Jonathan Cho's  Instablog

Jonathan Cho
Send Message
Independent trader currently seeking work as an analyst or trader with a hedge fund.
  • The Case For Going Long The Ruble Right Now 0 comments
    Dec 10, 2013 11:06 AM | about stocks: FXRU, RSX, RBL, ERUS, CEE, TRF, RUDR

    Position Trade Recommendation:

    Long the Russian Ruble

    Russia typically isn't on the minds of traders and investors. It's long been brushed aside as a backwards, corrupt country run by former KGB thugs. The latter may still be the case, but more than 20 years following the collapse of the Soviet Union, Russia has begun to take steps towards becoming a more open and more financially-inviting place to employ capital, so much so that long-time Russia bear Jim Rogers turned bullish almost two years ago, though its stock market hasn't moved since then, and its currency has dropped in value across the board of major competing currencies.

    Here's some basic fundamental information on Russia:

    Debt as % of GDP: 8.4%, the lowest of any major economy (by comparison, the US's is 102%)

    Foreign Currency Reserves: $509 billion, 5th largest in the world

    Budget Deficit: .5% of GDP (by comparison, the US's is 7%)

    Unemployment: 5% (vs. 7% unemployment in the US. I don't believe either country's government numbers, but I can believe Russia's is relatively lower)

    Interest Rate: 5.5%

    Absence of Capital Controls

    While its stock market may be attractive to some investors, this trade recommendation only involves the currency. The Russian ruble is trading at a location that provides a low-risk, high-reward opportunity against several major currencies, for a long ruble position trade that might last anywhere from five to six months, to a year or more, depending on how it's handled.

    This trade is based on technical reasons, though the favorable fundamental picture in Russia (relative to those of the countries the ruble is trading against) serves as a backdrop for gauging the potential longevity of the ruble's move.

    Basic Overview

    The trade recommendation is a long on the ruble, done by trading the ruble against a basket of other currencies. Specifically, the ruble against the US dollar, the British pound, the Euro, and/or the Japanese yen, as foreign exchange pairs-USD/RUB, GBP/RUB, EUR/RUB, and RUB/JPY. The trade is driven by technical analysis, but there is a reasonable possibility that the initial trade can develop into a much longer-term move, in which case fundamental economic factors would be more in play. While the main purpose of the trade is to benefit from ruble appreciation, the position will also act as a carry trade, because of the ruble's interest differential with the other three currencies, all of which have very low interest rates.

    To get to the point, the ruble is in a technical position against four major currencies and crude oil that make a rise in value in the ruble very probable. I'll go over the ruble against the US dollar, the British pound, the Euro, and crude oil individually, to show the rationale for the case. Though it's not as useful for reasons I'll explain further below, I'll also cover the ruble against the Japanese yen. Afterwards, I'll cover fundamental issues and risks, target prices, entry guidances, stop placements, and interest differentials.


    Looking at a weekly chart, we can see the USD/RUB drifted down into 2008 before spiking dramatically as people dumped assets for the dollar during the panic. After tapering off, the pair then drifted in a slight uptrend. At first glance, the chart may not look significantly telling, but technically, there's a lot going on.

    (click to enlarge)

    Chart Analysis

    Bearish Factor #1: Failed Inverse Head and Shoulders

    The USD/RUB formed a failed inverse head and shoulders pattern that has very bearish long-term implications. There's more than one way it can be drawn, since these patterns are individually drawn by people for themselves. But I think the most heavily looked at one is the rendering below. You can see that it failed to break out of the two most probable necklines to complete the pattern and move to the upside. Therefore, even with one of the most commonly recognized technical patterns on the weekly chart, there wasn't enough interest on the buy side for price to move up through it. It then pulled back down, with four clear attempts by bulls to take price back up to the neckline, if not through it, but all were overcome by heavier selling, resulting in a H&S pattern that failed to materialize. This has long-term bearish implications, even years out, because the H&S pattern, which ultimately reflects the net result of market participants, formed over a period of years. The implications won't likely play out over just a couple months.

    (click to enlarge)

    To be thorough, I attached a chart below with two alternate drawings of the head and shoulders-the only real variable is the right shoulder. I've drawn the two other most probable right shoulders, but these are too large relative to the head and left shoulder to be taken seriously by the majority of traders, and in fact, the two alternate right shoulder breakouts at the neckline would be so far extended upwards that the whole thing might not even properly qualify as a pattern marking the start of a reversal, which is what a head and shoulders is supposed to be. To get to the extended neckline alone would take price up fairly close to the 2008 peak. Even so, there are already signs that price is failing to extend higher, with a clear lower high followed by another lower high, so the alternate right shoulders don't look likely to complete anyway.

    (click to enlarge)

    Bearish Factor #2: Failure to Continue to the Top of a Weekly Channel

    We can also see that a weekly rising channel formed. Prices tend to trade off the support and resistance trendline boundaries, until price fails to reach one end or the other, reverses, and proceeds back before usually breaking the boundary. We can see that price is showing visible signs of failing to continue, a clear weekly lower low followed by what looks to be a lower high. This means selling is overcoming the buying that would normally occur until the top of the channel is reached. This is bearish and should this latest lower high hold, I would expect a break down through the lower support boundary of the channel.

    (click to enlarge)

    Bearish Factor #3: Weekly Upper Wicks Indicating Selling Pressure

    Examining candlestick wicks provides a lot of information. If you look throughout the chart, you'll see wicks of various sizes sticking out of the green and red candlestick bodies. They indicate that price got to the end of the wick, but closed the week back at the body. More specifically, a wick on the top means bulls bought price up, but couldn't keep it there due to heavy selling. When that occurs without a correspondingly lower wick of large size, especially over a series of candlesticks, selling will usually win out and price will trend lower, and vice-versa in the other direction. On the chart below, you can see examples of selling and buying pressure wicks in the past marked with circles. I circled the examples where wicks were clearly coming from one direction more than the other for a series of candles, not just one or two. From that, you can also see the trend directions that ensued. To the right of the chart, you'll see three red arrows-they point to a long series of bearish wicks starting June of 2013 to the first week of December, last week. This is clearly not bullish, as every time buyers try to take price up, sellers take it back down. That it's gone on for so long-just over six months now-shows that selling interest here is not temporary, nor shallow, but deep and sustainable.

