Currency Update 1-30-13

EUR/USD

The Euro continues to stay strong, far above all the moving averages, the MACD remains in the overbought range and the Stochastic remains overbought.  If you were lucky enough to have bought this a few months ago you are doing really well.  Look to stay in and take profits at any sign of weakness.  If you are not in, like me, then the strategy would be wait until there are strong signs of reversal.  I don’t want to chase after a long run like this.

EURUSD1_30_13

USD/JPY

The Yen is much the same only reversed.  As the Dollar continues to weaken vs the Euro the Dollar is getting stronger and stronger against the Yen.  Again we have a level that is well above all three averages.  We are bumped right up against the Bollinger Band and we continue to follow it along.  The MACD is overbought and the Stochastic is also overbought.  All signals that we are in a strong up trend and we should be looking for signs of a reversal.

US Dollar vs Yen

So with a boring update like this the question is what do you look for and what indicators do you use to confirm a reversal of a trend?

Currency Update 1-23-13

It is a new year and now that the market is settling into 2013 it is time to take a look at the Currencies.

There is so much to talk about that influence Currencies.  So much so that you could spend a whole day analyzing world news, data, and information from all companies and then try to guess how that effects currencies throughout the world.  This post will focus on technical analysis of the Euro Dollar and the Dollar Yen

EUR/USD

Euro Dollar Daily Chart 1/23/13

Euro Dollar 1/23/13

The Euro is gaining momentum again.  On the 6th of December all three major averages met and crossed having the 15 day EMA above the 52 day EMA which is above the 200 day EMA.  This shows great strength in the trend.  Now lets look at the MACD.  The indicator line (blue on my chart) is nearing a cross to the high side.  This would normally indicate a strong indicator to the up side.  However since both the MACD and the Indicator is above the 0 line this means use caution.  Anytime both are above the 0 line there is room for a reversal.  Finally lets take a look at the Stochastic.  This shows us that momentum is waning and again we should use caution.

Summing it up.  There is still a good indication that the Euro may continue to run but it seems to be losing momentum.  It might be a good time to tighten up the stops and be ready for a reversal of momentum.

USD/JPY

Dollar Yen Daily Chart 1-23-13

USD/JPY 1-23-13

Since November 16 the Dollar has been on a tear against the Yen.  It looks as if momentum is slowing and there may be some profit taking going on.  The markets simply go up and down.  That is what they do.  All three averages are in an uptrend indication.  However the daily averages are beginning to fall off the upper Bollinger Band which I have used as a good indication for a potential reversal.  Looking at the MACD the MACD line has crossed the signal line indicating a weakening in the momentum.  Finally if we look at the Stochastic again we are beginning to dip below the overbought levels.  For me there are three out of 4 good indications that the yen may fall over the next day or two.  I will be shorting the Yen and watching it closely.  The risk here is a reversal on big news and closing out my position.  I will be looking to hold this position at least for two days.  If the momentum is on my side I will be adjusting my stops and limits as I follow it down and into profit.  On the other hand I will not be adjusting my stop ever, and I will not look at my limit until tomorrow morning.

Beyond the cliff…..

OK, so I think we are all getting sick of hearing about the rapidly approaching fiscal cliff.  We all know that it will be resolved, most likely through a combination of spending cuts and increased tax rates on those earning more than $250K/year.  Whether this happens in December or in January is beside the point, because in the end tax rates will stand still for the majority of Americans.  But as this discussion has gone on for the past 2 months, we’ve seen the major indices both rise and fall. We got to a point after the election in November where the S & P looked as if it was establishing a healthy downtrend.  As of this writing, the markets have been trending upward for the last couple weeks, and are at critical support heading into a quarterly expiration week.  So the question still remains, what will happen once we reach a fiscal cliff deal and the focus is back to the major economic conditions.

