Identifying Market Swings - Medium and Long Term Trading

Come on guys keep this thing alive so that razor sees it as worthwhile to come back to .

If we don't keep it alive it just shows we all just wanted answers - now that we aren't getting them everyone f***s off...

Thanks for this thread, Razor.
I've read all of it, some parts more than once.
Looking forward to more ..
Junja

Razorjack i recently decided to trade EURUSD exclusively as opposed to dozens of pairs , i think it's easier to track two economies instead of dozens, what is your thoughts on this?

I think it's not about only two economies... EUR is about a lot of economies of european member states and USD is the reserve currency and is used for carry trades now... :]

Hi everybody, I wanna share some of "my" theories with you and I'll be grateful for everyone your comment.
First I would like to summarize the main fundamental events:

Long term:
1) Cooling of china's economy
2) Faster recovering of US economy then GP, EU, JP, ...
3) Buying of gold by central banks

Medium term:
4) EU problems (especially Greece) and GB problems, REPO 105
5) The end of fiscal year in JP (31.3.)

Short term:
6) correction on the stock and commodity markets

Well, let's look at them in more detail...

Long term in details:
1)
China is the first fastest growing economy in the world (India is next) and the third biggest economy (behind the U.S. and Japan). Estimates of the annual growth reaches nearly 10% and would increase compared to 2009. For us it is important whether these predictions realize or not and also how the Chinese government will treat it. Like Razorjack, I also suppose that government will continue to cool down the growing because fast growth means high risk of bubbles and their subsequent blowout would leads to unnecessary problems.
Meeting the expectations of growth at 9-10% = risk appetite (long term), temporarily cooling (eg, raising rates) = risk aversion (short-term middle)
The same situation can be seen in India, where on Friday (19.3) were raised interest rates in the scope of cooling economic growth, causing short-term risk aversion.

I am convinced that further information is very important. US senators want to label China as it's currency manipulator, in April, because the yuan is undervalued. In this way, also UK and EU politicians and representatives of central banks, expressed their opinions. The problem is, China has in the hands very powerful weapons in the form of U.S. bonds worth some 800 billion dollars and in addition, any lack of cheap Chinese goods to the US market would increase inflation.

Following development in China will be regarding of events in japan in the past. Japan is in a depression already for about 20 years and it struggles the deflation. This deflation originates in too quick yen revaluation and yuan therefore will revaluate only very carefully. Most of the financial historians agree that the liberalization of the financial sector prior to the crisis and Japan was no exception.
Similarly, everybody expects the Chinese yuan to strengthen. Chinese officials also say that they want greater international role for Juan, that could be achieved by it's reinforcing. The government has set 2020 as the year when the Shanghai would become of international financial center. China, therefore, plans to start with capital account liberalization, and it is difficult to assume it will avoid a similar fate as Japan. But China is only at the beginning of the trip and as Societe Generale analyst Dylan Grice says: "China may end similarly. But first it must experience the party." But of course, not everyone agrees with such a view.

Recently I read some interesting statement of an investors: it is a mystery for decades, how is it possible that the yen is so strong despite the level of japan debt (debt to GDP is about 180% and debt of Greece is about 115%). In favor of Japan plays it's export character and the fact that japanese households own the most of japanese debt. Japanese population is aging rapidly and they will start to outlay their savings and the debt will have to be financed by foreign investors who will call for higher interest rates. This will cause the hyperinflation, because Japan will have to borrow more because of high interest rates... This is a nice start of a cycle. After the second world war, Japan dealt with situation like that right by hyperinflation. Hyperinflation means a fall in yen price (long USDJPY).
In any case, the development in China is interesting but mostly it's about a long time range, at least a decade.