    (click to enlarge)

    Bearish Factor #4: Subsequent Weekly Lower Highs

    The chart below shows that after failing to break the inverse H&S, the USD/RUB formed a clear lower high at a weekly descending trendline in May 2013, followed by a subsequent lower high, a clear sign of a change of trend to the downside, since buying is unable to overcome the heavy selling now occurring, as evidenced the weekly upper weeks. These lower highs help confirm that the long-term bearish implications of the failed H&S may now be coming to fruition, and indicate that price is likely to fall at least to the long-term ascending support trendline (which is also the channel support boundary), to around a little above the 31.00 level at a minimum.

    (click to enlarge)

    Bearish Factor #5: Strong Ruble Buying After NFP

    The next market "tell" was the market reaction following Friday's NFP report. Prior to that, the USD/RUB had shown signs of slowing momentum, with new highs decreasing in size. Following that, on Friday, December 7, soon after the release of the NFP report, the USD/RUB got heavily sold and made a clear lower low visible on the on the four hour and daily timeframe charts. This was mirrored by strong buying of the ruble across the board-in the GBP/RUB, EUR/RUB, and RUB/JPY. These pairs had been drifting prior to the NFP news with a slightly weaker ruble bias, but once the news was out of the way, all four pairs moved strongly in favor of the ruble.

    We can tell ruble buying drove these currency pairs because the USD is negatively correlated with the pound and the Euro, yet all three weakened forcefully against the ruble. The RUB/JPY surge was partly driven by independent yen weakness as well, but the movements of the USD/RUB, GBP/RUB and EUR/RUB are enough to inform us that the ruble was the subject of heavy buying independent of anything else. The timing of this move indicates that a lot of money was waiting to buy the ruble, but not until after the volatile NFP news release was out of the way. The consequent buying was so strong that all four pairs broke their respective key support and resistance levels, and formed various types of technical patterns bullish on the ruble. The four charts below are 5 minute charts that cataloged what happened before and after the NFP news release.

    (click to enlarge) (click to enlarge)

    (click to enlarge) (click to enlarge)

    Bearish Factor #6: Location at Resistance of a Long-Term Triangle Trap Formation

    You'll also notice that the USD/RUB hit and is just beginning to come off the resistance trendline of a long-term symmetrical triangle trap. This provides us with a favorable place to short-price has already made a lower low off it, meaning the USD/RUB has made a clear change in trend off resistance that we can enter with a pullback to a lower high, with limited risk above the high. At a basic level, trading and investing come down to buying low and selling high, and selling here at long-term resistance is selling high.

    The trap can help us further in allowing us to project a target for the USD/RUB, should it reach the support trendline and break through it. Patterns like triangles are often categorized as traps because they "trap" price between support and resistance before it breaks out in either direction. The closer price gets to the end of a triangle trap, the apex, the more traders will treat a break outside one of the two boundaries as a trap breakout. If the majority of people see it that way, they'll tend to trade it as such. In this case, doing so means taking price to the target price the trap predicts, which is the measured vertical distance based on the first high and first low, drawn from whichever comes second vertically to wherever the other boundary is. This will be addressed more specifically near the end.

    Bearish Factor #7: Bearish Weekly MACD and Stochastics Oscillators

    Adding fuel to a downward directional bias are the oscillators at the bottom of the chart. These two technical indicators work for two reasons. First, they basically measure rates of change over time, though each in its own way. They can give objective measures of momentum, how quickly or not price is moving in its direction, and how long it's lasting relative to the norm. Obviously oscillators are not 100% accurate, but on a general basis, they have a high enough accuracy, if not just blindly used, to seriously incorporate them into our trade analysis. Moreover, people also use them to trade with, so the oscillators work in part due to self-fulfilling prophecy.

    That said, the weekly stochastics oscillator has reached its upper line, meaning it's indicating price is overbought. The fact that the stochastics reached the overbought zone while price could only manage a lower high is bearish, since bulls had their best opportunity to take price up while stochastics was trending up, but with that now as far as it can meaningfully go, fewer people are going to be willing to buy based on that indicator-it just doesn't make sense to do so probability-wise, since the indicator's more often correct than not. The weekly MACD signal lines, the two lines that move together up and down, are trending down now after topping out above the .5000 level, where all the four prior major weekly tops occurred, and there's plenty of room for that to go on the downside, so that's in tune with a bearish bias as well.

    (click to enlarge)

    Bearish Factor #8: Clearly Visible Changes in Trend on the Daily Chart

    Turning to the daily chart below, we can more easily see a change in trend. The initial high in August was sold heavily, making a clear lower low, which bulls tried to take up again. That was encountered by more selling at the weekly trendline trap boundary that culminated with three progressively strong red candles to end last week. These candles formed a bearish reversal pattern called "three black crows." This name refers to three progressively large, full-bodied candles (meaning price basically went straight down from the open to the close, and closed each day near the lows). It shows that selling increased in intensity each day and went almost completely unopposed by buying, which is unusual unless the prior trend is over. It's a common sign of a reversal, which is further corroborated by the fact that the third "crow" was created alongside strong ruble buying across all the major ruble pairs. That gives us reassurance that this pattern is based on ruble strength, not on a dollar, pound, Euro, or yen move.