Well to start with, after a deal is reached, not much will change.  The US Economy is still weak.  No matter which side gets their way out of the cliff negotiations, it will not be enough additional revenue to stop the deficit from growing.  Unemployment is still high, even though it supposedly has hit 8%, this does not include those who have stopped looking for work, retired early, or are attending college.  It does not paint the true picture of the number of consumers who are without funds.  I could go on naming negatives, but I think we all get the point.

Are there any positives?  Believe it or not, there are.  For starters, the housing market seems to be picking up again in select areas.  Homes are beginning to get sold, and homeowners who were underwater are starting to reach valuations where they can get out of their homes and break even.  This creates less strain on consumers, and frees up more money to be spent in other areas.  Also, energy prices are stable.  Whether it be crude oil or natural gas, a smaller percentage of people’s income is being spent on heating and cooling.

So what is trader to do?  The first thing is to acknowledge that there is no clear long term market direction yet, both from a fundamental and from a technical standpoint.  We are at a point on most charts that could take us in either direction, and either will probably be combined with a lot of sideways grind.  The next is to contain risk.  In choppy market conditions, it is best to reduce trading size and widen stops.  With wider stops and tighter targets, it’s much easier for your targets to be hit during the natural “noise” of the market.  The last thing to remember is to be patient.  The big trade will come, it just may not be this year, or in the indices.  There are countless single stocks that are moving, as well as commodities.  We saw great trends in grains over the last year, in addition to other markets.  I would say that on 1 out of 5 days, the best trade is till  being “flat”.  These are the days where you need to be content watching the markets, and not kick yourself for not being in a move.  Would the trade have been profitable?  Yes.  Did you have a way to predict that? No.  And are you sticking to a trading plan that includes NOT trading some days, a plan that has ultimately proven itself as profitable?  Well, there is your answer.

Obama won, now what?

The election is over.  We now know that Barack Obama will be President for another four years.  We also know that we will continue to have a divided congress.  For the last few months, as traders, we have been trying to make trades (or stay out of the markets) based on what may or may not happen as a result of the election, and even though we cannot predict the specific legislation that will be passed, we know who the major decision makers will be.

No matter which candidates you supported, it is now time to take a step back and look at the markets objectively.  All of your hopes and aspirations for individual politicians has to take a backseat to your analysis of which policies they support and how well they will be able to tackle the challenges ahead.

We know that energy prices are high, interest rates are low, and economies around the world are still hurting.  Although we have had a drop in the reported unemployment rate over the past few years, we also know that many workers have accepted lower paying jobs and most households are still earning less than before.  So, with these facts in mind, what is the proper trade right now?

Well, after the election, we saw an immediate drop in the indices, which may have been a result of the approaching “fiscal cliff”.  Congress put off this discussion until after the election, and now the time is here to make some tough choices.  Markets like certainty, and if Washington gives us certainty on a budget over the next few years, the markets may experience some stabilization.  The big fear of the markets is that there will be a temporary solution to the problem and real solution will not be reached in the short term.  This may cause more volatility in markets, thus reducing the risk that investors are willing to take, opening the doors for more money to be taken out of investments.  This fear may take a toll on all investments: stocks, bonds, commodities, and forex.  The only thing that will be acquired during this process is the US dollar.

But even though uncertainty may be the trigger, a bear market may not be the result.  Time and time again we have seen Washington step in with stimulus, and this may be no exception.  Between billions of dollars in stimulus funds and quantitative easing, we saw a potential bear market averted because of government support.  Of course without the hopes of another presidential term on the line, this may not be a given this time around.

So, as you scan your charts, I would be more bearish than bullish, but I wouldn’t expect an all our crash.  I think there is more room to the downside currently, but I also know how politicians act to avoid bear markets these days.

 

Life After Trading

If you’re anything like me (and I think most traders are), you like to plan ahead whenever you can.  When I take a trip, I like to know where I’m going, where I’m staying, and what I’m doing before I get there.  That doesn’t mean that I don’t enjoy spontaneous adventures along the way, but I operate much better when I have an idea of the events that are going to occur.  This tendency also carries over to my trading life.  I go into every trading day knowing which instruments I will be trading (or at least monitoring), and I know what my stops and targets will be should I enter a trade.  I also have my discretionary exits already planned should something change in the middle of a trade.  Furthermore, I also have a plan for what I am going to do with my profits, and how my future trading plan looks.

