Tag Archive for: UUP

Japanese Yen is attempting to break out of a major H&S pattern.

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A chart analysis of the forex markets

This post looks at the present forex markets through the lens of classical charting principles, as originally forumated in the early 1930s by Richard W. Schabacker, editor at the time of Fortune Magazine. Factor LLC is recognized as one of the world’s preeminent authorities on classical charting principles as applied to the futures and forex markets.

There are a number of forex crosses that indicate substantial trading opportunities for traders willing to hold positions for weeks or even months.

Before examining the current forex markets, a basic understanding of classical charting principles is approriate.

  • Charts simply show where a market has been, what it is doing now, and what the path of least resistance might be. Classical charting is simply an attempt to define market behavior in geometric terms. The real edge provided by classical charting comes from the marriage of risk management with well-defined geometric patterns.
  • There is no magic in price charting. Charts do NOT predict the future. Unlike some Elliott Wave adherents who attempt to label every zig and zag, I believe that the vast overwhelming majority of markets the vast overwhelming proportion of time cannot be understood through the lenses of classical chart principles (or any other method of technical analysis, including Elliott Wave Theory).
  • Well-defined chart patterns naturally provide opposite possible outcomes. A rectangle can complete in either direction. A rising wedge can become a running wedge. A symmetrical triangle can fake a trader out in more ways than imaginable. A H&S pattern can become a H&S failure. And on and on it goes.
  • Charts are subject to morphology. I do my best to always find a geometric explanation for price action. As a chart morphs it can be subject to different geometric construction. As a general rule, intraday charts morph more often than daily charts, daily charts morph more often than weekly charts. But, more often than not a market cannot be explained easily by geometry. It is then time to find another market. This is why I might be focused on Robusta Coffee one day and some foreign stock index another day. I want to focus on markets I can define geometrically.
  • Reliable chart trading is cyclical. There are periods during the year (an average of two periods lasting two or so months each) when an unusual number of markets form well defined patterns AND the markets respond to those patterns in predictable fashion. Using language of farming, this is time to make hay. During the other periods we rely on aggressive risk management to limit our losses and keep out pile of chips somewhat intact.
  • It is a thing of beauty when classical chart configurations work. It is a thing of frustration when they do not work. It is a thing of confusion when the majority of markets defy definition from a classical charting perspective.

A review of selective forex markets

Eurocurrency (EUR/USD)

The long-term trend (as featured by the 45-year trendline) in EUR is under threat, as shown by the quarterly graph. The dominant chart construction is the 6-1/2 year descending triangle completed in Jan 2015. This pattern has a target of $.84. Such a decline would likely be accompanied by a massive change in the European Currency Mechanism (ERM).

2.7_EUR_Q

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U.S. Dollar has seen its annual high or low in January in 20 of past 21 years

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It’s called the Forex January Effect — and it is a powerful driver of the U.S. Dollar and Eurocurrency

 

There is an extremely powerful tendency for the U.S. Dollar Index to experience its annual high or low in January. The same (but opposite) is true for the Eurocurrency.

In fact, in 20 of the past 21 years the EuroFX has topped or bottomed in January. In four of these 20 years the January high or low was part of topping or bottoming phase that was not resolved until February or March. The table and chart below tell the story.

1.6_Jan Effect Chart_Euro 1.5_Jan Effect table

Will the low or high for the Euro in 2015 be registered in January? Only time will tell. Yet, a technical case can be made for a decline in the Euro — and this would set up the possibility of a January high in 2015.

The decline to-date in January is attempting to complete a massive 5-year descending triangle on the monthly chart  A decisive decline below the 2010 low would seal this case and establish targets as low as $.91xx.

1.6_EURUSD_M

The recent decline on the daily chart penetrated the lower boundary of a channel. Such a penetration often is a sign of the acceleration of a move.

1.6_EURUSD_D

Disclaimer: I am short Eurocurrency, long the USDSGD, short Peso futures and long U.S. Dollar Index. In other words, I am talking my position.