    (click to enlarge)

    Bearish Factor #9: Bearish Daily MACD and Stochastics Oscillators

    On the daily chart, the MACD signal lines are just under the 2.000 level, an area that has marked local tops in the past. Moreover, the MACD is showing two signs of divergence. First, the signal lines are higher than the lines that marked the actual top in August, even though the top this week was lower. This is a bearish sign because normally higher signal lines correlate with higher highs. If the signal lines are even more overbought while price can't even match, let alone exceed, the prior high, it shows there's an abnormally low level of buying interest. The second form of MACD divergence involves the histogram-the green and red hills in the middle. The green hills began to decline in height since the beginning of November, resulting in a shrinking histogram as price rose. It's usually a sign that the buying being done is slowing down---the higher highs in price are getting smaller, as buying interest fades and selling interest picks up. The daily stochastics also showed divergence, visible by the lower high on the oscillator at the end of November as price continued to rise. These divergences ultimately proved correct this week with the three black crows formation.

    (click to enlarge)


    We have a number of reasons to believe the direction on the USD/RUB will be down for several months, though more like closer to a year or more. I'll cover profit targets following analysis of all the ruble pairs and crude oil.


    Now let's move on to the GBP/RUB. This is a tougher animal. If it was very clear the British pound would be weaker than the dollar for most of the duration of the USD/RUB trade, it would be easy to take a GBP/RUB short. Even short-term GBP weakness during the time period of the initial entry can be sufficient to take a short-entry, for GBP relative weakness for a couple weeks would allow a GBP/RUB short to get far enough in profit, more than a USD/RUB, to move the stop to breakeven and protect ourselves in case I am wrong. As of now, it seems probable for the GBP to be stronger than the USD until the middle of this week, upon which I would have to reevaluate. The USDX is at a price where an argument could be made either way, at least for direction for the next one to three months. This uncertainty makes it necessary to ensure that independent analysis on the GBP/RUB, separate from the USD/RUB, makes it evident that the trend in the GBP/RUB will be down before considering it for a trade, or at least for an entry at this time.

    *(As an aside, however, following the next one to three months, I am biased more to the downside on the US dollar. There is good technical evidence sugar and coffee have just formed long-term, multi-year lows, and a lesser but still decent probability that wheat and corn have as well. If crude oil has also done so, as seems probable based on analysis further below, these commodities are probable going to be aided by a weaker dollar. EUR/USD analysis also makes me more inclined to have a dollar-negative bias; however, independent analysis of the USDX does not give me as clear a picture. In addition, I think precious metals have or are very close to forming multi-year bottoms. Taken together, these readings give me good reason to believe that while the next one to three month is hard to forecast, as there might only be a sort of wide trading range for a while, the trend over the next year or even two is more likely to be down than up in the dollar.)

    Chart Analysis

    On the weekly chart below, we can see that the GBP/RUB has moved somewhat in tandem with the USD/RUB-after trending down prior to 2008, the pair spiked during the financial crisis before tapering off and then trending up. The similarity in the two charts is informative because it means the ruble is driving these pairs, not the currencies the ruble is paired with.

    (click to enlarge)

    Bearish Factor #1: Location at Long-Term Resistance

    The GBP/RUB is now right at a level of long-term horizontal resistance based on the top created during the financial crisis in 2009. Because it's weekly chart resistance, as opposed to a shorter-term one, in terms of probability I see very little chance price is going to break sustainably through on the first go without a major multi-week if not multi-month pullback. While price did shoot above the 54.04 horizontal resistance level, small moves above long-term resistance that don't last more than a couple days are usually insignificant-they look negligible on a weekly chart. You'll notice that the false break above produced a large upper wick followed by a close of the candle far below where price opened the week. That wick was likely created by a short-squeeze-people shorting the 54.00 level with stops set too tightly just above it, making it ripe for market-makers to buy the GBP/RUB to a hit a series of stops, resulting in buy orders to cover the positions. That price sold off so heavily afterwards supports the view that the buying that caused the false break was not caused new longs, but forced liquidation.

    Another reason the slight move above is unlikely a real break, and that the level is unlikely to truly break anytime soon, is based on the manner in which price got there. From the end of 2012, it's basically been a trip straight up. There hasn't been a meaningful pullback, resulting in a more than 20% rise with barely a hiccup if you look at it from a weekly chart perspective. This does not usually occur. More often than not, such moves are unsustainable without a breather. The majority of traders are more to wait for a major pullback to occur than rush to buy right at major long-term resistance. I would expect the first serious effort to continue the trend up would come at around the 50.00 level, but that's to be dealt with later.

    (click to enlarge)

    Bearish Factor #2: Weekly Reversal Candlestick Marking the Top

    The most recent week's candlestick turned out to be a reversal candlestick pattern-a medium-sized red body with a long upper wick, identified on the prior chart. As mentioned earlier, the wick seems to be based on a short-squeeze, which is a classic sign of a top, because right at major support and resistance there's typically a large number of stops placed too close to the level, that can be easy to pick off when the market's quiet. What gives this view credence is that, as mentioned, selling then took over to such a strong degree that price ended the week far below where it opened. The lack of a lower wick is an indication of how unopposed the selling was.

    Bearish Factor #3: Bearish Weekly MACD and Stochastics Oscillators

    The weekly MACD and stochastics oscillators provide supportive evidence to believe the next major move for the GBP/RUB is to the downside. The weekly MACD is just under the 1.0000 level, an area that's roughly marked every major weekly chart top since 2008. The MACD histogram is also useful-it's been decreasing in height since the first half of the recent trend up from the end of 2012, while price has been rising, an indication of divergence that fairly accurately predicts at least a pullback-type move. It has been diverging for quite a while, but now with price at major long-term resistance, it makes technical sense for the pullback, if it's not a reversal, to start from here.