 

But no matter how much I plan, there is one event that will leave my trading plan and my family somewhat paralyzed (emotionally) if it happens: an early death.  I am not paranoid that I will die at an early age, but also accept the fact that it is a possibility.  I carry life insurance that will replace my income, I do not use consumer debt, and I make sure that my wife knows how to operate ALL of our finances if I should die.  We also have a plan in place in the event that both of us would die.  I know it’s not something that is enjoyable to discuss, but those that do not plan for it are the ones that suffer more if it occurs.

 

My wife obviously understands how important trading is to us.  She also accepts the fact that I make our investment decisions.  But a while back, she told me that she wanted to know more about how our investments and trading accounts worked, so that she would know what to do if something would happen to me.  So I took some simple steps to make sure that she would be able to access our trading capital and close our accounts if necessary.

 

  1. Have joint accounts: this puts both my name and her name on every brokerage account we have.  She can now make every decision that I can in regards to these accounts.
  2. Write down important information: usernames, passwords, and security questions should all be common knowledge.  This will give immediate access to accounts if needed.
  3. Knowledge of how to close positions: teach your spouse how to close both long and short positions in every market that you trade (stocks, options, futures, etc).  This can eliminate risk immediately if necessary.  In the event that this has to happen, this is a bad time for your spouse to learn how to invest.  It is probably best if he/she flattens the portfolio.
  4. Keep a journal of current positions: write down your positions, expectations, and update if regularly.  If your spouse wants to manage your existing positions, this will convey your research and outline where to take profits and cut losses (targets and stops).
  5. Have a consultant in place: it can be a friend, fellow investor, or trading service.  Have an individual that your spouse can call for help.  Death can take a toll on emotions and thought processes.  It is good to have someone who can assist in difficult times, who is also knowledgeable about investment accounts.

 

Risk 3 to make 1?

One of the biggest questions I get from amateur traders is “why do most of your setups involve taking profits at a 5 pt profit, and having stops set at 15-20 pts?”  (this would be an example of my first target and stop loss order on a YM day trade)  My answer is simple:  I set my first target much closer because naturally the market is going to move up AND down a little, it’s not going to go straight in one direction.  It the YM shakes back and forth, let’s say 5 points up and 5 points down from my entry, then my first target is hit.  My second target is 10 points, which is usually also hit.  At this point, I move my stop loss order to breakeven, so the worst thing that can happen to my trade is that I profit 5 points on the first leg of the trade, profit 10 points on the second, and breakeven on the final leg.  The wide stop loss is set so that my trade will have a little wiggle room to work out.

I often hear of many traders (and instructors, who often are not real traders) risking only 1 point in hopes of making 3 points.  If this were the case, if they thought a stock was going from $40/share to $43/share, they would buy the stock at $40, set their stop loss at $39, and set their first target at $43.  Although their risk is contained, there is a good chance that the stock will move back and forth, and even though it may go to $43, it will probably hit $39 before it hits $43.  If that is the case, the trader would have been right about the direction, but would get stopped out simply because their stop loss order was too tight.

Now there are times when I do place orders similar to this.  If I have a good feeling about a breakout, I have no problem setting a tight stop and a wide target.  This is only when I am very certain about market direction.  If it moves against me even slightly, it probably means that it is headed further in that direction, so my tight stop gets me out of even further losses.  But normally, I like to give my trades plenty of room to work out.  Furthermore, my trading plan is designed around reasonable targets, and getting my stop loss orders to breakeven so that each trade has a chance to run after it becomes profitable.