2)
It is clear that the US economy is recovering much faster than GB, EU and JP. This means the earlier increases in interest rates and the strengthening of the dollar against the currencies of these countries. It is a long-term process. Please note that opinion of many analysts about this process is that the US economy is now recovering only because of pumping vast amounts of money to markets at the expense of the huge debt.
The question is that when these fiscal incentives expire (approximately the end of the summer), will the US economy be able to continue recovering, or it will begin decline again.
I think the recovery will be say about in this order: US, GB / EU, JP. The Fed will raise interest rates as the first central bank and much sooner then BOJ and thereafter will be yen again the main currency used for carry trades.
GB economy is doing circa as badly as the EU. The main difference is that the BOE can print money as desired unlike the ECB. This means that GB may, at the expense of higher debt rather start up an economy, but then the EU will have less problems, because of lower debt than GB.

3)
Various central bankers argue that gold will be worthless and the price of dollar will be higher. But central banks are the largest holders of gold in the world and last year were net buyers of gold (they don't sell it at all). We can predict from these facts that the gold will have a much higher value in future and the dollar will lose its value. The problem is that other currencies like EUR and GBP will lost it's value against gold either. Although it seems that there is no high inflation in US in near feature, there is a big difference between inflation and hyperinflation. I fear that US heads to hyperinflation. The only solution for hyperinflation is the using of the gold standard, whether spontaneously or managed.
I'll present a link to point 1. If there will be any FX war between the US and China, and China would begin to sell US bonds, there will be no one else then the Fed who will buy them in the situation like this. The only possible result of this process would be hyperinflation and subsequent using of the gold standard.
And therefore, if I was a millionaire and would like to insure my property against loss of it's value, I would certainly buy PHYSICAL gold. But beware, because this is helpful only in the long run.

4)
Recently, there are issues of EU countries (PIIGS) with a high debt. Nobody knows how things turn out with those member states leading by Greece. It's sure that for some time, these problems will pull down EUR (risk aversion). Possible financial aid to Greece either from EU / ECB or the IMF will not solve existing problems, but only temporarily ceased the situation on the markets. It is said that more about the aid to Greece shall be known in early April, but it was spoken much already. In any case greece will need money to pay various loans whose maturity is approaching in next few months. Greece doesn't have enough money for this purpouse and it will have to lend again.
Greeks did the first step by suggesting the fiscal consolidation. Many neutral people (not Greek prime minister, or members of the EU parliament, whether the ECB) expressed opinions that the Greek plan is rather unrealistic and fail to be met, which would have negative impact on the euro in the long run.
It should be noted that, the Greek fiscal state is similar in other EU countries! Greeks already made at least a first step, because a fire broke out there already, but it is only a matter of time when such fires break out in other EU countries.
In addition, also GB has a huge debt and they haven't done anything yet about it. Besides that this year is the election and during "the election year" spare nobody. Such fires may therefore arise in the GB also.

Another interesting information is the using of Repo 105 and 108 transactions by extinct Lehman Brothers. The using of these transactions was discovered in recent weeks by investigations of Lehman's fail. The report from this investigation is here: http://lehmanreport.jenner.com/ (recommended to read something about repo 105). It's too complicated to be explained here, but in principle Lehman used off-balance sheet devices to hide loans in annual reports.
Even Greece has lent huge money by Repo 105 transactions and "nobody knows" about that (at least not officially). If these loans were known greece would not get to the EU, because they didn't met certain limits (I think it's the Maastricht criteria)! The reason I write about Repo 105 is that, these transactions were used even by other countries and not only greece. It may rise a huge problem in any country because of these off-balance sheet loans at any time and without warning! Countries have "secretly" borrow and rely on the fact that in the future will pay the loans. But when it will occure any crisis or the second bottom of actual crisis, they can get into a situation that they will no longer have money for anything and then next greece will appear.