    The weekly stochastics is also in the overbought zone, which is usually followed by a move down in price far enough for the stochastics oscillator to move somewhere beneath the 75.00 that marks the overbought level. But with price now at weekly resistance, there's a bigger case for the oscillator to complete a full cycle down. Either way, selling when the weekly stochastics is overbought gives us more confidence that we're selling high, not low.

    (click to enlarge)

    Bearish Factor #4: Heavy, Sustained Selling since June 2013 Evidenced by Daily Chart Upper Wicks

    A look at the daily chart can show us an unusual amount of sustained selling for the past six months despite the uptrend. In the chart below, I've circled the areas of pronounced selling, evidenced by upper wicks without corresponding lower wicks of any meaningful size. Notice the difference between the wicks on the first half of the chart and the second, in terms of their distribution above and below the candlestick bodies-there is clearly a larger number of upper wicks on the second half, despite the uptrend. This is a strong indication about future direction. This pattern of selling pressure is similar to the one identified on the USD/RUB weekly chart. For the uptrend to now give way to the bears makes technical sense since the GBP/RUB has reached substantial resistance.

    (click to enlarge)

    Bearish Factor #4: 3 Black Crows on the Daily Chart

    This overlaps with bearish factor #2, but it's worth noting, because the reversal formations on both the weekly and daily charts are going to catch the attention of more traders than one of them alone. Like the USD/RUB, the GBP/RUB developed a three black crows reversal candlestick formation on the daily chart. The third came on the back of the strong wave of ruble buying after the NFP news release, as mentioned earlier, giving credence to the view that the ruble has the attention of a lot of traders. The reversal pattern broke the rising trendline that supported part of the move up and produced a clear lower low on the daily chart, which is going to turn a lot more people bearish, and at the very least give bulls serious pause before considering buying in any sustainable way.

    (click to enlarge)

    Bearish Factor #5: 4 Wave Overextension

    If you're familiar with Elliot wave theory, the basic idea is that each overall directional move can be divided into three parts-a first wave, a second wave, and a third wave. I've found it's a good rule-of-thumb. Now the recent daily timeframe move up since the beginning of 2013 is marked by four clear waves, or legs, not three. When that happens, the last leg is usually an overextension, an unsustainable runaway move that might have started as a short squeeze but carried on farther. It usually ends with a parabolic rise up before undergoing a serious correction, if not a full-blown reversal. As you can see on the daily chart below, the last leg did end up going slightly parabolic, getting progressively steeper each day before topping out with a short-squeeze high, a sort of blow-off topping candle. If that last leg up was indeed an overextension, the GBP/RUB is in for a serious drop. Supporting this view is that the recent fourth wave up roughly matches in distance each of the three prior legs. Given that, it's probable that this fourth leg is over, and if the last three legs are any guide, we should expect a pullback for at least a month, though I do expect more than that.

    (click to enlarge)

    Bearish Factor #6: Bearish Daily MACD Signal Lines

    As a final piece of technical evidence on the daily chart, the MACD signal lines are in the .40 to .60 range, which marked prior daily chart tops that usually lasted three weeks at a minimum, which gives us assurance that a fall in the GBP/RUB has a lot of room to go before we'll need to look for a serious buy effort.

    The daily stochastics is on its way down, but that can trend in a downward posture for a while, and when it does begin to rise, likely in the middle or latter part of this coming week, it can help us time a lower high entry.

    (click to enlarge)


    While not as markedly bearish as the USD/RUB, the GBP/RUB is in a location where we can reasonably expect a move down large enough to warrant taking a short trade.


    The weekly EUR/RUB chart has the same basic template as the USD/RUB and the GBP/RUB. The major difference is that the Euro appreciated more against the ruble than the other dollar or the pound did. However, the overall similarity is reassuring-we can see that while the ruble isn't commonly traded, it doesn't mean it gets pushed around-it moves with enough strength in either direction to have the controlling influence on almost every other major currency it's traded against, with the exception of the Japanese yen. The EUR/RUB is arguably the hardest one to read, but we can gather enough information to form a fairly clear bias if we take break down the chart carefully.

    (click to enlarge)

    Chart Analysis

    Bearish Factor #1: Weekly Triangle Trap Completed

    Like the USD/RUB and GBP/RUB pairs, the EUR/RUB spiked in 2008 before tapering off. It then began to tighten its trading range, before breaking out to the upside. We can see this more exactly by drawing trendlines that delineate the upper and lower boundaries traders used, as shown on the chart below. We can see that the first high came in August 2011, and the first low from late 2008. However, notice the large gap between the 2008 low and the next low on the trendline-such large gaps tend not to get respected for trap measurements. Because of that, it may be more realistic to use the next low, from February 2012 as the starting point of the lower boundary. In doing so, we can measure the trap target with a vertical line from the February 2012 low to the upper boundary. This gives a 4.58. If we add 4.58 to the price location of the breakout in January 2013 at a price of 40.23, we get a trap target of 44.81. The absolute high on the chart came at the beginning of this past week at 45.27, so it went little over, but that's normal variation, given the very long-term nature of the trap the target was based on and the slight discrepancies in the way traders draw the trap boundaries. That it was more likely a mere overshoot is suggested by the fact that it occurred on the same day the GBP/RUB spike topped on a probable short-squeeze above its weekly resistance, before selling off for the rest of the week.

    The technical fulfillment of the trap target removes a major reason for bullishness on the pair, and gives bears an opportunity take over for the first time on a weekly basis. While hitting a trap target doesn't mean price must sell off, it does mean arguably the key technical impetus for the weekly trend up is no longer in play, and we can look at other factors to determine whether bears indeed might take over from here.

