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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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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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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