5)
The end of March is the end of the fiscal year in Japan. The end of the fiscal year in Japan implies a shift of large amounts of money of japanese investors to Japan from abroad (selling foreign currency / commodities / shares and buy yen, short USDJPY). Subsequently, they will again invest abroad and to sell Yen (USDJPY long) from April.
USDJPY is currently in the form of a triangle, created by strong downward trend and the line / limit of the maximum price yen at 88-85 which can be accepted by the japanese, given by the export orientation of the country. Based of the state in the country and the pressure that government develops to BOJ, it's certain that 88-85 limit will resist and the strong downward trend line will be disrupted and the result will be a significant upward move. Thus I expect that this happens sometimes in April.

6)
In recent time (days to weeks), equity and commodity markets (oil) grew strongly, and therefore they need a correction. This correction in turn affect the commodity currencies through risk aversion. Most of commodity currencies are currently at the top of short and medium term trends (take a look at audusd audjpy, etc.). This will cause a short-term decline in commodity currencies.
Guys from the OPEC said that the price 70-80 dollars per barrel of oil is good and the raise of this price is expected in the second half of 2010 when the increased demand for oil is expected. Then the raise of oil price also will push up commodity currencies (mainly CAD). Current oil price is about 81 dollars, so short term decline can come in.

This analysis includes only a part of the events that are happening in the world and affecting FX markets. I chose those that I understand at least a little bit .

Long term conclusion
In the long term I think, that the economy in China will now begin to move ahead rapidly and chinese management have to cool it down to avoid a disaster and to prevent of developing it's future like in Japan. The rising of chinese economy will pull forward all other economies, and slowly pull up the stocks and commodities. This means risk appetit.
The commodity currencies - with more risk - will prevail the bull trend and on the "safer" currencies will prevail bear trend.
Japanese yen begins to be re-used as the main currencies to fund carry trades. This happens as soon as it will be cheaper than USD, ie when the FED raise interest rates. Then yen begins to lose momentum, particularly against commodity currencies, but also against other currencies, for example. USD.

Medium term conclusion
If the EU and GB economies will not begin to recover, eventually, if any additional round of recession will come, then PIIGS countries, but also GB will have huge fiscal problems, because of their growing debt. EUR and GBP then will go down because of the growth of risk aversion and USD and JPY will raise. Vice versa, if the EU and GB economies will flourish, they may miss these problems and it will support the risk appetit.

Short term conclusion
Until the problem of Greece solves somehow and there will not appear any problem in another countries, we will face the risk aversion. Thus, riskier currencies (EUR, AUD, CAD, NZD) go down and "safer" (USD, JPY) will increase.
Probably in the coming days / weeks there will be a bounce on the USDJPY to up for a short time period which would later be able to maintain even for a long time period and it could change to a medium term tend.

So that's all, thank you and I beg you for comments.

TGpop,
I will continue to post when I can, sometimes I don't read the thread for a week.

Please take this reply as simple opinion of someone who is still learning as well.
If I remember right you are very young and I'm sure you play some kind of sport.
For this analogy I only consider the major currencies.

Here we have two teams in one team we have AUD, NZD and CAD. These are well defined players of these team, EUR also belongs to this team. On the other team, team we have CHF, and of course the two stars USD and JPY.
GBP doesn't belong to any of these teams but GBP is in the field and it happen to be the fastest runner that only follows directions from GBP individual couch.

This is not an easy game, is about runing, players of one team are not equal some of them run faster, when they get tired they walk and sometimes they even turn around and go in the opposite direction, in each team there is a general couch but each player has an additional individual couch. Players follow the signals from the team couch and from the individual couch. The individual couches talk to each other all the time.

I watch the game and I try to see where the action is going to be, which is hard to tell, I have to see what happens during the week, I have to know the players, I need to know how these players feel, I need to see what is the individual couch telling each player and of course try to guess the strategy from the general couch of each team.

Complicated isn't it?

I studied the players for a while and I preffer to follow AUD and CAD from one team and USD and JPY from the other team. In my game, their personalities usually represent the teams better.
So if I compare audjpy, audusd, usdcad and cad jpy I get the idea of what is going on most of the times, if it is not clear, then I use more combinations.

