Identifying Market Swings - Medium and Long Term Trading

Gentlemen and ladies,

Please allow me to rant a bit, I need to get my thoughts clarified and organized.

This is my plan for getting in on the next major long term trend.

We're now seeing the end of the 1st leg of the long term uptrend that started in March '09 and continued until Oct/Nov '09. I believe that the markets are in a correction of the 1st leg and I am anticipating a swing back to the upside to continue the 2nd leg of the long term uptrend.

However before the swing back to the upside, I believe several developments need to occur before investors will push prices back up again.

First I believe that clarity will be needed regarding changes China's fiscal and monetary policy. Investors will probably need to see that these changes will not impact economic growth.

Second I believe that we're going to need to see further evidence of recovery in the US accelerating. Japan, Europe, UK and China all need a stronger USD to help their economies. Right now, USD is on the border of "acceptability", if we see a weaker USD (i.e. USDJPY below 90), then there may be indications of central bank intervention at the next G7/8 to strengthen the USD.

In the case of central bank intervention, this will help the economies of Europe, China and Japan, but it could dampen economic inflation in the US and thus delay interest rate hikes by the Fed. Then we can expect the carry trade into commodities and commodity based economies (AUD, NZD, CAD, etc) to continue to be financed by the USD.

If there is no central bank intervention at the next G7/8, then it's because economic leaders are anticipating an accelerating recovery in the US and thus interest rate hikes by the Fed. In this case we should look for a shift in carry trade funding from the USD to JPY.

So what does this all mean?

Let me see if I can summarize all this to clarify my strategy.

The 2 economies that will have the greatest impact on the 2nd leg of the long term uptrend are US and China.

If we see USD strength, then I'm looking to short JPY throughout the 2nd leg. If we see USD weakness then we could see central bank intervention, with a quick burst of USD strength, but it will delay the recovery in the US.

Having said this, I believe the mostly likely scenario (and the favored scenario by global central banks) is US recovery accelerating, no central bank intervention and indications of interest rate hikes by the Fed in 2010.

At the same time, I'll be monitoring the situation in China. China can be seen as the "engine" behind the global economic recovery.

This means that once things have calmed down regarding China's fiscal and monetary policies, I am anticipating a swing to the upside once this current correction is finished. I will be looking for a swing to the upside if AUDUSD hits 0.87 and USDCAD hits 1.0850 within the next 2 months.

Whether the strongest trends for the 2nd leg of the long term uptrend will be in the USD pairs or JPY crosses will depend on the US recovery in the upcoming weeks.

BTW, this is not a recommendation for anyone to take trades based on what I wrote. This is mostly for me to clarify my thoughts so I can verify the robustness of my strategy.

P.S. Does anyone else see the MASSIVE opportunity in China's credit fueled expansion could bring in the next few years?

Hi Razor, which economic news websites do you recommend?

Hi Porkpie,

If you already understand fundamentals, then you should start looking at news sites. If you don't understand fundamentals just yet, then learn it first before looking at news sites otherwise you'll have so much information to filter through that you won't understand what is crap and what is useful vital information.

I would first recommend that you start reading books by Victor Sperandeo, he gives fantastic explanations of how economies work and an in depth explanation of how the Fed works. Once you understand how the Fed works, then you'll understand how every central bank works

Next find a book called Currency Trading and Intermarket Analysis, this will help you tie together the global economy and how it's impacted by oil, commodities, bonds, carry trades, etc.

Then do a study of how the different economies react in conditions of risk aversion and risk appetite. For instance how does the US economy react during risk aversion and risk appetite. Then look at Japan, then Europe, UK, Australia, New Zeeland, etc.

You'll see similarities and differences and this will help you foresee economic changes and their impacts in advance.

After doing this, then you should start to look at different news websites. Studying the above will help you filter through all of the bullsh*t.

As to the websites I look at:

1. Bloomberg, CNBC, and Reuters for news
2. fx360 for Kathy Lien's comments
3. CME for Fed Funds Rate - provides market sentiment for Fed rate hikes
4. I also look at the VIX and Bond Spreads once every 2-4 weeks to monitor economic "health".

Hope this helps.

Here are some recent developments:

1. Bank of China has said that they will keep an "appropriately lose" monetary policy, while it is tightening credit. If this holds true, we could see a move towards risk appetite.

2. Japan just approved a budget increase of over 1 trillion JPY to stimulate the economy. This could mean weakening of the JPY should the markets move towards risk appetite.

From my previous posts, this was part of the news I was looking for.

I am now looking to start building my long term positions. However I'm still going to keep an eye on China and the fallout of it's credit tightening.

The last piece of the puzzle will be the US economy. If we start to see good numbers in eco data, then I will look to increase the size of my positions.

Basically if the China monetary policy holds and we start to see better numbers in the US, then I believe we COULD start to see the beginning of a long term uptrend in the JPY crosses.

However, I believe the move upwards won't accelerate and really take off until we see AUDUSD, NZDUSD, USDCAD complete their corrections.

If there are no other major shocks to the global markets like sovereign debts, I believe that the JPY crosses are now only waiting for the US economic numbers to confirm a rate hike this year. So keep a close watch over the inflation and employment numbers.

