Here’s my zone trading strategy
FX: As we indicated we would, we added to our long AUD/USD
position at 0.7370 today. Recall that we were buyers on January 3 at 0.7350 and
then took 1/2 profits at 0.7525 just as we were buying a large amount of USDCHF
at 1.2720 to hedge our Aussie position. We have held the rest because we
over-weighted US dollars near the highs in Aussie and because we consider Aussie
to be a good interest rate carry as our synthetic position gives us long AUDCHF.
Our strategy for this year has been consistent in that our
“Buy Zone” for Aussie is in the 0.69-0.73 area. Since we are now overweight the
US dollar we consider this good protection of any correction.** This does not
mean we are bearish on US dollar. We simply have identified this as a good area
to purchase AUD/USD for the “medium term” trend as we foresee a move to 0.80
sometime this year.
As you should have read in our weekend report we are very
close to launching a unique signal service called FxSignalZone. We never wanted
to do a signal service because most are so bad that everyone loses money. So we
identified the one lacking aspect of these services and developed a concept
using buy and sell “zones” which incorporate money management discipline. Good
money management is very hardly ever taught in books even though it is the most
underappreciated (and most important) characteristic of good trading.
Because the dollar is little changed from last Friday we want
to show the same chart we put together of USDCHF at last week’s close for our
FxSignalZone service. Note that we have what appears to be a completed
corrective move lower in “XYZ” form from the November highs. We bottomed within
50 pips of the key support we identified for you (at 1.2500) and we were buying
in “Zone 3” the first week of January because of that.
The way the Zone Trading service is set up is to place 1/3 of
a full position (whatever that means for you depending on leverage you use) in
Zone 1, another 1/3 in Zone 2 and the final 1/3 in Zone 3. We then identify
profit taking target zones in the same manner.
Today, the dollar is still holding in Zone #1, indicating that
traders should look to establish 1/3 position at current levels. Obviously, if
you were buying alongside us in the 1.2720 area, you should be closer to a full
position as we are.
A sustained move above 1.30 (the previous breakout level from
October) would be the best indication that we are moving to profit taking Zone
#1 in the 1.32/33 area where one would look to take some money off the table,
wait for a reaction and possibly add to the existing position on a pullback.
Readers know that we are long a full position at 1.2720 and we
added to this on Friday making us slightly leveraged. We will therefore look to
take back one unit of leverage on a move to 1.32/33. And this is how we hope to
teach the FxSignalZone service to traders.
**Note that if you were a more aggressive trader you could
establish a full position (3/3) at current levels. But you would in effect be at
more risk than others that are following our money management concept of zone
trading. What we hope is that visually, we help traders identify the best
possible trade setups in the market so that day traders, swing traders and
position traders may all incorporate our signals into their trading strategies.
Readers will recall that we accurately forecasted a bottom in
the dollar at 88.00 in the first week of January and were buyers when we hit
this level two weeks ago. We then said to wait for a confirmed move above 89.50
to add to this position which we did on Friday.
As we said in this weekend’s report, the euro needs to break
1.19 to get the dollar bears to capitulate once again. The dollar index has
cleared the first hurdle at 89.50 and we are now testing the second key
resistance at 90.50 that we identified two weeks ago. That also means that 89.50
will be acting as support until we clear 90.50.
Gold was crushed yesterday which has helped our long USDCAD
position make up for lost ground. The break below trendline support at $565
should mean we see a test of $540 at the least. We are hoping for a bigger
correction back to $490 where we will again recommend longs.
To clarify, we list below our trades with some updated
comments.
Jan 3: Short USD/MEX @ 10.63 — Looking to add at higher
levels possibly.
Jan 3: Long AUD/USD @ 07350 — Closed 1/2 @ 0.7525. Sitting tight as dollar
rallies.
Jan 6: Long USD/CHF @ 1.2720 — Bought on a dip to 1.2800. Added at 1.2920 on
Friday.
Jan 9: Long USD/CAD @ 1.1660 — Added at 1.1415 for an averaged rate of 1.1575.
Jan 12: Long USD/JPY @ 113.70 — Closed out at 116.30 as indicated.
Jan 27: Long GBP/USD @ 1.7825 — Closed cost.
Recommended longs from 88.00. Added on a sustained move above
89.50. Look to add more above 90.50.
Gold: We said Monday: Aggressive traders may look to
short on a break of trendline support at $565.
We have said for weeks now that “Gold looks like it is topping
right now and should be headed sharply lower. Sentiment measures are at levels
that preceded previous sharp declines. So with gold very overextended and ripe
for a correction we think that an expected top in gold should ine up well with a
strong rally in USD for 2006.” Gold’s steep selloff is indicative of a market
that needs a healthy correction. While doing so, we should see a steady rise in
the US dollar.
We don’t ever recommend selling gold. But traders may look to
buy protection from put options. We recommended shorting on a break of trendline
support at $565.
Stocks: No change: For the past week we have said the
steepness of the rally from October coupled with the clear “five wave” move from
the lows suggests a deeper correction at the very least.
For the bears to steal the ball we need to see a top in the
S&P500 around current levels and a ‘five wave’ move down below 1275 and then key
support at 1245. Once accomplished, we’d expect more selling pressure to follow.
We still think traders can look to go short with risk limited to 1,300. But a
more pragmatic approach is to wait for a completed “five wave” move below 1245
to confirm a top.
Go short with risk above 1,300. Add to position on a move
below 1245.
Bonds: No change: Notes also broke below key trendline
support at 109 as expected and we have recommended shorts from 109. Key
resistance at 4.5%-4.7% lines up with the key 107-108 level in notes. A move
below here could really ignite some selling considering that the market is
bearish on bonds but positioned the highest net long in 3 years.
Recommended shorts from 109. Stops should be placed just above
109.15.
Crude Oil: The wave count is still a bit messy, but our
overall outlook stands for a move to $80-$100 over the coming months. One
possible interpretation is that the move from the November lows counts as a
“five wave” move higher with a failed “fifth wave” at $69. Since we did not
clear the August highs, this should just be “wave 1” of a larger “five wave”
move from the November lows. Key support is now crossing below at $62 where
traders could look to go long with key support at our previous buy level at $55.
Unlike gold, oil is not overbought from a technical or speculative standpoint,
making it the favored commodity play right now.
Recommended long at $55 last November. Looking for a move to
$80-$100 over the coming months.
Regards,
Jes Black
FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.
Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.