I trade futures, forex and stocks on the basis of classical chart patterns. I believe that price geometry is an indication of the power of the supply and demand forces in the markets. I pay little attention to technical indicators and no attention to the type of fundamental or macro analysis nonsense spouted by the pretty faces on CNBC. My goal is to identify the 10 to 20 best chart patterns in the forex and futures markets each year. I also periodically will trade patterns in stocks

This analysis is the type of technical research provided one to three times per week to members of the Factor Email Service. Factor members were alerted as long ago as last September to be long the Dollar. For more information on becoming a member of the Factor Service, click the appropriate tab in the upper menu bar.

$DX_F, $EURUSD, $UUP,

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The Japanese Yen is over sold — oh, really?

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The word on the street is that the $USDJPY has moved too far too fast. Nonsense!

There is no doubt but that the Yen has been a big mover since October 2012. But, I am hearing many traders say they want to fade this trend — that the move has been too much too quickly. Really?

Shown below is the daily chart of the $USDJPY spot and the Yen IMM futures (the IMM trades at an inverse to spot). The moves have been huge — and very profitable.

 1.15_JPY_daily

But, this 3+month advance in spot must be placed into historical context. Shown below are longer-term charts — the first showinig the spot crossrate expressed in Yen per USD and the second showing the value of the Yen in USD. As these charts show, the Yen has mot moved much at all.

 1.15_USDJPY

1.15_USDJPY_monthly spot

The weekly chart of the $USDJPY displays a H&S bottom with a minimum target of 92.70. Targets of 94.50 and 100.00+ [and as high as 125.00) also exist. Fear that this market has moved up too quickly has resulted in plenty of sold-out bulls. There is nothing more bullish than a huge supply of sold out bulls waiting to buy the first big dip.

1.15_USDJPY_weeklyH&S

Markets: $USDJPY

Another update on the EURUSD January Effect

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Composition of open interest is a story for the history books

Earlier this afternoon I posted a piece on the January Effect in EURUSD, posing whether today’s high (or the high in the next few days) will become the January Effect high or if the Jan 13 low will be the January Effect low (or if there will be no January Effect).

I did go home short $EURUSD at 1.3109 (spot). However, upon further study I am starting to believe that we have a January Effect low in place. I am employing a zero tolerance policy on my short position. If my position blinks wrong I am gone. With split stops, I am risking a net of 28 pips in the trade — the noise alone will get me. This is a hail Mary pass. I consider the risked amount as the cost of a ticket to a trading war.

There is an absolutely historic story to be told in this market regarding the composition of that open interest of futures contracts.

The graph below shows the EuroFX futures contract and the composition of open interest at the bottom (upper thick line is the commercials, lower thin line is the large spec). WOW!

 

Since early September (with the hype of the collapse of the EU) commercials have established a net long position of 187,185 contracts. That is equal to E23,4 billion Euros. Big number for the future market. The large spec has established a net short position of 160,030 contracts, equal to E20.0 billion Euros.

Folks, there is a war about to happen. This huge differential between the commercial and large spec will have to be unwound at some point. So, which group is going to blink first?

The obvious guess is that the commercial will win out in the end. But, it is not that easy. Since the May peak the commercial has gone from net short 124,000 contracts to net long 187,185 contracts, for a net purchase of E38.9 billion Euros. During that time the market has dropped from $1.480o to the present level of $1.3100. Anyway you count it the commercials have lost a ton of money and the large spec has an enormous open profit.

What we know are the COT data in futures. We do not know what is happening in the spot market — and spot forex is where the big dogs play. Does an imbalance exist in spot? If it does, is the imbalance in spot forex in the opposite direction, nulifying the futures profile. We don’t know.

What I think we can know is that there will be fire works. The liquidation of the current positons will be facinating to watch.

