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Identifying Market Swings - Medium and Long Term Trading

  • #361
  • Feb 24, 2010 8:33pm Feb 24, 2010 8:33pm
If U.S dollar will be bought ( in line with rise in % rate)...and/or JPY sold...then we would see the U.S equities FALL in price...as risk is averted and U.S dollars are bought. (equities sold??)


currently, we are still in the bull run stage but at the correction phase.

USD will be bought and JPY will be sold
but
AUD will be bought and USD will be sold
if you trade ccy pair

i think the slight appreciation of US will make export from US less competitive and earning may go down a bit but it only has minor impact to the US equity. if the world economy is doing well, non-US companies will buy much more volume of goods from US companies, which may negate the effect of higher price and overall earning of US companies may go up.
thus, US equity will go up .

usually , i think in terms of flow of funds
which is related to the

1. carry trade

2. risk appetitie / aversion

3. i cannot remember the others ; i need reader to fill it up
  • #362
  • Feb 24, 2010 9:03pm Feb 24, 2010 9:03pm
I read that the Fed's TALF (Term Asset-Backed Securities Loan Facility) program is expiring soon (next week?) and will soak up $1.5 trillion from the system.

See, the Fed doesn't always need to raise rates to tighten money supply. Hey presto....
  • #363
  • Edited 7:43am Feb 25, 2010 1:27am | Edited 7:43am
Quoting Stock_Rocket
As well then.....would you yourself (with your method of trading) consider this area of 1.02-1.07 more or less..the first pullback (im looking at a 10 yr weekly) in this pair.....since its biz cycle completed?

And if so....wow....is it fair to say that the phase of "markup" (late 08) is truly ridiculous with respect to its profitability...and in turn so vital (as per your thread and instruction) to be there BEFORE this takes place?

If confirmed...I as well as all others here on FF who trade the long time frames will again....greatly appreciate...
I think you're missing a major portion of the picture. What you are looking at from Oct 2007 - March 2009 is the LONG TERM RISK AVERSION caused by the financial crisis.

You forgot that we are in LONG TERM RISK APPETITE and medium term risk aversion. Which way does USDCAD move during risk appetite and which way does it move during risk aversion?

The long term trend in USDCAD already started in March 2009. We have already seen the end of the first leg and are now in the pullback. What you can do is get in on is the second leg and hold on until the end.

The area of the chart you should be looking at is from Feb 2002 to Oct 2007, we are trying to catch a similar long term trend.
-Razorjack
  • #364
  • Feb 25, 2010 1:30am Feb 25, 2010 1:30am
Quoting Stock_Rocket
Razor,

I had suggested usd/cad as the pair in accumulation.

Now looking at usd/jpy I clearly see where (you consider) we are at.

A question...and I hope additional learning for all.

If we look at the low in usd/cad in nov 2007 at .9055..and in turn consider a full business cycle has come and gone (ie accumulation -looks exactly like current chart pattern in usd/jpy NOW, markup, distribution and markdown) to see us presently at a price, that is more or less the "breakout" price back in late nov 07

Could one look at this as a...
Unfortunately you can't compare USDJPY and USDCAD, they're driven by different fundamentals.

See my previous post, you missed the part about what what kind of market we are currently in the medium term and the kind of market in the long term.
-Razorjack
  • #365
  • Edited 7:47am Feb 25, 2010 1:55am | Edited 7:47am
Quoting Stock_Rocket
from your original post:

for those that have done their homework, the USD has turned around after hitting bottom and is starting to reverse the down trend.

So what does this mean for traders?

To get an idea of what this means, look at AUDUSD, NZDUSD or USDCAD daily charts from March / April 09 to Nov 09. We're seeing the end of the 1st leg of the bull run. Now when the carry trade funding currency shifts then we'll see the next leg of the bull run move the JPY crosses more than any other pairs.

The next leg...
The next leg of the bull run in what?...U.S equities?..commodities?

The global economy, i.e. risk appetite, so it's basically every market that goes up during risk appetite.

We get the "selling of JPY" in Carry trade "if/when" U.S raises rates ( which many believe may not happen til mid 2011...including GS)

You forgot about the part where I wrote that we won't need to wait for the Fed to actually hike rates, the market will factor rate hikes into prices much much sooner when the market ANTICIPATES a rate hike. Also the biggest move will come, if the Fed surprises the markets with a rate hike EARLIER than expected. Combine these 2 factors and there is a very good chance that we will see the USDJPY take off this year, EVEN if the rate hike doesn't happen until 2011.

What Im missing ....is the usual co relation of stocks/bonds/commod/equities...would have it that........

