Download 5th of February 2017 A Trading Shift: Back To Basics Last week was

5th of February 2017
A Trading Shift: Back To Basics
Last week was very busy in terms of economic publications, European supply and
Central banks’ meetings. Did it bring any much needed clarifications? The answer is
NOT REALLY. Everything looks toxic to me and we might be at some kind of turning
point.
The purpose of The Weekly was to show that the main driver will still be the US$,
torn up between bullish Fundamentals and bearish political and official rhetoric.
My point is the following: January has been a volatile month in some asset classes
(FX and FI), much calmer in risk and stock markets. Where are we heading to?
Difficult to assess.
BUT I have a strong conviction: focusing on the short-term, intraday price action
could have been counter-productive in the current environment. I made January
trading more difficult than it should have been.
What is the real purpose of a research like the one proposed by Resurgam? Take
some distance and isolate the best risk-reward trades and also the major trends.
We are in a trading environment made of sharp and quick reversals. Faster and
short-lived trends. Various quantitative and qualitative metrics indicate that
markets react faster to the new information. Look at the following graphs showing
the reaction time for recent major events (August ’15 selloff, Brexit, US Election,
Italy Referendum) that has compressed from weeks to hours.
Quantitatively, we can notice a higher density of market turning points. The
average variability of asset trends (averaged across major asset classes) shows
turning points occurring at the fastest pace in recent history (over the last 30
years). Additionally, information is created and consumed at a much faster pace
than even few months ago (think of twitter). An emerging class of fully automated
quant strategies/algos is also speeding up the market reaction – these strategies
process and trade on new information (e.g. feeds from tweets, press releases, etc.)
in real time. Increased popularity of trend following strategies is also contributing
to trigger shorter and faster trends, as strategies react quicker and lead to potential
over/undershooting of fundamentally justified levels.
This makes the short-term trading very risky and tricky.
January has been all over the place but few high risk-reward trades took place.
Which started on KEY technical levels.
Just few examples – My point is NOT to do backwards trading BUT to highlight
what I will re-focus on: away from the noisy intraday trading and focus on these
trades:
1. Usdjpy:
2. Silver:
Although this break-out doesn't necessarily mean silver will surge to new
highs, the behaviour of participants has clearly changed. This can be seen
with a Demark indicator I use to show buyer and seller exhaustion. Buyer
exhaustion is shown in red (it is a signal to short), and seller exhaustion in
green (a signal to cover shorts or go long).
Throughout the second half of last year, the buyers exhausted quickly and
every sell signal worked. In contrast, the first signal this year led to a measly
one-day pullback (circled) and buyers managed to get to a second signal
before exhaustion (shown by the arrows). Even then, the pullback was very
small and only acted as a spring board for the breakout.
This is just one way of showing that buyers are much more aggressive. The
market has changed, and the high probability bet is to now buy the dips.
Where?? I think a first good level could be around 17.00/16.90, 50DMA:
Fractal: I compared the current price action with 2011:
The point here is not to try and match the current action and expect the
same to happen, but to get a better understanding of how silver acts. In
both examples above, there is a parabolic phase to the rally. This may be of
use in future: the current rally has not had a parabolic phase, yet. So we
might have a small pullback which should be used to go long.
Conclusion:
Silver has broken the downtrend, and the behaviour of participants has
changed. Sell signals will not work in this market and the high probability
set-ups are now on the long side.
3. Audnzd: 2 big trades so far this year:
On these 2 currencies: big week with both the RBA and the RBNZ meetings. See the
Position Review for full analysis.
And more generally on the Oz$:
4. Of course, some intraday trades may also arise when all the stars are
aligning (like the Buxl on Thursday morning).
Conclusion:
1. In tricky trading environment, the best solution is to keep it simple!
2. The Week ahead of us will be poor in terms of publications. The main event
will be the 2 Australasian Central Banks, the US Supply (see the Positions
review). And of course any news coming from Washington DC.
More generally, I will watch closely market developments and allocate risk
accordingly. As I said before, we might be at some kind of turning point.
What I also know is that I have for almost each single asset class a long list of
PROs and CONs and sometimes the best trading is to watch and get the
timing right. Because a great idea with a wrong timing ends up in a wrong
trade.
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