The bottom line is simple: many new traders are sucked in by the idea of risking a little to make a lot (they want to risk little money and time).  They want to have trades that profit thousands of dollars, while only risked couple hundred.  And often, once their trade turns profitable, they exit it at a small profit, only to watch it charge further into profitability.  These traders do not want to take a risk when it comes to profits, they would rather have a small profit and get out, rather than risk losing that small profit in search of even larger gains.  These same traders are often the ones who eventually have a losing trade, and stay in their losing trade in hopes of getting back to breakeven.  So in other words, they are willing to risk money when it comes to losing money or breaking even, but they are not willing to take risk when their choice is between breakeven and large profits.  They never give themselves the chance to hit home runs, because they are scared to lose their small profits, which are eventually completely wiped out by one of those losing trades that they can’t bear to close out.

6 Reasons I’m STILL bearish

Although the stock market is moving higher, I have yet to surrender to the bulls just yet.  As most of my fellow traders know, I am extremely bearish on this market, yet it continues to trend higher.  Does this mean that I have lost money, of course not, because a profitable trader can put his/her own opinions aside and make decisions based on price action.  And I’ve still had my share of good short trades with the index futures in the last few months.  These trades usually hit the first targets, and then were stopped out at breakeven instead of having the last open target run.  But even though we haven’t seen an exceptionally hard run to the downside, I believe there are many reasons to be curious about the recent price action (upward) in the indices.

1.  Unemployment – Although the numbers released today said that the rate was 7.8%, let’s face it………there are a lot of people out of work, and although the government may claim that conditions are improving, we are simply not seeing it economically.

2.  Quantitative Easing – as the Fed continues to subsidize its own debt, this is forcing bond prices higher, and typically when bond prices rise, stock prices fall. My only concern here is that bond prices are rising because of Fed purchasing, and that there is still enough capital out there to buoy the stock market also.

3.  Energy – energy prices are high, and they don’t seem to be going anywhere but up.  Natural gas is the cheapest of them, and even it seems to have put in a hard bottom for now.  Although alternative energy seems to have a lot of backing, there have not been any major breakthroughs lately that will lead us away for oil dependence.

4.  Earnings – As the 3rd quarter earnings reports start this week, we have already been warned by many companies that number will be lower.  I simply have not seen the market price this in yet and worry that it may not begin to take poor earnings into account until we get a few bad reports.

5.  Stock index prices – have you looked at the index prices lately?  The Dow and the S&P are almost back to the highs that they reached before the crash in 2009.  Out economy is nowhere near the condition that is was at its peak, and I’m not sure why the stock market thinks that it is.

6.  Commodity prices – with energy prices high, food prices will also begin to move higher.  More money spent on food and other commodities means less money available for growth and investment, be it personal or corporate.

What exactly is Quantitative Easing?

It’s been in the news a lot, and it has definitely had an impact on the stock market.  But what is it?  Many people use it when discussing the current economy and what is driving it, but how many people understand it.  My goal here is not to sway political opinion or to preach for or against quantitative easing, but to educate and show people what it really is.

When bonds are bought, they guarantee a certain return over a certain time frame.  Let’s say a 1-year $1000 bond is bought for $800.  That means that in 1 year, this bond could be redeemed for $1000 for the price of just $800 today.  This would be a 25% annual interest rate.  Although this is an extremely high rate, it could happen.  If bonds were giving this much return, and a 1-year $1000 bond was only selling for $800, that would mean that people were very scared to buy bonds, probably because they were not certain that in 1 year that they would get their money from them.  Other interest rates often follow these bond rates, so this would also signal that people in general were scared to loan money, and they would only do so if they were guaranteed a high rate of return (interest rate).

That $800 bond moves just like a stock.  If more of them are bought, is price rises, and if more people are selling them, the price goes down.  Let’s say people wanted those bonds and drove the price up to $900.  Well, then the rate of return would only be 11.1%.  This would mean that other interest rates (home, auto, credit card, etc) would also be lower, and the people would be more confident about loaning money and getting repaid.