Have you read the Intermarket Analysis book recommended in this thread?

If U.S dollar will be bought ( in line with rise in % rate)...and/or JPY sold...then we would see the U.S equities FALL in price...as risk is averted and U.S dollars are bought. (equities sold??)

Not quite. Markets don't move in a black and white, cut and dry way like you are describing.

It's all about balance. As an economy expands, interest rates will need to rise to keep it from overheating, strengthening the currency, but interest rates are low enough to continue expansion but SLOWER expansion. As the market continues to expand, there will be more rate hikes, etc. Until interest rates are too high to sustain economic expansion.

As the USD strengthens you will see a SLOWDOWN in the rise of the equities. It's not until interest rates get so high and the USD so strong that the US economy can no longer sustain expansion that we will see a decline in the equities. Remember that we are focused on the long term, not on just one interest rate hike.

SO.....in the face of the attached chart....and the endless print of U.S dollars...you feel strongly that we are seriously on the cusp of the full on turn around of the U.S dollar as seen (secular bear) for the past ten years?

First of all the Fed started to soak up excess liquidity, endless print of USD that you are referring to.

And what I meant is that we've seen the USD bottom from being used to finance the carry trade when you compare it to the other carry trade funding currency, JPY. Had the US interest rates been 25 basis points higher in March 2009, we would not have seen the dramatic weakening in USD against JPY from March - Nov 2009.

As for the long term decline in the USD index, you can thank George W. Bush's economic policies for that. Whether we'll see a reversal depends on whether the US gov't now decides to reduce gov't spending and reign in the massive deficits. If that happens then we can expect the USD index to strengthen for quite some time.

Because the USD Index weighs the USD against a basket of currencies, where a major portion of the basket is EUR, another argument in favor of the USD uptrend is the weakness in the Euro and all the trouble the EuroZone is having.

and in turn....double dip/re test of March lows in U.S equities?

No, I expect equities to undergo a correction in the medium term and continue upwards in the long term.

in that any rise of the U.S dollar... of any magnitude to truly change its downward direction over the long term...would it not be indicitive of lower prices in equities?

You have to stop looking at the markets in a black and white fashion, i.e. a strengthening USD means depreciation in equities, there a many many colors that shift over time.

For instance, what if the ONLY country doing well was the US but interest rates in the US were still low enough to fuel economic expansion. Then what would you have?

That's right, a strengthening USD AND appreciation in equities!
-Razorjack
  • #366
  • Feb 25, 2010 2:03am Feb 25, 2010 2:03am
Quoting TGpop
long audjpy on this pullback
What makes you think it's a pullback?

I think this is a very risky trade. We've been talking about risk aversion in the medium term for several weeks.
-Razorjack
  • #367
  • Feb 25, 2010 2:15am Feb 25, 2010 2:15am
Quoting TheRas
I have been thinking about bigger picture aspects to FX trading recently....
What you're missing is the difference in deficits between the US and JP. Because the US is a consumption based economy, gov't debts are financed from other countries. Where as JP as an export country finances it debts INTERNALLY.

If you need more explanation around this, I suggest looking at the Intermarket Analysis book, it's a bit too complicated to explain in a post.

Deficits are reduced not by financing from abroad (more debts) but from cutting gov't spending, raising taxes, etc. This means:

Weaker JPY -> rise in exports -> higher corporate profits -> higher corporate and income tax revenues -> deficit reduction
-Razorjack
  • #368
  • Edited 2:49am Feb 25, 2010 2:25am | Edited 2:49am
Quoting peter lee
If U.S dollar will be bought ( in line with rise in % rate)...and/or JPY sold...then we would see the U.S equities FALL in price...as risk is averted and U.S dollars are bought. (equities sold??)


currently, we are still in the bull run stage but at the correction phase.

USD will be bought and JPY will be sold
but
AUD will be bought and USD will be sold
if you trade ccy pair

i think the slight appreciation of US will make...
Well done Peter!

You're picking things up very quickly!

For the last part, I found it easier to think like this:

1. Global economy in risk appetite or risk aversion:

a. If in risk aversion than invest in "safer" assets

b. If in risk appetite go to 2

2. Do the current conditions in risk appetite favor the carry trade or equities?
3. If the carry trade, which is the best pair for this?

etc......
-Razorjack
  • #369
  • Feb 25, 2010 2:28am Feb 25, 2010 2:28am
Quoting hohgch
I read that the Fed's TALF (Term Asset-Backed Securities Loan Facility) program is expiring soon (next week?) and will soak up $1.5 trillion from the system.