I am sure you can count as well as I can, but the commercials are out a TON of money in the EURUSD. There will be capitulation in this market — but I am not so certain the commercials will win, although I hate to bet against the them. I have seen markets in the past when the commercials have built up a massive position and have been wrong. I will try to look for some examples tomorrow if I have the time. When commercials are heavy in one direction and end up wrong, it is an ugly site.

Markets: $EURUSD, $G6E_F, $UUP

 

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EURUSD and the January Effect – An update

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Will the January Effect work in EURUSD in 2012? If so, what’s next?

I have written about the January Effect in the forex markets (see here) — the strong tendency for a season low or high to be made during January from which at least a six month advance or decline will occur.

Initially it looked like the Jan 3 might have been the January high. But that high was exceed yesterday and today. We now have a new January high (so far). The questions are:

  • Will the high today (or by next Tuesday) become the new January, marking the risk point for shorts?
  • Is the Jan 13 low the January low — and we go up from here?
  • Will the January Effect not work in 2012?

I do not have the answers to the questions above. But, the market today looked like an exhaustion day — trading higher and closing back at its opening price. I asked my Tweet community what this pattern is called — and I got back about 6 or so different names.

I normally trade patterns — big patterns (12 weeks or longer) but I also have a few specialty set ups I trade. The January Effect is one. If the cross closes today in the area of the open price I will bet 50 basis points (1/2 of 1% of capital, or $5,000 per $1 million) that the mid Dec high will hold. The worst thing that can happen is that I will be wrong.

Markets: $UUP, $EURUSD

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Silver is a cross dresser!

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 …and other charts I am watching the week of September 12, 2011

One of the goals of this blog is to focus on the purity of price charts without the clutter of any number of indicators. Not a single chart in Schabacker’s manuscripts or in the Edwards and Magee book contains such indicators as RSI, stochastics, MACD, ADX, DMI, Bollinger Bands, oscillators, %R or the like. Yet, who can question the brilliance of their legacy?

All of these indicators are derivatives of price. I take nothing away from traders who make their living using indicators. All the more power to you! Heck, some of my good trader friends use various indicators. But, in my mind, why should I study price derivatives when I can directly study price itself? Am I discouraging novice traders to avoid the use of indicators? No, not at all! But for me, price is king.

The markets and charts I am watching the week of September 12, 2011 include:

  • Silver
  • S&Ps
  • Nasdaq 100
  • Soybean Meal
  • Soybeans
  • Euro Currency (EURUSD)
  • Canadian Dollar
  • U.S. Dollar Index
  • Crude Oil
  • Rough Rice
  • Sugar

It is highly unlikely that I will become involved in any markets besides these. I select my trading list each Saturday for the following week and I attempt to keep the list intact without additions.

So, here we go, folks

Silver

Often times a market will become a cross dresser – putting on bearish clothing one moment and bullish clothing the next. Such is the present case in Silver. Both a bullish and bearish story can be told technically. The bullish pattern is a bull horn, or sloping bottom (solid lines). Note that the final breakout of the horn has stalled in the form of a symmetrical triangle. A move into new highs would complete this triangle and confirm the horn – and establish a target of 52.00.

The bearish narrative is a rising wedge from the June low (dashed line). The same small 4-week triangle is also in play in the bearish scenario. A completion of this triangle in a downward direction should provide the thrust to complete the wedge, establishing a target of 32.50.

I am without a position in this market, but I have the market bracketed with buy stops above and bear stops below.

S&Ps

Like all other of the broad stock indexes, the S&Ps are forming a 5-week flag. I continue to view the H&S top completed in early August as a MAJOR reversal in stocks.

I am short two layers. I will attempt to extend leverage next week on any minor rally. I believe that Friday will become to the upcoming decline what August 1 was to the early August decline. I have given up (for the moment) on the idea of a BOGI gap. Instead, I am labeling the flag as the BOGI flag. I will extend leverage further upon the completion of the BOGI flag.

