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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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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Quadrant study of the USD Index – is it consolidating lower?

Looking at the USD index, it does appear to be consolidating, having said that, there has been strong USD buying of late. If we take the view that USD index is consolidating (correcting, going down) this means that the dollar will be making losses against Euro, Japanese yen, Pound, Swiss Franc, Aussie and Canadian dollar. My view is that if gains have already been made in any two of these currencies, but especially Euro and one other, gains which look like they are not likely to go much further, but the index is showing a clear pattern, it might be a sign to, in this case, sell the dollar against one of the other currencies, especially if that currency has been strong recently, for example, buy GBPUSD.

In other words, index seems to be going down, indicating short term dollar weakness (intraday). Euro and Japanese yen have already made gains against the dollar. These could continue to lead the index lower, but in case they seem to be stalling, or reversing, it might be worth looking for a reversal in the other pairs making up larger components of the index, particularly if those pairs have been posting losses against the dollar.

Here is the dollar index. Based on the post about quadrant trading the dollar index seems to be moving from the first sell quadrants (4 and 3) into the second sell quadrant (2). Could the index reach the bottom of quadrant (2)? It does not seem an unreasonable thought, especially given the confluence with the 61.8% fiboacci expansion.

The overall message here, is that the idea formed for the day on this basis, is that the dollar is in a weak (consolidation) position today.

It has made a new low, the SMA5 is turning down, the momentum of the SMA8 is slowing and there is a ‘double doji’ pattern (see the orange and pink triangles) which according to this very useful and thorough economics and trading blog post can be a warning of serious consolidation (sometimes).

 

To the upside, the two moving averages will act as resistance. To the downside, the selling of the USD is against the long term trend (turquoise line and purple lines).

In conclusion, the dollar index is a useful way to gauge the currency basket making up the index against the dollar. The immediate implication of the trend is weakness in those currencies against the US dollar (in an uptrend which we have clearly been in for months).

In the short term, there may be opportunities to sell the dollar down against other currencies.

 

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