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I am a professional trader/analyst with expertise across a broad array of markets including equities, futures, options, and FX. The conclusions drawn about financial markets are derived through a multi-disciplined approach which examines the technical, fundamental, and behavioral aspects of the... More
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  • Sterling (GBPUSD) Painting A Short and Long-Term Bearish Picture

    Early Tuesday morning, news that the UK economy shrunk by 0.5% during Q4 of 2010 sent Cable reeling. Expectations were for a growth rate of 0.4%. The worst winter weather in a century is to blame. Even without inclement weather hitting the retail and service heavy economy, growth might have still come in flat. Take slow (negative) growth and throw in an uncomfortable rise in inflation --reaching an annual rate of 3.7% in December -- and you have a recipe for stagflation. In the weeks prior, traders were snatching up Sterling vs. the Dollar as risk to the upside in interest rates appeared to be present, and with Bernanke's easy -- very easy -- monetary stance, it was a thesis to be bought into.

    Last night, the BOE minutes from January's meeting were released indicating a slight increase in hawkishness as the committee shifted ever so slightly in favor of a rate hike later this year.  A rate hike from the current benchmark rate of 0.5% will still keep monetary policy highly accommodating and the interest rate differential between the U.S. and UK will remain quite narrow. This week's surprise in growth numbers was reason to give pause to the notion of higher rates, and that is exactly what happened Tuesday as the GBPUSD shed over 200 pips at its worst levels. While the report could be a weather related abberation, we will still need to keep a close eye on further signs of economic deceleration as growth is still quite tepid even when the sun is shining.

    From a technical perspective Sterling is at an important crossroads with two significant long-term trend-lines intersecting recent highs on the weekly chart. One passing down from peaks made in '07, '08, and '10. The other trend-line connects two peaks made in '09 and one in '10. Adding even further bearish implications are two technical developments. A head-and-shoulders pattern near completion within a longer-term 4th-wave triangle. If the H&S pattern comes to pass, then it would be the turning point for the C-wave of an A-E triangle which will end in a sharp move lower, completing the trend which began in late 2007.

    Gbpusd long and short term

    Could this set-up be a perfect storm of fundamentals and technicals converging to tell the same story? I will be looking for entry points to sell short, maybe as soon as this week.

    Later today the FOMC is expected to leave rates alone, but, it will be their statement, as per usual, that will move markets. Since the crisis the Fed has become increasingly transparent taking away the shock factor. However, should Ben and Co. hint at taking their foot off the LSAP gas pedal then it could spark a strong broad based rally in the Dollar. This shouldn't come as a surprise given the recent improvements in economic data, strong rise in equity prices since the speech in Jackson Hole, and fears over inflation and the ever climbing commodity sector. Upward global pricing pressure has inflation rates in most corners of the globe -- from China to India to South America to the UK -- climbing into uncomfortable territory.

    Ahead of the meeting I am not inclined to take on additional risk, as I currently have bearish bets on in AUDUSD and Copper. I took profit in the precious metal shorts as bullish sentiment and momentum indicators have receded back to levels seen at the lows in July of 2010.  (Gold still has room down to 1280-1300 if it can break support around 1320.) Furthermore, there is a fairly high degree of positive correlation between precious metals and the Australian Dollar (currently my most substantial position).

    Disclosure:  Short AUDUSD, March Copper.
    Tags: BOE
    Jan 26 10:13 AM | Link | Comment!
  • Sentiment In Equity Markets Flashing Signs Of Caution

    Earlier in the week, I highlighted the bullish extremes present across a wide spectrum of asset classes, and expressed my bearish tilt on certain FX pairs and precious metals. However, I only briefly touched on equities, and so it seems prudent given the current sentiment levels that I delve more into the situation brewing in equities.

    Before getting started, I want to point out that simply identifying extremes in sentiment, in of itself, does not warrant a trade, at least not by the rules from which I operate. Sentiment indicators are powerful tools for identifying  price points where reversals are more likely to occur due to herding behavior. It provides the initial edge, but what sets the trade in motion is price action, by providing confirmation of trend saturation and reference points for assessing risk.

    Sentiment Indicators In Focus:

    AAII (American Association of Individual Investors) - Mom & Pop investors have been warming up to stocks quite a bit lately, in fact, so much so that the 4-week average of the AAII has extended towards the highest levels seen in half a decade.

    Source: Sentimentrader

    II (Investor's Intelligence - (or lack of))- Newsletter writers are also showing some love for equities, not to the degree as individual investors, but none the less they are still climbing aboard. This week the II Bull Ratio rose to an overbought reading of 67.1%, but still well shy of the 75%+ readings seen back in April and January.