Nasdaq 100

The Nasdaq is forming a flag as a retest of its massive broadening top. The broadening top is a rare, but potentially powerful chart pattern. According to Schabacker, “In most cases a rally will develop shortly after the level of the fourth reversal has been broken, and in most cases this rally will carry prices about half way back….” The retests of broadening tops are notorious for digging back into the completed pattern.

In fact, the retest rally in the Nasdaq retraced 55% of its July to August decline. I believe this flag will resolve itself in the direction of the broadening top with a flag target of 1899, slightly lower than the target from the broadening top.

I am short one layer, looking to extend short leverage. I think that Friday will be the counterpart to the upcoming decline as July 27 was to the first major leg down.

Soybean Meal

A firm retest of the underlying rectangle took place this last week. The market seems to lack any ability to rally. We will see if this retest holds. A move below the August 22 low negates the rectangle. I am fully committed to the long side. I do not have a very good feeling about this trade, but I am not willing to trump my trading rules to satisfy my feelings.

 

Soybeans

The daily Soybean chart is almost identical to the Meal chart. A break below last week’s low will begin to put the bull trend in Soybeans into doubt. I will buy a retest of this past week’s low with very tight protective stops.

 

Euro Currency (EURUSD)

The decline this past week resolved all of the confusion of the past 4 to 5 months on the daily chart by completing a decisive descending triangle. To label this price action as a descending triangle I am ignoring the one-day spike down in July. It was an event Edwards and Magee define as an out-of-line movement. The descending triangle has a target of the test of the January low in the area of 1.2900. I am short one layer.

Canadian Dollar

Two charts are shown. The upper chart is the weekly CME futures contract. This chart displays a possible double or “M” top, requiring a close below par (1.0000) for completion. The lower chart is the daily graph of the spot USDCAD which trades at a reciprocal value to the futures. Thus, the spot chart shows a possible bottom pattern, requiring a close above 1.0000. I will wait for the completion of this pattern before taking a position.

 

U.S. Dollar Index

The market completed a rare triple bottom on Friday. This bottom is almost identical to the DX bottom in 2008 (not shown). The target of this pattern is 81.50. I am long one layer.

 

Crude Oil

The Crude Oil is setting up for another leg down in a bear market that began in May. As shown on the weekly chart, there is plenty of empty air underneath the market.

The daily chart displays a 5-week rising wedge. Normally this is not a long enough pattern for me to trade, but given the strong downtrend I will short this market if the wedge is completed. The CFTC COT data shows that the commercials continue to be significant sellers of futures. Notice how volume has dried up during all sideways periods. This volume profile confirms the major bear trend.

Rough Rice

The market has now confirmed the completion of the 7-week inverted continuation H&S on the daily chart (top graph), which in turn, confirms the 5-month triangle on the daily graph, which in turn confirms the massive 5-month H&S bottom on the weekly chart (bottom graph). The target is 2280. I am long one layer.

 

Sugar

I want to once again show the quarterly chart. The massive base completed in 2009 is the dominant pattern driving this market. This base has an eventual target of 60 to 70 cents – and this has biased my interpretation of the daily charts for the past two years.

The daily chart (March) is forming a possible 2-month continuation H&S pattern. I have bought this market in anticipation of a right shoulder low. I am not sure this will prove to be a successful trade, but the reward to risk ratio is quite favorable with this maneuver. If the market can hold last week’s low I will attempt to quickly build leverage. The Sugar ETF, SGG, is also shown.

I am basically willing to bet that this current area of consolidation will lead to another leg of this bull trend. If my foundational bias is incorrect I will almost surely be wrong on the majority of my trades in the months to come.

 Markets: $QQQ, $NQ_F, $SPY, $ES_F, $ZM_F, ZS_F, $SB_F, $SGG, $USDCAD, $G6C_F, $FXC, $ZR_F, $EURUSD, $G6E_F, $FXE, $DX_F, $UDN, $UUP, $CL_F, $OIL, $$

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U.S. Dollar bottom almost identical to 2008

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The entire concept of charting is based on the premise that geometric configurations tend to repeat themselves — of course, with slightly different variations.