See, the Fed doesn't always need to raise rates to tighten money supply. Hey presto....
Yes, it all started with the hike in discount rate last week. Further tightening of the money supply will push the USD higher.
-Razorjack
  • #370
  • Feb 25, 2010 2:42am Feb 25, 2010 2:42am
Razorjack's explanation is the still best.


thank you.
  • #371
  • Edited 6:42am Feb 25, 2010 6:41am | Edited 6:42am
Hi Razor

The thread is turning out to be something. I really enjoy the questions you post. If you can keep them it would be greatly appreciated. I managed to finish the Intermarket Analysis book by Laidi. Definitely a great recommendations there. Alot of things have started to make sense. Theres alot of questions ive got instore but wont ask them all at once.

1) Do you mind me askin at what prices are you starting to accumulate USD/JPY? I'm thinking of accumulating a soon. If it drops further tonight. I may opt to pick up a few small lots. Do you see USD/JPY dropping below 85?

2) With your fundamental analysis are you currently also analysing other mid term risk aversion events that could possibly take place? Theres been some talks on the side about china overheating with a real estate bubble. Any views there?

thanks razor!
  • #372
  • Feb 25, 2010 7:59am Feb 25, 2010 7:59am
Quoting Sydney-sider
Hi Razor

The thread is turning out to be something. I really enjoy the questions you post. If you can keep them it would be greatly appreciated. I managed to finish the Intermarket Analysis book by Laidi. Definitely a great recommendations there. Alot of things have started to make sense. Theres alot of questions ive got instore but wont ask them all at once.

1) Do you mind me askin at what prices are you starting to accumulate USD/JPY? I'm thinking of accumulating a soon. If it drops further tonight. I may opt to pick up a few small lots....
1) Do you mind me askin at what prices are you starting to accumulate USD/JPY? I'm thinking of accumulating a soon. If it drops further tonight. I may opt to pick up a few small lots. Do you see USD/JPY dropping below 85?

I am looking to slowly accumulate around 87-88 area, but I won't put on the major portion of the position until I can see clear evidence that risk appetite is starting to come back into the markets.

As for USDJPY dropping below 85 ..... I don't think it will, but this is purely a guess on my part, I have nothing to back this up.

The real question is how much of a fallout will we see from the Euro debt crisis, China's monetary tightening, unwinding of monetary stimulus around the globe, etc?

This will decide how low USDJPY goes.

2) With your fundamental analysis are you currently also analysing other mid term risk aversion events that could possibly take place? Theres been some talks on the side about china overheating with a real estate bubble. Any views there?

I thought I mentioned this earlier in the thread. China's real estate market overheating is one of the reasons why China is tightening credit. I believe that we will see further measures by China's central bank soon.

I don't expect the real estate bubble to burst just yet. If the bubble persists, it will burst several years down the line when interest rates are so high that corporate revenues are no longer enough to pay back the increasing cost of loans. That will be the time to look for Long Term Risk Aversion.
-Razorjack
  • #373
  • Feb 25, 2010 8:10am Feb 25, 2010 8:10am
Razorjack,

When you start to build your position, what % of account do you enter the market with? What % of account do you eventually build up to?

Thanks.
  • #374
  • Feb 25, 2010 8:55am Feb 25, 2010 8:55am
Thanks again Razor - for all the insight on a number of levels.

I will be trading in my 'black an white' for a new and improved 'technicolor' view!

side note...I popped out of cad/jpy at 84.77 last night...(in at 87.50)..a lil shy of the trendline...but a good trade regardless.

Big picture thinking sure makes it easier to sleep at night - with confidence, that our decisions are well rooted in the fundamentals.

Med term risk aversion in full swing here today - great thread...great learning.
  • #375
  • Feb 25, 2010 9:01am Feb 25, 2010 9:01am
Quoting Bluehills
Razorjack,

When you start to build your position, what % of account do you enter the market with? What % of account do you eventually build up to?

Thanks.
This really depends on the volatility of the currency pair and where I need to put my stops. If the stop is very close, then I'll risk a bit more, but if the stop is further away, I'll risk a bit less.

My initial positions are basically bait that I throw out and they sometimes get taken out, so I don't risk more than 0.5 - 1%.

Once I see that the initial position holding then I'll increase the risk in each additional order. The amount that I risk here depends on the odds of the trade going my way. If the odds are lined up in my favor I'll risk a little more, if there are some uncertainties then I'll risk a little less.

The final position size varies because I am continuously adding to the position on dips and rallies as the trend progresses. So I really can't answer this question, because the final amount depends on how the trend developed.

This part of the trading has to be unique to each trader and this is what works for me.