Also remember that this turn around will take several days to weeks, and trading the long term market swings takes an entirely different approach then intraday trading. Building long term positions should be done over several days to weeks and on occasion even small losses can occur. But playing it right can keep you on the right side of the market for months to years and more than make up for any losses.

Again, I don't recommend anyone take trades based on what I wrote, you will only end up losing if you don't know what you're doing.

Hi Razorjack

Firstly I would like to comment on an excellent thread you have going here, it's good to see someone using the fundamentals especially as it appears that the technical s seem much more apparent, well around here anyway.

I personally don't use fundamental analysis but feel my trading is similar in that I also attempt to capture the major swings.

The one subject I want to touch on is George Soros and this was a major aha moment for me and that was when he was interviewed buy swagger in market wizards he talks about testing the waters.

Now my interpretation of this was as he is anticipating a reversal or trend change, the same as you do through your Fundamental analysis and I with my technicals and it is anticipation as anticipation is what this game is all about in a nutshell.

Anyway he is anticipating a reversal and thus tests the waters with an order or parcel of orders in his case and waits for the market to prove him right or wrong.Now if he is stopped out his timing was out a bit but if he is still firm with his analysis he will then look for another entry to test the waters again.

When this opportunity presents itself he will enter again and again wait for the market to confirm or deny his thinking. If at this time the market then goes his way and confirms this new direction he will then look for further opportunities to add to this position and again await the markets approval as such by waiting to see if he is stopped out or not.

While he is still firm with this analysis he will keep doing this and thus constantly building position size and profits accordingly.

This is how you make money in the markets.

You can be wrong many many times but when you are right be really really right.

I just wanted to share my view as I see many similarities in our trading even though we take an entirely different approach and I do admire Soros as he is one of the greats. This is the beauty of trading there are many ways to make money in the markets but you only need one.

Keep up the good work and will be following your thread closely.

Cheers

Perry

What do you mean by long term and what reasons do you have for the long term bias?

Also, what sectors will be the driving force behind this growth?

What about inflation? Isn't that the only way US will be able to deal with its debts? Do you have any worries of hyperinflation?

What about inevitable rising energy inputs?

Great thread man, I love it!

Hi Bluehills,

Welcome to the thread.

What do you mean by long term and what reasons do you have for the long term bias?

Long Term to me means where you hold your positions from several weeks to several months, possibly even years. Take a look at a monthly chart, I basically look to trade the swings that you see.

In an effort to avoid repeating myself, please read post #41 and #44 in this thread. If after reading it, you still don't understand my reasoning please point out the specific parts you don't understand and I'll try to explain it in more detail.

Instead of just having me give my opinions to your questions. Why don't you write down yours answers and opinions, so we can have a discussion around it.

I don't see how the US economy can continue to grow while burdened by so much debt. If I owe tens of thousands of dollars then I am going to have to change something about my life (better job, start saving to repay debt). What is the US going to change to deal with its debt? Print more money? Inflation?

I flat out do not believe in this recovery. Our government and it's costs are just too big. To deal with it's debt it has to print more money which destroys the economy as consumer prices rise and rise. Where are new jobs going to come from? I do not believe in this rally in equities. It's speculation driven by cheap money.

Ofcourse I'm talking about the US economy but they are all much one of the same these days. Atleast to a certain degree.

What is you opinion on these problems?

Mmmk I see that you mean weeks to months to possibly years as long term. I consider weeks to months to a year to be medium term where 2-10 years as long term.

For the medium term, cheap money will inflate US economy. So yeah, I agree with you weeks to a year.

I don't see how the US economy can continue to grow while burdened by so much debt. If I owe tens of thousands of dollars then I am going to have to change something about my life (better job, start saving to repay debt). What is the US going to change to deal with its debt? Print more money? Inflation?

The deficit is a major obstacle, however the deficit is still manageable in my opinion. If we don't start to see any reform for addressing the deficit from the US gov't within this business cycle (up trend) before the next bear market, then there is real cause for concern and it will be even more difficult to recover from a bear market.

I believe that Japan is in actually much worse shape than the US, with a deficit of nearly 200% GDP and growing.

I flat out do not believe in this recovery. Our government and it's costs are just too big. To deal with it's debt it has to print more money which destroys the economy as consumer prices rise and rise. Where are new jobs going to come from? I do not believe in this rally in equities. It's speculation driven by cheap money.

You may be right, maybe it won't be a lasting recovery. In which case, we'll see a pretty spectacular crash in a few years.

Speculation driven? Maybe with some companies, but then at the same time there are companies making good profits, i.e Goldman Sachs, Apple, etc.

But I completely agree, the debt burden is a heavy ball and chain.

Ofcourse I'm talking about the US economy but they are all much one of the same these days. Atleast to a certain degree.

I agree to the extent that most of the economies around the world use the same Keynesian style of central banks and gov'ts intervening and trying to "control" the economy via credit expansions and interest rates.

This in my opinion is the main cause behind the boom and bust cycle. This of course does gives us markets to make profit from.

