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Jay Norris
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Jay Norris is a 20-year CBOT floor veteran, author of the Best Seller "Mastering the Currency Market", McGraw-Hill, 2009, and "Mastering Trade Selection and Management", McGraw-Hill, 2011. He is a Market Analyst and Director of Education at Trading-U.com where he teaches the... More
My company:
Trading University
My blog:
Seeking Alpha
My book:
The Secret to Trading Forex, Futures, and ETF's: Risk Tolerance Threshold
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  • Gold Set To Repeat The Great Sell-Off Of 2013

    While U.S. economic releases last week hardly painted a positive picture of the economy, and the Euro gained sharply against the dollar, there were a couple of developments that reminded us that many economic reports are "rear view mirror indicators" and that in the big picture we are still in a bear market in commodities and a bull market for the U.S. Dollar.

    Interest Rates

    Despite most analysts agreeing that the Fed will again put off raising interest rates in June, the yield on U.S. 10-year Treasuries jumped from 1.91 to 2.11 last week - that may not seem like much but it is actually a 10% move-- see Figure 1.

    (click to enlarge)
    Figure 1. Daily Chart of the U.S. 10-year Note Yield

    After carving out a higher low in April the yield on the 10-year notes rallied into position last Friday to potentially reverse its 50-day pattern this week and put in a higher high - a higher high in a downtrend equals a market reversal.

    We interpret higher interest rates in the face of slower than expected economic numbers for March twofold. Number 1: while March's economic performance may have been disappointing, April's won't be. And number 2: while consumers had not spent as much as estimated in the 1st quarter of 2015, savings rates, along with home prices, are up strongly, and so is consumer confidence.

    Gold

    Despite the weaker dollar throughout last week the Gold market slumped badly - see Figure 2 -- begging the question "why?" Gold is a leading indicator of economic fear, and does well when the economy experiences uncertainty, which is what the March data, from job growth, to manufacturing, to retail sales, was showing.

    (click to enlarge)
    Figure 2. Daily Chart of Gold Futures

    We see the sell-off in the gold market last week as confirmation of a positive U.S. economic performance for April, which will be seen in the May releases; and as a reflection of a marked improvement for household balance sheets given the healthy uptick that U.S. home prices are currently experiencing.

    The Trade

    The question following the analysis is how can we profit?

    Higher U.S. rates are supportive of the current long-term trends in place: a U.S. Dollar bull market and a bear in commodities. So the advantage of a trade based on this higher interest rate theme is it will be in-line with the current dominant trends.

    After going back and analyzing market performance during the most recent jump in U.S. rates in the 2nd quarter of 2013, the most obvious correlation to higher interest rates was lower gold prices- see chart.

    (click to enlarge)
    Figure 3. Weekly Chart of U.S. 10-year Treasury Yield & Gold

    When 10-year interest rates rose a full percentage point in the second quarter of 2013 -- chart on the left -- it spelled a quick and violent end to the previous bull market in gold. From this perspective we believe another leg higher in U.S. rates, this time sanctioned by the Fed, would finish the job started in 2013 and push gold below $1000.

    Should U.S. rates continue to uptick the risk /reward on a short gold trade looks to be the best trade on our screen today.

    Jay Norris has written two books on trading which were published by McGraw-Hill. To see Jay highlight trade set-ups and signals in live markets this Thursday go to Live Market Analysis and click on the "free trial" option.

    May 03 7:47 PM | Link | Comment!
  • What Gives: Durable Goods Or Stocks?

    With new U.S. Durable Goods orders having come in lower for 6 of the last 7 months, and the S&P 500 having chugged happily higher over that same period, market analysts have to be asking the question "what gives?"

    Here is a historic chart of new durable goods orders -- top --and the S&P 500 on the bottom.

    The March Durable Goods figures will be released tomorrow at 8:30 AM EDT by the U.S. Census Bureau and are expected to rise by 0.7%

    (click to enlarge)

    The long-term correlation seen in this chart makes perfect sense; when consumers and businesses are buying "big ticket" items the economy does well and the stock-market benefits.

    When Durable Goods purchases turn lower however so does the long-term trend in stock prices.

    In 2008 stocks led the way lower while in 2000 durable goods topped 2 months before stocks corrected.

    Currently Durable Goods topped in July of '14 and have been lower for 6 of the last 7 months. Before you get too bearish on stocks though, realize that there is a powerful Spring seasonal for the U.S. Economy that is just kicking in.

    And volume into the stock market is also much higher than it was during past cycles meaning it takes longer for the momentum to wane. Markets are like ocean liners...they take a lot of distance and time to turn around.

    Stay tuned; this ain't rocket science and they haven't repealed the law of gravity just yet either.

    Jay Norris has published two books on trading for McGraw-Hill and currently hosts Trading University's Live Market Analysis

    Apr 23 8:19 PM | Link | Comment!
  • The Most Important Tenet In Technical Analysis

    Talking Points:

    *The Fractal Nature of Markets

    * Applications of the Phenomenon

    * Statistical Validation

    The most important technical tenet in trading is straight out of Dow Theory and says that a market can retrace up to 2/3rds of an impulse price move and still maintain its primary pattern. The 2/3rds retracement is the most important level on the chart. It is effective not just for long-term patterns, but the short-term and micro patterns also. This tendency is highlighted in these current charts of the Euro, U.S. Dollar Index, crude oil and gold in Figure 1, 2, and 3.