    (click to enlarge)

    Bearish Factor #2: Sustained Selling Pressure Visible by Weekly Upper Wicks

    The presence of large upper wicks on the weekly candles since the first part of 2013 shows a strong amount of selling interest among traders and investors. This type of signal more often than not results in a trend in the direction of the pressure, and most especially when the pressure occurs over a long period of time. As noted on the chart below, you'll see such examples in the past and the direction that followed. If you focus in on the candlesticks since early 2013, you'll see a prominence of upper body weeks throughout the rise up, indicating that selling wasn't enough to overcome the technical buying that most likely can be attributed to the trap breakout. But despite that, for nearly an entire year, the move up was heavily contested by bears. This is important because typically trending moves don't go so visibly and unrelentingly opposed throughout its entirety. Look at every other trending move on the weekly chart-none of them have had the type of opposition this most recent one has had except at the very end, when the trends reversed. With the trap projection target now hit, that sustained selling now has its best chance to manifest in a move down in the EUR/RUB.

    (click to enlarge)

    Bearish Factor #3: Weekly Reversal Candlestick

    The most recent candlestick on the weekly is characterized by a long wick and a tiny body. It's referred to as a shooting star, and it shows that large buying was countered by an equal amount of selling, so much so that bears took price down to the lows of the week and kept it there; normally in a bullish trend, any selling is minor as pullbacks are quickly bought to extend the overall move up. This candlestick is a bearish factor to consider not only because it reflects what buyers and sellers actually did, but because traders use them for analysis to make trading decisions. Of note is that this reversal candlestick occurred as the USD/RUB and GBP/RUB made corresponding ones. The candlestick is marked on the next chart.

    Bearish Factor #4: Bearish Weekly MACD and Stochastics Oscillators

    The weekly oscillators tell a consistent bearish story-both the MACD and stochastics are diverging with price. The MACD signal lines and MACD histogram have each been falling since the summer, while price has continued to move up, and the stochastics has behaved in the same way. These divergences indicate the uptrend is unsustainable. The two oscillators are also in prime positions for a reversal in price to begin. The MACD is just below the 1.0000 level, where the major weekly tops have been with the exception of late 2008, and the stochastics is in the overbought zone, all bearish signals to consider in tandem with the other factors identified.

    (click to enlarge)

    Bearish Factor #5: Break of the Daily Uptrend with a Possible H&S Pattern

    On the daily chart we can zoom in to specifically how this past week's shooting star candlestick played itself out. Focusing on the upper part of the chart, we can see the EUR/RUB had consecutive days of lower lows and lower highs, with the first day of the sell-off marking a clear break of a support trendline. This is giving traders legitimate technical reason to sell. Moreover, it's either potentially formed, or may form over the coming week or two, a reversal H&S pattern. The daily chart change in trend is a clear sign that the uptrend, at least for a while, may be over.

    (click to enlarge)

    Bearish Factor #6: Bearish Daily MACD and Stochastics Oscillators

    The MACD signal lines in the above chart are in the .3000 region, where local daily tops in price have a history of being made, and the daily stochastics has just begun to come down from the overbought zone. Both the MACD histogram and the stochastics also diverged with price before the final top, which is useful in confirming that it was more probable to be the top, as opposed a temporary high soon to be followed by a higher high.


    The EUR/RUB has clear signs that a major reversal to the downside is beginning, independently of the USD/RUB and GBP/RUB. This analysis corroborates the idea that the ruble is going to rise in value across a board of major currencies for the medium-term at least.


    I mentioned earlier that the RUB/JPY wasn't as useful for assessing the future direction of the ruble alone. The reason for this is that Japanese yen is on a tear to the downside, so strong that every yen currency pair is being driven by it. I don't expect that to stop for a longer-term breather until the USD/JPY reaches the 120.00 or so level, which is still quite a ways away, in distance and in time, so it's difficult to assess historical price action to help understand the ruble component of the RUB/JPY pair. However, at the least it's important to know whether the RUB/JPY is more likely headed down than up. If it's up, then at the very least, the ruble isn't going to be so weak as to oppose the yen, but if it's down, given the high probability of continued, long-term yen weakness, we would need to pause to consider why the analysis is inconsistent with the ruble against the other three currencies.

    Chart Analysis

    Starting with the weekly chart, we can see that the RUB/JPY dropped dramatically during the financial panic, followed by a tapering off, and a drift downwards. So far, it doesn't seem so different from the other ruble charts-it's just flipped upside down, because the RUB is the base currency (the numerator) for this pair, not the quote currency (denominator). Where things change, however, is the dramatic rise from the second half of 2012 to the first part of 2013-while the RUB dropped in value against the USD, GBP, and EUR, the ruble seemed to have risen significantly based on the RUB/JPY chart. That rise though had nothing to do with the ruble, but rather was the result of a sudden, large move down in the yen, so strong that it overpowered any weakness in the ruble.

    Because this trend of yen weakness is likely to continue, the only thing necessary is to make sure the RUB/JPY is not probable to move down, or even stay flat, as that would mean the yen weakness would be matched with ruble weakness.

    (click to enlarge)

    Bullish Factor #1: Failed Head and Shoulders Pattern

    If you look at the period from mid-2012 onwards, you'll see price clearly broke out of the downtrend following the financial panic, with an easily visible higher high.

    (click to enlarge)

    It then formed what looked to be a head and shoulders reversal pattern. But what happened after really tells the story-just as the USD/RUB failed to complete its weekly inverse head and shoulders, leading to long-term bearish implications, the RUB/JPY failed to complete its H&S as well, with a break above the right shoulder high this past summer. This has longer-term bullish implications that favor a move to the upside, and that may have begun on the breakout last Friday following the NFP news release.