There's no way around it, you have to do this yourself to see what your risk tolerances are and that your emotions can handle the drawdown.
-Razorjack
  • #376
  • Feb 25, 2010 10:21am Feb 25, 2010 10:21am
stopped out on audjpy, on demo :/
  • #377
  • Feb 25, 2010 10:40am Feb 25, 2010 10:40am
Quoting Stock_Rocket
Thanks again Razor - for all the insight on a number of levels.

I will be trading in my 'black an white' for a new and improved 'technicolor' view!

side note...I popped out of cad/jpy at 84.77 last night...(in at 87.50)..a lil shy of the trendline...but a good trade regardless.

Big picture thinking sure makes it easier to sleep at night - with confidence, that our decisions are well rooted in the fundamentals.

Med term risk aversion in full swing here today - great thread...great learning.
It's much easier when you can see things in color!

I think you jumped out of the CADJPY trade a bit early, but still you managed nearly 300 pips ..... not bad.

The challenge you'll have going forward is hanging on to the winning trades and riding them until the end. It's difficult but with a bit of practice it can be done and the profits are definitely worth the effort.
-Razorjack
  • #378
  • Feb 25, 2010 10:45am Feb 25, 2010 10:45am
Hi Razor,

With fundies being king all said and done...I (and likely all reading) agree with projections of U.S % raise before Japan...and the longer term opportunities therein.

Looking at both trendline support (diagonal) as well as all important horizontal price levels (Fibs for most).

Ive got mine drawn from a 1 yr weekly with the high in April around 101.50 and low late Nov at 84.73.



What creedence/concern for your entires and position building do you put on these "technicals"?....broken trend diagonal...yet seemingly firm level of support horizontally?

A time of continued platience?...and possible indication of lower prices (broken trendline) and better spots to build from?

Or...solid respect for the horizontal price support (around 88.6943) and consideration that this may well be, as low as she currently goes?

I guess - a combination of the fundies driving decision making...but as well firm grasp/abilities to decode the near term technicals to achieve best buys.

go man go....
  • #379
  • Feb 25, 2010 10:47am Feb 25, 2010 10:47am
Quoting TGpop
stopped out on audjpy, on demo :/
No worries, not the first mistake and certainly not the last. I've also made my share of bonehead trades.

The important thing is that you learn from this so you don't make the same mistake again.

Next time, you'll see that it's much easier to profit by knowing which way the freight train (trend) is headed then by jumping in front of it.
-Razorjack
  • #380
  • Feb 25, 2010 11:33am Feb 25, 2010 11:33am
Quoting Stock_Rocket
Hi Razor,

With fundies being king all said and done...I (and likely all reading) agree with projections of U.S % raise before Japan...and the longer term opportunities therein.

Looking at both trendline support (diagonal) as well as all important horizontal price levels (Fibs for most).

Ive got mine drawn from a 1 yr weekly with the high in April around 101.50 and low late Nov at 84.73.



What creedence/concern for your entires and position building do you put on these "technicals"?....broken trend diagonal...yet seemingly...
What creedence/concern for your entires and position building do you put on these "technicals"?....broken trend diagonal...yet seemingly firm level of support horizontally?

Yes, I use trendlines, fibs on the long term and medium term swings, swing highs / lows, round numbers and psych levels.

If the fundamentals line up, I usually tend to get in with the initial order even before I see a trendline break, then I'll wait for confirmation (break of trendline or S/R level, etc) before risking more, and the more the technicals AND fundamentals line up, the more I'll risk.

A time of continued platience?...and possible indication of lower prices (broken trendline) and better spots to build from?

Or...solid respect for the horizontal price support (around 88.6943) and consideration that this may well be, as low as she currently goes?


It's a bit of both trendlines and price levels. This is my personal preference, because I want things to be dynamic and flexible. You however may prefer to have a fixed set of rules.

This definitely takes patience. If you haven't done this before and haven't traded long term, then this will wreak havoc on your emotions. This is where you really have to work on a system that can keep your emotions in check.

You have to remember that it's almost impossible to call a bottom. In the beginning I made several mistakes of putting on too large a position in the accumulation / distribution phase and the drawdown was almost too painful. Who knows maybe you can handle it better than me.

Developing a system / style that works with your emotions is #1 thing every aspiring trader should strive for. This is why I keep emphasizing that the system you develop has to work with your personality and you can only do this by making your own system, not copying others.

I guess - a combination of the fundies driving decision making...but as well firm grasp/abilities to decode the near term technicals to achieve best buys.

This is basically the heart and soul of my trading system.
-Razorjack
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