    (click to enlarge)
    Figure 1. Euro and Dollar Index futures

    (click to enlarge)
    Figure 2. Price Charts of Crude Oil and Gold

    (click to enlarge)
    Figure 3. 2/3rds Retracement Patterns on Intraday EURUSD Chart in February 2015

    This trading tenet is as important now as it was when Robert Rhea wrote about it over 80 years ago in The Dow Theory. And focusing on buy and sell signals, at these key levels, dovetails with the golden rule of trading: "buy dips in uptrends, and sell rallies in downtrends". No doubt underlying fundamentals determine a markets predominant trend, and that is always the direction we want to trade in, but it is these 66% counter-trend price dips and rallies that cause the majority of retail traders to lose, and provides market-makers and professionals a living.

    The Fractal Nature of Markets

    We have a theory for this collective behavior called Risk Tolerance Threshold Theory, but we know most traders are not as interested in the behavioral science and academics of this phenomenon as they are in the practical application: successful trading. Before we focus on those applications however, there is one academic subject that will go a long way in helping you to understand how to profit from this market tendency, and that is markets are fractal in nature. "Fractal" means that the same behavior is programmed into the system regardless of the degree, or timeframe, and this behavior is a two way mechanism. So the lower time frame patterns mimic the higher time frame patterns and, the higher time frames mimic the lower time frames. As traders we just need to know that if we have a measurement to determine the current pattern on one time frame then that same measurement will work on all time frames. The 2/3rds retracement is that yardstick. And this same measurement also provides a reliable indication for measuring when a pattern has reversed!

    Applications of the 2/3rds Phenomenon

    Just as important as the actual support and resistance the 2/3rds level provides, perhaps even more important, is what is implied in Dow's observation: A market can retrace up to 2/3rds and still maintain its pattern/trend; therefore a retracement beyond that level will indicate a pattern reversal. That truism in light of the market's fractal nature gives us the means to be able to measure the pattern on any time frame!

    For example, if the high price on the chart came before the low price, and that market has not retraced more than 2/3rds of the difference between those two numbers on a 2 close basis following the low price, that time frame pattern in down --bearish. Likewise if the low price came before the high price, and that market has not retraced more than 2/3rds of the difference of those two numbers on a 2 close basis following the high price, that time frame pattern in up - bullish.

    In the gold chart in Figure 4, we have broken the market down into 3 patterns: the 50-day, the Secondary Pattern, and the Primary pattern. We can identify with confidence the direction of those patterns based the high price, low price, and the closing price - fact based occurrences --in proximity to the 2/3rd retracement.

    (click to enlarge)
    Figure 4. Individual Patterns in Gold market

    By taking this same information and plugging it into what we call our Risk Tolerance Threshold Ratio, we give ourselves a much easier to read, objective graphic where we can see at a glance what the current direction of the tradable patterns are -- See Figure 5.


    Figure 5. Gold RTT Ratio from late Jan 2015

    If you are a short-term trader you would be more focused on the lower time frame patterns and the support and resistance created by them, while a longer-term trader would be interested in the longer-term patterns and levels.

    The RTT Ratio gives us an objective tool for determining trade selection because it definitively measures the trading environment we are in: trending or counter-trending, and provides the foundation for a method that is easily validated.

    Statistical Validation

    We teach that it is not the direction of the individual time frame pattern that is important but the direction of the majority, or collective pattern, that counts. We focus on any 3 successive patterns and trade in the direction of the majority of those three. We have absolute confidence that this collective pattern is a reflection of the influential fundamentals of the day.

    The RTT Ratio helps insure that our trade selection --are we buying or selling? -- is aligned with the current trading environment. It also allows us to back-test or forward-test a methodology or tactic to determine if the effort is more effective in a trending market or a counter-trending market. Charles Dow said the hardest thing in market analysis was determining when the market shifted into a counter-trending environment and how long it would last? Our RTT Ratio, which is based on Dow's observations, identifies the trading environment so we can adjust our strategies and filters accordingly. One of the most powerful advantages you can have as a trader is to simply know ahead of time if you are going to be a buyer or a seller.

    (click to enlarge)Figure 6. Trading-U's 15-minute Benchmark

    The spreadsheet in Figure 6 is our benchmark method's performance on the 15-minute chart for the 30 days prior to writing this chapter. We only took trades that were in-line with the collective pattern at the time of the trade, i.e.: we bought dips in uptrends, and sold rallies in downtrends.

    Jay teaches trading at Trading University. To sign up for a free trial of Trading-U's Core Concepts Course and attend a interactive live class where Jay points out set-ups and signals in live markets go to Trading-U Trial and choose the "free trial" option!

    Apr 01 5:17 PM | Link | Comment!
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