    (click to enlarge)

    Bullish Factor #2: Triangle Trap Breakout

    Last Friday's surge in the RUB/JPY looks to have been a breakout of the ascending triangle trap that had contained price since early last summer. It's identifiable on the weekly chart, but more clearly definable on the daily. The trap began to form after it negated the H&S, with the primary resistance boundary a little above the 3.100 level. It was approaching the apex at the end of last week, but before it broke out to the upside following the NFP report. If Friday's move was indeed a breakout, which seems so given the correlated moves in the other ruble pairs, this would be very bullish. What complicates this a bit is that the RUB/JPY surge was also driven by strong yen weakness. However, simply based on evidence of independent ruble strength in the other three pairs at the time, some of the breakout can attributed to the ruble.

    (click to enlarge)

    Since the RUB/JPY hasn't yet given a real pullback since then, there should be a good opportunity for a long entry this week or next, though I'm more biased towards this week. The ascending triangle trap projection is at just under 3.300, plenty of room, should it play out, for us to move our stops to breakeven for a risk-free trade.

    To note, the weekly MACD and stochastics oscillators for yen crosses aren't too reliable right now-because the yen cross pairs are in very strong trends, the oscillators can stay elevated for long periods of time. The oscillators on the daily timeframe are more useful, but the daily MACD isn't providing any useful information, as it's narrowed into a progressively tigher range as price consolidated towards the trap apex. However, these oscillators aren't necessary, as we have more than sufficient information based on the failed head and shoulders and the ascending triangle trap breakout to the upside for us to conclude, independently of the three other ruble charts, that the RUB/JPY probable to trend up In both the short- and long-terms. This is further corroborated by the USD/JPY, which acts as a proxy for all the yen pairs. Analysis on the USD/JPY shows that it's started the second major leg of a move up, at least to the 110.00 area if not the 120.00 area. So there should be no reason for the RUB/JPY to fall significantly except on a very short-term basis. Since the RUB looks set to be stronger than the USD, the RUB/JPY should rise in value more than the USD/JPY.


    The RUB/JPY looks primed for a long-term move up after breaking out of a fairly large price trap at the end of last week. With the USD/JPY in a strong uptrend as well, the RUB/JPY should make strong gains for the foreseeable future.

    Crude Oil

    The ruble has a fairly strong correlation with crude oil. It is Russia after all. We can see the correlation easily with a side-by-side weekly chart comparison of crude oil with the USD/RUB (both are priced in US dollars, so it's the most logical comparison). Because the RUB is the quote currency of the USD/RUB, crude oil and the USD/RUB are correlated negatively, meaning their prices tend to move in opposite directions, which is easily visible on the charts below. What we need to confirm is that crude oil is probable to trend up, or at worst trade in a range; otherwise the oil chart would be at odds with a rise in the ruble and give us reason to pause.

    (click to enlarge)

    (click to enlarge)

    Chart Analysis

    Bullish Factor #1: Confirmed Weekly Uptrend w/ Bullish Reversal off Trendline Support

    The weekly chart is in an uptrend that may have begun to move back to the upside this past week. On the chart below you'll see the series of higher lows matched by a higher high made over the summer of 2013. Since then, oil trended down into late autumn, before finding a bottom at an overall weekly higher low in the last week of November. This was followed by a very bullish surge up last week on strong volume. This surge went unopposed-it didn't pullback in any meaningful way, meaning there was hardly any selling interest and the buyers weren't closing out their longs, which would have been evident by a minor retracement on profit-taking. So there must be a number of market players looking for a long-term move up, which would technically be expected given the weekly trend of higher lows, a higher high, and now, if it holds, another higher low. This type of strong volume move is common at market tops and bottoms, so it gives more reason to believe the late November low represented a long-term higher low that keeps the weekly uptrend intact. If this is the start of a multi-month rise in oil, the ruble should rise with it.

    (click to enlarge)

    Worth mentioning is the upper descending trendline. How seriously it's taken as a trendline is uncertain-it's formed based on two highs, and when price hit it the third time, there was hardly any reaction, as though it wasn't there. My best guess is it will act as minor resistance, but I don't place too much importance on it for now.

    Bullish Factor #2: Bullish Weekly MACD and Stochastics Oscillators

    The weekly oscillators give further technical backing for an upside bias in oil. The MACD histogram reached the oversold area when oil bottomed, and as should it continue to rise, the signal lines will cross up and invite technical buying. The weekly stochastics also bottomed as oil did. Since the average stochastics cycle on these settings is six candles, there should be five more weeks of upside pressure after the current one. The MACD histogram tends to peak a little earlier before tops and bottoms, while the signal lines tend to peak a little after. The weekly stochastics is particularly accurate in timing tops and bottoms within a band of a few candles. As illustrated on the chart below with black vertical lines, the relative accuracy of these oscillators bodes well a sustained upside bias.

    (click to enlarge)

    Bullish Factor #3: Bullish Daily MACD and Stochastics Oscillators

    The daily MACD signal lines bottomed also as oil began to bottom. The signal lines reached a fairly deep oversold region, which provides additional confidence that the bottom may be in, since bottoms in old were correlated with oversold signal lines.

    The daily stochastics is now overbought, but that's not indicative of a long-term move because while it may take the daily MACD signal lines six months to move from oversold to overbought, the daily stochastics generally do so in six days. Near-term downside would be normal anyway-price hasn't pulled back at all yet. Should a pullback occur, a higher low in oil is likely to correspond with an oversold daily stochastics. We might be able to use that information to help time an entry in the ruble pairs, though it would just be one piece among many we'd have to consider.

    (click to enlarge)


    Crude oil has probably found a multi-month bottom, and based on the weekly uptrend, a move above the summer high at 112.15 looks to be in the cards.

