was hawkish (i.e. suggestive of strength in the US economy, thus the dollar, and possibly hinting at an interest rate hike, or clearly, as we will can see by the big red candle, indicating selling of the pound and buying of the US dollar, market participants got that sense of hawkishness and the big players and intraday winners will have traded it).

What was happening on the H4 was a different story to H1, and a more powerful one…

As you can see, that little move into quadrant 3 in the H1 chart, in fact took the market right to the top of the H4 channel, from which a reversal candlestick pattern (shooting star / hammer type) can clearly be seen followed by the sell off right the way through quadrant 4, 3 and 2 and finally into quadrant 1.

But as if to catch unwary traders out, not without a test of the very high of the hammer candle (+1 pip for those who will have been disappointed today by having a terribly tight stop).

Figure 4 H4 chart by this evening

What to perhaps take from all this in terms of technical analysis and possible strategy.

Learning & Strategy (for educational and not advisory purposes).

  1. Check the H1 and H4 for the channel in which the prices appears to be trending currently. Look for confluence, otherwise the H4 should take precedence.
  2. Quadrant trade short: Sell a move from 4–>3 down to 2 or 1.
  3. Quadrant trade long: Buy a move from 1–>2 up to 3 or 4.
  4. Look for a reversal at the top of bottom of a channel.
  5. Hint: For the hammer reversal candle (the candle before the big downmove), rather than entering on the close with a stop just above the candle, wait patiently for a retrace to 40%, 50% or 60% of the hammer candle as a ‘pre-empt’ of the short, giving some room for stops that are too close to the high of the hammer to be hit, e.g. 12 pips above the hammer high.
  6. Entering at the 50% retrace of the hammer at 1.2710 with a 20-30 pip stop (1.2730 or 1.2740) would have allowed a 30, 60, 90, 120 or even 150 pip profit today.
  7. Short term averages like the 8 period simple moving average can give a clue as to the near term trend. Longer term averages, like the 100 and 200 can give an idea of the medium to long term trends.
  8. There was big news today for the dollar. Trading without a stop somewhere (a decent distance depending on risk willingness for the trade, but undoubtedly above the quadrant 1) could have led to a nightmare had the news gone the other way.

I trust this brilliant and yet simple analytical tool taught to me by a long term bank trader of GBPUSD, Jimmy Young, helps traders make more intuitive sense of the trending nature of markets.

Happy Advent Season,

Sam

 

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