This is where quantitative easing comes in.  Although the US bonds are still a pretty safe investment, there is still some risk.  With rising deficits and no clear budget in place, there is a certain level of fear.  And the US government does not want interest rates to rise, because they want to have growth and the availability of money.  So the government essentially steps in to buy their own bonds.  As a result, the bond prices rise, and the interest rates fall.  The federal reserve is currently buying the US debt, also known as quantitative easing.  This has caused the interest rates to become so low that there is virtually no interest to be made in bonds, so people would rather take risks in the stock market, and thus it has driven up the price of stocks, probably to levels that are not sustainable.

This week the major indices reached levels not seen since 2007.  We can all agree that the economy has not nearly recovered to the levels that it was at back then.  The stock prices have been buoyed by factors such as quantitative easing.  Is it illegal, well no, but it does also create some fear as to whether or not we will continue to see buying in stocks if quantitative easing stops.  The US economy is going to eventually need real growth and investment interest in both its stocks and bonds in order to experience a sustainable recovery.

Things to come…..

As we enter the last 4 months of the year, you may be asking yourself what trading opportunities are out there.  No matter what you trade or how you trade, there will be volatility in almost every market.  Here are just a few things that will drive markets:

1.  The Presidential Election:  Let’s face it, the market bottomed almost 4 years ago, and although the market has almost made a complete retracement of that move, I think we can all agree that the US economy is has not improved.  Most of the equity market growth and price increases that we’ve experienced have only come from unprecedented amounts of government stimulus to the economy.  November’s election, regardless of who is elected, will be a source of both hope and fear, two things that create volatility in markets.  People will be optimistic of a better economy, and at the same time scared that the current situation will not improve.

2.  The Harvest:  The summer heat wave devastated countless fields of crops.  Some farmers have persevered, and some have given up.  It costs a lot of money to irrigate a field, and a fair to poor crop is not worth the costs of harvesting.  Many farmers have plowed their crops under, which will lead to a shortage of corn, soybeans, and wheat.  But we won’t know how low that yield will be until crops are actually harvested and sold.

3.  Tension in the Middle East:  Whether you agree or disagree with military action in the Middle East, it drives markets.  Oil prices as well as equity prices will be affected.  With more and more news coming out of the region, we can expect it to put pressure on markets.

4.  Eurozone Crisis:  Europe is still dealing with their financial mess in the same way that the US is.  With Greece and Spain (just to name a couple countries) both suffering, we can expect to see continued movements in currency prices.  The British Pound and Euro will continue to rise and fall as the news develops from Europe.

Facebook – who could have seen it coming…..EVERYONE!!

Facebook has been the hot topic of discussion since its IPO debut several months ago.  The stocks initial asking price was officially $38.00/share, with discussion of it debuting as high as $44.00/share.  Since then, it has lost over half its value at its low, the lockup period has ended, and many investors have dumped their stock (small an large).  From the day that Facebook announced that it would issue shares, I listened to people I knew (some of them good friends) talk about buying.  Even though I trade professionally, I knew that my knowledge and experience would not be enough to stop them, and I generally don’t give stock tips to friends.  So why was I so concerned about Facebook from the beginning?  Well, my first concern was the size of the IPO…$100 billion!  When Microsoft went public back in 1986, their offering price was $250 million.  Now I understand adjusting for inflation, but at $100 billion, how much higher can a company climb who really hasn’t put together a consistently profitable business model.  Facebook really doesn’t offer a product that can generate a regular cash flow from its users.  My other big concern was the anticipation of the offering.  Before debut, everybody was ready to buy.  The price of the IPO had already factored in every potential long position, which meant there was nowhere for it to go but down.  Once the stock was bought, there were no buyers left.  All of the excitement and hope was already priced in.

Now this doesn’t mean that the company will go bankrupt.  I’m confident that they will get things figured out eventually and maybe even see some appreciation in their share price.  But for now, I am comfortable using them for short term options trades and not much more.    And by the way, feel free to share or like this post!