    Fundamental Outlooks and Risks

    On a fundamental basis, my own view is that Russia has about as bad a reputation as a country can get for investing, so barring a banking crisis, a sudden, large drop in interest rates, or some other big event, I think the situation is akin to buying the ruble when Russia's at the bottom of the barrel, perception-wise. An improvement in the way Russia's economy is perceived is more probable than not, given the actual state of its government finances (sound enough, as shown at the top of this report with some relevant statistics), and Putin's recent foray onto the international scene as a rational peacemaker. And while there's always the risk of the central bank lowering interest rates, unless the drop is dramatically large, I don't think its effect on the ruble will be strong enough to cause a long-term change in trend in the ruble. The only risk from that point of view is if the central bank lowers its interest rate soon after the trade entry is made. Other than that, a drop in interest rates is more probable to produce just a temporary setback before a resumption of the trend. To note though, Russia's central bank has shown an unusually strong resilience to the pressures of Russian corporations and the financial industry to lower rates, even at the expense of well-acknowledged slow growth. It's made reining in inflation its top priority, so a drop in rates would come more as a surprise than not, even though the interest rate is among the highest among developed countries.

    The US position looks like the opposite of Russia's. The US enjoys a perceived status as the most respected country economically, while underneath it's a financial mess burdened by an impossible-to- pay-off debt that increasingly no one wants except the Fed (though not by choice). With its monetary policy soon to be managed by an inflation-happy Yellen Fed, my own position is that the US is in an emperor-has-no-clothes situation, somewhat the reverse of Russia's. And I don't think Fed has any intention of raising rates in the near future. Consequently I think the risk to the US dollar is more to the downside than up, which gives added reason to favor a long-term USD/RUB short.

    Additionally, I think England, the European Union, or Japan aren't any better-all are in similar positions of unpayable debt, and are either outright financing themselves by printing money because there isn't enough debt demand to keep interest rates sufficiently low, or In the EU's case, are at the point that printing money or instituting negative interest rates are now basically on the table. The chances of a central bank-initiated hike in interest rates in any of these countries is very small. Compared to these countries, Russia looks like an economic saint suffering from a badly misjudged, outdated reputation that's beginning to wear off.

    Aside from the above considerations, the only other major risks to watch out for are major market-moving news releases around times of possible entry, or if a position is still in the entry zone, not far from the stop. An influential news release like British retail sales can cause a large spike in price either way, but I don't think the effect will last.

    Regarding oil, given that there are no wars in the Middle East grabbing headlines right now, the risk for oil based on fundamental events is to the upside now, meaning to the upside for the ruble, a condition that favors a trade for ruble strength.

    Price Targets

    Because the trade involves taking a basket of ruble foreign exchange pairs, setting targets can be appear difficult, but it's actually more manageable than it looks. We established that the USD/RUB, GBP/RUB and EUR/RUB were highly correlated-even though the dollar normally trades in the opposite direction of the pound and Euro, the ruble moves so strongly that it carries these other currencies with on a general basis, as was made last week when all three topped out together, and all three were sold heavily following the NFP release. Of the three pairs, the USD/RUB makes the most sense to watch for direction and price targets. The dollar's still the reserve currency and the most widely traded in the forex market. Moreover, the USD/RUB is the ruble pair most commonly available to retail traders-the two others are less common, so the USD/RUB would likely be the ruble pair most watched. Trading the ruble with the USD/RUB as a proxy for the GBP/RUB and the EUR/RUB would be akin to using the USD/JPY as a proxy for the yen pairs-while not always exact, it's accurate enough. Moreover, should the USD/RUB break the long-term support trendline, there's little chance the resulting fall won't drag the GBP/RUB and EUR/RUB down with it.

    The RUB/JPY needs to be treated separately, because the main driver there is in all likelihood going to be the yen. Given how strongly the yen can move without slowing down or pulling back in any meaningful way, I think the best strategy is just to buy and hold, with targets based on the USD/JPY. The first major resistance level the USD/JPY is likely to make a serious pullback is the 110.00 level, so a strategy to close out half the long and reenter at a lower price makes sense, followed by a similar strategy if and when the USD/JPY reaches 120.00. The areas in between that might be difficult to evaluate or time because the USD/JPY may start a major pullback while the ruble may be beginning a strong leg up, so as of now, those are the only two targets I can consider with any confidence at this point.

    Going back to the three other pairs, due to the long-term nature of the trade, or investment as it might more aptly be called, there need to be multiple targets based on the USD/RUB, not only to take partial profits at, but to reevaluate and look for re-entry opportunities on pullbacks. The first major target I have in mind is the weekly trendline that serves as the support boundary for the weekly trap and the weekly channel. By the time the USD/RUB gets there, that trendline should be around the mid-31s, which coincides with prior lows made last summer. We can plan to take half the position off at that point, and reenter the half position at a higher price, since I don't see a clean break through that support area as likely at all on the first hit. The rough timeframe for that target is five to eight weeks from now.

    Following that, I would anticipate the USD/RUB will continue the trend down and break that support, which would be very bearish. If it does, we may have the opportunity to add to our position on a retest of the trendline after the fall through it.

    The break would technically bring two targets into the picture. The first would be based on the weekly channel. A measured move of the distance between the resistance and support boundaries, measured from the first low to the resistance boundary at a 90 degree angle, gives a value of roughly 4.80. The target based on that measurement would be 4.80 from wherever the USD/RUB breaks down through it. The other target would be based on the trap projection. Because the first and low were based on prices before the financial panic and after, the target would be excessively low-if the USD/RUB broke down from 31.50, the target would be 14.61. Of course that is possible, given the possibility of hyperinflation with Yellen leading the Fed, and at some point a collapse in the value of the dollar from some form of US debt collapse. Additional support for that scenario would be if Jim Rogers is right in his long-term bullish stance on Russia. But for now, I think it's not something we need to plan-the USD/RUB still has cross a number of support barriers. A more conservative trap target would be based on the 2008 high and the low following that in 2011, which gives a measured value of 7.76. We'll use that number as the basis for the third target, which we can't set yet because we don't know where the USD/RUB will break the trendline support, if it does at all. At each of those three targets, the plan would be to close part of the position and reenter on a pullback.