There is evidence that the U.S. Dollar is bottoming. In fact, the current 4-month bottom in the US$ is almost identical to the 5-month bottom in 2008.

Below find three charts:

  1. The weekly graph, showing the 2008 bottom and the possible bottom at hand.
  2. The daily chart from 2008, showing five points of demarcation.
  3. The daily chart today, showing the same five points.

 

I established a light long position overnight. Time will tell if it was the right thing to do. I am risking about 50 basis points. The ideal buy spot came on September 2, so I am already chasing the market. I hate to chase markets — it usually has a bad outcome. Because I am paying up for my position I have assumed a greatly reduced leverage. By paying up I alter the reward/risk profile in a degenrate manner. Do NOT chase rallies in this market.

Because the U.S. Dollar Index is so heavily weighted to Europe, shorts in EURUSD would be another way to play a bull move in the US$. Also, in the ETF world, short FXE, long UUP or short UDN would be similar plays. The chart of UUP is shown below. Protective stops at 20.84 should hold.

Markets: $DX, $DX_F, $EURUSD, $FXE, $UUP, $UDN

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Why it doesn’t matter if I am right on the U.S. Dollar

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Yesterday morning I posted a perspective that both the U.S. Dollar and the U.S. stock market could tank at the same time. The post, “The US$ and U.S. Stock Market Both Down – How is this Possible?” can be seen here.

I knew I would get reaction. And, of course I did.

My friend and fellow trader, Bob Sinn, contacted me and asked if he could post a rebuttal on his blog, The Stock Sage. Bob’s a class guy for asking. I said, “Go for it.”

Bob and I have had our fun with trading issues before (see here, and here and here). 

Bob presented a logical and well-presented macro-economic case for why both of my scenarios could not be true. Well done, Bob. Actually, Bob is probably correct. It is highly unlikely that both the U.S. stock market and the U.S. Dollar will decline together. And herein lies several tremendous lessons for novice traders. As with the last time Bob and I arm wrestled, I want to use this as a teaching moment.

Here are the lessons:

There are many reasons for different opinions on the same market – and they can all be legitimate

Bob is looking at the stock market and US$ from a macro-economic perspective. Is this a great way to analyze markets? ABSOLUTELY! Some of my good friends are macros. Including Bob. Not only do I hope he is right on direction for the right reasons, but, more than that, I hope he makes a lot of money from his analysis.

I look at markets through as a series of high/low/close bars. I could care less about macro economics and the reasons why markets … have, are, will, should, could, would, must, might … do something. When people respond to my technical thinking with fundamental narrative, well quite frankly, I yawn. Borrrrring! Except for when Bob speaks. When he speaks I start looking for different chart interpretation.

In the end, making money is more important than being right

The markets are for trading, not for understanding. At least that is my own opinion. I want to be on the right side of a move. I could care less what causes the move. And I could care even less if I had accurately predicted what caused the move. Bob’s analysis is profit-driven – he wants to make money on his ideas. I think Bob would agree with me that profits trump prophecy.

Markets can have nasty surprises for those who think they have it all figured out. I love the following quote by John Maynard Keynes.

“Markets can remain irrational a lot longer than you and I can remain solvent.”

How true! Whether our analysis is technical, fundamental, macro-economic, or dart throwing, there is real danger in being too sure of ourselves.

A great trade needs two elements – correct direction and precise timing

Without both, no great trade. Timing is vitally important.

Opinions are not positions and positions are not opinions

I can express a bearish opinion on the U.S. Dollar. That does not necessarily equate to a short position. And, in fact, I am not short. I would go short if the Sept. futures contract moves below 73.00. But not one moment sooner. And even then, if I am wrong, so what! My risk would probably be about 70 basis points. I am not offended by losing trades.