    Composite Model by Sentimentrader- This model is a compilation of various indicators including sentiment surveys, Commitments of Traders data, put/call and open interest ratios, volatility indices, breadth ratios, TRIN, and several unpublished indicators, which Jason at Sentiment has under lock and key. As one can imagine, with all those inputs, it gives a pretty well rounded view of what is going on under the market's hood.

    On 10/14 the reading for the Composite Model dropped to 23%, which is only the 11th time since the data began in 2000 that a reading fell below 25%. As you can see from the table below, when the indicator fell below 25% the market had a tendency to struggle in the next 2-4 weeks, and in a few instances much longer.

    For this study, I outlined the number of days it took to reach a peak, which I defined as a price high proceeding a decline resulting in a close one month later that is lower than the peak price. The peak dates were also determined by looking at the first day the model pivoted higher after crossing below 25, which is consistent with mybelief that contrarian trades shouldn't be taken until there is a pause or shift in momentum. Furthermore, I also calculated the return of the market over a two week and one month period. 

    If you throw out the three occurrences which occurred at the very beginning of the 2003-2007 cyclical bull market, the market folded in the near term 6 out of 7 times by an average of 3.4% vs. the one time the market rose by 2.1%. The reason I am discounting the 2003 occurrences is due to the extreme nature of sentiment and price at that time, similar to what the markets experienced in the spring of 2009. (Surprisingly, the monster recovery in early 2009 did not push this model below 25%.)

    Also, take notice in regards to the amount of time it took for a price decline to materialize. In two instances the peak was 2-3 days prior to the turning point in the Composite model, and in 4 other instances the peak was seen inside of 9 days. This means that if the current extremes are indeed creating an inflection point, then the market should begin to experience weakness very soon.  (The turn date was Monday October 18th.)

      Composite Stats
    source: Sentimentrader

    U.S. Dollar Sentiment - The inverse correlation between the Dollar and Equities has been a considerable focal point for both technical and fundamental traders alike. The prospects of more QE has created a "what's good for risk assets is bad for the Dollar" mantra, and everyone is buying into it. The Daily Sentiment Index, as seen below, has recently registered pessimistic readings indicating that only 3% of traders are bullish, which is below levels seen in August just before a 4%+ rally ensued, and worse than the levels seen at the 2009 trough.

    US dollar DSI sentiment Oct 2010
    source: Elliot Wave International

    The inverse correlation between the two assets has been extraordinarily strong, and like most correlations it will eventually experience a reversion, that time could be now. With that said, a reversal in the Dollar doesn't necessarily mean equities will also reverse, however; it does suggest some caution is warranted until the Dollar begins to make adjustments to correct the high level of pessimism.

    Quick Glance At The Technicals:

    Chart #1 - ES contract carving out a possible Reverse Symmetrical Triangle (RST), or a megaphone, depending on who you are talking to.

    Chart #2 - EURUSD looks to be rolling over and forming the right shoulder of a H&S pattern.

                          Es megaphone
       Eurusd 240

    In conclusion, equities, like other risk assets, look poised to retrace in the near term. I am not as keen on being short equities as I am on remaining bearish on Precious metals and certain FX pairs. On another note, the EURGBP triggered stops at 0.8830 - that's trading, moving on.


    Disclosure: No Positions

    Disclosure: No Positions
    Tags: ES, Macro, FX, Dollar, Sentiment
    Oct 21 6:53 PM | Link | Comment!
  • EURGBP - SHORT: Solid Risk/Reward Set-up

    The confluence of bearish technical factors present on multiple time-frames creates an excellent risk/reward opportunity in the EURGBP (Euro vs. Pound).

    Here are the details:

    1. Long-term trend-line extending back to the end of 2008 touches off on peaks formed  in 10/2009, 03/2010, and now.

    2. Daily 14-period RSI has hovered above overbought for an extended period of time, and rolling over now as price stalls at trend-line resistance.

    3. Head-and-shoulders pattern developing on the 240 minute chart.

    EURGBP LONG TERM     Eurgbp 240

    The projected price target, based off the range of the H&S pattern, is 0.8550-0.8600, to occur sometime in the next week.  An entry here at 0.8750 with a stop above the right shoulder pivot of 0.8823 provides this trade with a risk to reward ratio of better than 1:2.

    Disclosure: "No Positions"
    Oct 19 3:47 PM | Link | Comment!
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