    It's worth noting that prior to 2008, the ruble was appreciating in long-term trends against the dollar and the pound, and stayed even with a strengthening Euro. The financial crisis caused a massive fall in the ruble, but if anything, the financial crisis and the events proceeding it have only made the fundamental economic situations of the US, England, Europe, and Japan that much worse than they already were. From that perspective it doesn't make sense for the currencies of these countries to be worth more than the ruble, the currency of a country finally on the economic and financial mend from the collapse of the Soviet Union. The ruble's rise in the early 2000s can be attributed to its correlation with a rising oil price, but at the time, Russia had not begun making the reforms it has in the last few years in its efforts to attract foreign capital. With this shift in policy, oil's influence on the currency may begin to lessen over a period of some years. Accounting for these factors, a resumption of the former trend of ruble appreciation, a sort of reversion to the mean, may be what's starting, especially if the weekly USD/RUB trendline breaks.

    Until that point, however, we can still use crude oil for one more way to set a price target, or at least as an indication of when to consider doing so if the USD/RUB hasn't reached one of our planned price objectives. If oil shows signs of topping, possibly next summer after a higher high of last summer's high, that may correlate with a local bottom in the USD/RUB. Should that occur, we would need to evaluate the situation at the time.

    Entry Guidelines

    Given the extent of ruble buying to mark the second half of last week week, I'm anticipating pullbacks of some degree this week. However, these pairs have in the past continued to trend without providing more than very shallow retracements, especially the RUB/JPY.

    The best I can do for now is suggest an entry zone for each pair. Regardless of the exact entry, the stop should be same for every pair-above the prior week's high for the USD/RUB, the GBP/RUB, and the EUR/RUB, and below 3.070 on the RUB/JPY. Should these stops get hit, the trade would be technically negated for the time being. If you have experience short-term trading, you might be able to get some well-timed entries near the pullback highs, but if you don't have such a background, entries anywhere in the guidance zones should be fine. Just keep in mind that the ruble pairs aren't as liquid as some of the more commonly traded currency pairs. If you take an entry at a time when general liquidity is thin, like in the New York afternoon, you'll have to deal with a wide bid-ask spread. The most liquid times for the ruble seem to be in the early-middle part of the Tokyo stock market trading day and from the London market open to an hour before the London market close.

    You might also want to consider scaling in an entry-building a full position with three or four different smaller entries that together add up to the position size you're comfortable risking.

    Below are the entry guidance zones. They range from the shallowest place price might pull back to, to the deepest end without causing technical damage to the charts. The pairs run away from us without decently retracing, there should be small pullbacks along the way we can find reasonably safe entries at.

    RUB/JPY: 3.06 - 3.12

    USD/RUB: 33.80 - 33.22

    GBP/RUB: 53.85 - 54.45

    EUR/RUB: 44.91 - 45.20

    Stop Placements

    These are based on the bid prices.

    USD/RUB: 33.32

    GBP/RUB: 54.70

    EUR/RUB: 45.30

    RUB/JPY: 3.043

    Should the ruble pairs move as planned, we should move our stops to lower the risk when it makes technical sense. If an entry is taken at the earliest part of the entry zone, it might not make sense to move the stop to breakeven if price drops below last Friday's low, whereas if the entry were taken deeper into the zone, it might be more feasible. At this point, if the ruble pairs pull back before heading in the direction of ruble strength, we should first be able to lower the risk by moving the stop to above the pullback lower high it creates on the USD/RUB, GBP/RUB and EUR/RUB. The RUB/JPY is harder to gauge right now because it's so dominated by the yen, but it's more likely than not that if the USD/RUB breaks to new lows, the RUB/JPY will probably be high enough to look for ways to lower or eliminate the risk.

    Interest Rate Differentials

    While it's not the main attraction, trading a basket of ruble pairs long on the ruble side has another advantage-interest payments. The ruble has one of the highest interest rates among developed countries at 5.5%, which we'll be able to profit from, since we're buying the ruble against lower interest-bearing currencies. To go long the ruble, we're going short the other. That means, in effect, we'll be borrowing whichever currency the ruble is trading against in order to buy the ruble, and so we'll need to pay interest on that. But the interest will be covered and then some by the higher interest rate paid out because we'll be holding rubles. Basically, we'll be in a carry trade. Given the leverage available when trading forex pairs, this can result in a fairly tidy profit, especially if the trade continues for more than a year.

    The interest rates for the currencies are the following:

    Ruble: 5.5%

    Dollar: .25

    Pound: .5%

    Euro: .25%

    Yen: .1%

    To calculate the interest you'll receive for each pair, subtract the borrowed currency's rate from the ruble's, though there are normally very minor fluctuations in the rates.

    It's important to mind though that this interest rate differential might not last. While the Fed, Bank of England, ECB and BOJ don't look like they're going to raise rates intentionally for the foreseeable future, at some point one or all of them may lose their ability to suppress interest rates as their debt situations worsen. I don't think there's reason for concern yet on that front for at least another year.


    The Russian ruble is in a position that technically highly favors a medium-term to long-term move to the upside relative to the US dollar, the British pound, the Euro, and the Japanese yen. The risk relative to the potential reward is low, and we can expect entry opportunities this week, and latest the following week.

    While Russia's had a checkered economic history, the country's shown signs of stabilizing itself and heading in a more capitalist-friendly, free-market direction, a trend that on a fundamental level supports the potential for ruble appreciation in the coming months, and possibly longer.

Back To Jonathan Cho's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers


More »
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.