Trading is less about trade analysis and more about risk management

Newcomers to the trading world may think the payoff comes from market analysis. Not so, folks. Sorry to the bearer of bad news. At the end of the day, profitable trading is not about fundamental analysis or technical analysis — but about risk management. I consider myself first and very foremost to be a risk manager, then a trader, then a chartist, then a techician. I use charts because I can fine tune risk. How do I fune tune risk if my focus is on QE3 or interest rate differentials or other such stuff?

The U.S. Dollar – A bullish chart interpretation

I gave a bearish chart interpretation in my last post on the subject. And, quite frankly, I think for now that is the best interpretation. But, it is not the only interpretation possible. While not an ideal labeling, it is possible to interpret the US$ as constructing a 4-month symmetrical triangle bottom on the closing price chart. [It is not ideal because the third low point is lower than the second low point.] And if this is the correct interpretation, I hope I can find good timing for a low risk trade on the long side. 

I would love to make money on Bob’s analysis.

Comment on the U.S. stock market

No comment. I will let the market speak for me. However, the Nasdaq could rally swiftly, back to 2165, and still be in a sharp down trend.

Markets: $DX, $UUP, $DX_F, $SPY, $DIA, $QQQ

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The US$ and U.S. Stock Market Both Down — How is this Possible?

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In recent weeks I have expressed an extremely bearish technical perspective on the U.S. stock market. Then yesterday I posted a possible bearish interpretation on the U.S. Dollar.

Apparently I stepped into something brown and sticky. I have received comments that the U.S. stock market and the U.S. Dollar have a strong inverse correlation — thus how can a bear case be made for both at the same time?

Yesterday my good friend, a fellow blogger and an excellent technician, Bob Sinn (http://bit.ly/nE7mVm or www.robertsinn.com) thought the subject could make interesting fodder. I agree. Bob and I have very constructively gone back and forth on various trading subjects in the past. I think we both (and our readers) gain from such dialog.

How can stocks and the greenback both go down? Here is my thoughts on the subject. I am looking forward to Bob’s response.

1. The idea that the two markets are polar opposites is current conventional wisdom. I don’t trust conventional wisdom.

2. I believe all markets must be traded on the merits of their own charts. I am not able to place an order for the U.S. Dollar in the S&P pit. I trade price and price alone. All  the time I hear how one market cannot do such and such because another market is doing such and such.

3. High inverse (or positive) correlations between two different markets do not last forever. The chart below stacks the U.S. Dollar ($DX_F, $DX) and $SPY charts. Note periods when both markets advanced (A), when the US$ dropped, but $SPY ended up going sideways (C) and when $SPY advanced, but US$ chopped sideways (B).

The next chart is $SPY expressed in terms of the U.S. Dollar Index price ($SPY divided by $DX). In the past 13 years $SPY has ranged from two times the price of $DX to 80 percent of the price of $DX. This is not high correlation in my mind.

4.  The marketplace finds all kinds of reasons why two markets must go in different directions. And for long periods of time the inverse correlation may exist. But my experience is that when a certain correlation ends, it ends big time. And most often, the reasons for the change do not become known for a long period of time. Macro economics create strange forces. I think it is a mistake to project current understandings forever into the future.

Bob, your turn.

Markets: $SPY, $DX, $DX_F, $ES_F, $$, $UUP

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Bottom in U.S. Dollar Identical to 2008

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Now, as in then, a bottom may be launched from a bear trap

The chart structure of the daily U.S. Dollar chart ($DX_F, $UUP, $$) is nearly identical today as it was at the bottom in 2008.

In 2008, the bottom formed when a downside breakout of a flag sprung a bear trap. Study the structure of the 2008 carefully. The sentiment of the U.S. Dollar was extremely bearish then.

 

Tell me something bearish about the US$ today that I do not already know — and have not already heard from a thousand voices. Conventional wisdom is overwhelmingly bearish today. Conventional wisdom is usually wrong. Next look at the structure of the U.S. Dollar today. Same flag. Same downside breakout. Same bear trap??? Same advance to 90? Time will tell. Will history repeat itself?

Markets: $UUP, $DX_F, $$