Now, open your Trader Vic book in page 49 and see that there is more than one trend. A short term, a mid term and a long term.

I guess your question is what is going in the immediate term and it looks to me that the risk is leaning towards risk of apetite in these days, but the dollar is running on the other direction very fast.

I have been wrong in the past, I could be wrong here.

Excellent

Correlations are in and out of sync all the time, I believe we should not just say that something is in or out of sync and that its hard to trade. I believe we should concentrate on finding ways to exploit that. Just like correlations can be exploited for profit, lack thereof should be used as well, just need to find a way to do it.


R

Just finished reading all the posts.

The start was good as they always are, 5ysfx is just an idiot like there is plenty of them here, whoever has read few threads knows that you can't avoid them and the best thing is to just ignore them. Razorjack is probably right about his trading career, just look at the guy's charts, they're more work of art then trading charts, how he can understand anything from them is beyond me. Its also beyond me how someone with so many vouchers can't understand the simple concept of respect - read the damn thread and post on the subject, if you don't like the subject move on. I guess the voucher system has broken down, not that I care about it much, I'm not here for that.

My hat off to Razorjack for being able to articulate his thoughts so well. I fully agree with his way of thinking and approaching markets that is truly where the big money is. I'm trying to stretch my trading time frame that long but I recognize that I'm not mentally ready for that yet so I'll take my time to get there - currently trading hours-days TF, however, even at such a low TF looking at the whole 360 degrees picture is much more useful then trading without it. I would even say its like a night and day.


I notice many posts are still trying to get guidance/opinions from Razor as to the specific pairs and their short term trend. I think that is still missing the point of this thread which is to teach others how to think and analyze correlations between markets-economies-politics and you have to be able to do that on your own if you want to survive in this business for any period of time.

Whether Razor comes back or not is his decision based on what is best for him, what he gave so far is so valuable that anyone new to this business who is wise to enough read it and understand at least half of it will save himself years of mistakes.


R

After reading this thread, properly, it's got a little clearer, but still a loooooooooong way to go .

So basically-divide the 3 trends and for each say whether we are in risk appetite or aversion, thats the short, medium and long. So from that which markets will move on risk appetite/aversion? Also, to realise that a medium term risk aversion trend will be a correction in a long term risk appetite driven trend.Also, that scaling in to positons with small risk, as a little 'bait' can work very well

That's what i've learnt from this thread; i hope it's not all i learn, and i really hope razorjack comes back .

If not, then thanks anyway this thread is very different from the usual

Hi Robert,

You are absolutely right. Razor, started this thread to share his knowledge and teach what he knows about markets, economics, fundamentals, medium and long term trading, etc. etc.. his each and every post confirms his knowledge on the subject. If he is around, we would have learned so much by now.

So, who are the losers?

-myFx-

I don't think there are any, but it depend on person's way of thinking.
Why do we need to assume that we lost something because someone is not sharing his knowledge instead of looking at what we gained so far and think of ourselves as winners. No one has obligation to post anything for anyone's benefit and if they do just be thankful and respectful.

R

Anyone else seeing the usdjpy trendline break? can't wait to go long this pair

Yes, it has happend on 24th of March. So, the short term trend has changed to bull and the question is, where it will end. I think, it will go at least to about 100.
1) The 38.2 % fibo level of the move from June 2007 to November 2009 is at 99.82
2) There is a head&shoulders formation on the weekly chart. Based on this formation it should go to about 101.
Then can come a correction and I think this trend will continue -> it will become a medium trend because of fundamentals (FED will raise interest rates much sooner then BOJ, Japan need week Yen because they are export based country, ...)
See the attached chart.

Edit: You should wait for a small correction first to enter the trade, based on your technical analysis.

Very interesting what you write, especially the things about USDJPY are coming true as you have described for the short term since you wrote it. Spot on.



R

accumulating some USDJPY on a pullback with small risk sounds like a good plan...scale in small and add more on further pullbacks