However as far as long term sustainable growth, I don't believe the current systems take into account the human factor. Namely that when you have economic stimulation by means of a credit expansion, the idea is to invest now but that investment needs to pay off to cover the cost of credit. Unfortunately the human factor tends to make everyone think that easy, cheap money is available to everyone and there tends to be a lot of reckless spending that can never be recovered when it comes time to reign in credit.

Then when it comes time to pay the piper, we all know what happens.

Actually, I agree with you that medium term is weeks to months and long term is months to years.

What I meant, was that long term in how I refer to MY way of trading is from weeks to years, hence it covers both the medium term and long term, as it is stated in the title of this thread.

So we are in agreement. Apologies for being unclear about that.

Well, it looks like I'll have to wait a bit longer for the JPY crosses to turn.

Over the long term (months to years) I am still bullish. In the medium term (weeks to months), there's quite a bit of risk aversion:

1. China tightening credit availability and it's monetary policy
2. Japan debt outlook downgraded to negative

It looks like there will be some more effects of China's monetary tightening.

But then it also presents another opportunity.

If the USD continues to weaken against the JPY in current risk aversion, then the JP economy will start to feel more pain. In the last week of Nov '09 during the Dubai debt crisis, the JP gov't was in an uproar when USDJPY hit 85. And the JP Finance Minister was hinting at possible central bank intervention.

My understanding is that 90 is the MINIMUM USDJPY level that the JP economy can tolerate, how much further below 90 prices can go, will depend on the fallout of China's monetary tightening.

So if there is a much greater fallout than what we've seen so far, then Japan may push for a global coordinated central bank intervention at the next G7/8 and it's quite likely that this will be supported by China, the EuroZone, UK and others.

If this happens, you don't want to get caught on the wrong side. I'll be looking to stay long on the USD during the G7/8, just in case.

Just goes to show how much patience is needed especially when you believe there is a long term uptrend but the markets are in a medium term downtrend and you're waiting for the market to swing back in alignment with the long term.

Here's a chart from finviz for the last year against the USD. Looks like AUDUSD is the trade with the most downside.

to me it looks like AUDUSD is the trade with the biggest advantage
who says giving back all the gains from 09 is where price should be?

Exactly!

The AUDUSD has been the strongest performer of the major currencies.

Here's a guideline I use when looking for downside "potential":

The strongest performers will not drop a whole lot due to strong fundamentals, unless of course the fundamentals change.

The lowest performing instruments don't have very far to fall, because they never really took off.

So the best pairs to ride to the downside are the medium performing pairs like EUR or GBP.

Please see my reply to silverheat.

Hey razor. I know you suggested some books by Kathy lien an victor sp..... But I was wondering if there were any books out there that were geared towarda beginners in fund. Analysis. I think I am a pretty good tech. Analyzer and am now ready to add the fundies to my arsenal. I want to be a medium term to position trader so being able to learn fundies would be great.

Hi dre,

Try this website. They have plenty of tutorial videos and are geared towards the beginner.

http://www.learningmarkets.com

" The lowest performing instruments don't have very far to fall, because they never really took off. So the best pairs to ride to the downside are the medium performing pairs like EUR or GBP. "

the above is a gd idea ...

btw,

1. how you measure risk aversion if any ?

2. is it mkt is waiting for gd news to push up aud/usd, eur/usd, etc ?

3. are you using mkt action to news to time your enter and exit ?

gd day

Good questions!

1. how you measure risk aversion if any ?

This is always done on a case by case basis. And this is where fundamentals and a study of history will help.

You have to look at what has been driving risk appetite and once this changes then you have risk aversion. For instance, China's economic expansion has been driving the global recovery and this expansion has been driving the demand in commodities in particular. So now that China is taking measures towards tightening credit and monetary and fiscal policies, this impacts the "engine" behind the uptrend we saw from March - Nov '09.

That is why we are seeing the long term correction. Once prices are low enough to warrant investors to take risks, we'll see risk appetite back in the markets again.

I believe the engine behind the 2nd leg, we'll be different from the 1st leg. It won't be just China, but will probably include the US as well as European economy.

2. is it mkt is waiting for gd news to push up aud/usd, eur/usd, etc ?

If depends on what you mean by good news. If you mean good numbers on the economic calendar, then no, it will take more than this before the markets turn upwards again in the long term.

Remember that the economic calendar only shows the SHORT TERM fundamentals.

Instead I believe it will happen when things have settled down after the fallout of China's monetary tightening. And prices need to fall low enough for investors to feel that risk is warranted.

3. are you using mkt action to news to time your enter and exit ?

Yes, that's part of it. I still use technical analysis to time entries and exits, but I look at the fundamentals (and thus the news) to tell me which instrument to invest in and WHEN I should look to the technicals to enter, add on, or exit positions.

For instance, fundamentals guide as to where the big trends will be and roughly when they would start / correct / end. Once I get the fundamental signal then I look for a technical set up.

Then there are occasions where the markets are waiting for a particular news item to show directions. For instance NFP is big because employment is seen to be very important to the US recovery. So on these occasions, I will plan for the different reactions from economic data releases.

Hope this made sense