How I Get More Conviction On A Per-Trade Basis
In yesterday’s column I
mentioned that there would be some good Fade the Gap’s on the opening.
Well, there were several, shorts (chips and banks) and longs (gold stocks).
What was really odd was that the opening print was the highest print. I never
try to make predictions, but I really did think that the market would have fed
on itself yesterday to the upside. That was my thought Sunday afternoon as I
sat there in front of my screens watching the Euro, The Swissie and the Yen,
simply bottom out and yet again chug higher. I remember asking myself, “Has the
capture of Saddam really changed anything?” I kept saying “No.” But something
inside said; “Do not get in the way of the perma-bulls who may take the market
to yet higher levels.” Perhaps yesterday was a sign that some of the nagging
issues are having an impact. Time will tell.
Yesterday was a good example of just how one’s
expectations can be proven wrong (I was expecting a pretty volatile day) and how
the session only offered a few “quality” set-ups, primarily on the opening.
Yes, I know there were probably several dozen trades that could have been had at
any given time. However, you know me, I am one picky trader, and this market
still demands rigid discipline and focus. Again my focus was gold stocks,
stocks like NEM, GFI, WHT. One needs to remember that HVT techniques work with
any market, you simply need a lead indicator and an underlying stocks. It does
not have to be the S&P’s and a chip stock. These relationships exist in several
areas, the key is to identify areas with adequate range and liquidity. I cannot
stress enough the need to be flexible.
The persistent weakness of the US Dollar (DXC) is
becoming a global problem. Despite repeated absurd comments by the
administration that says they have a strong dollar policy, we know the charts
tell a different story. How can anyone tell a crowd of reporters this and not
flinch? But that is not the point of today’s article. Today, I want to show
you how I look at some large macro themes, and then overlay that on longer-term
FX charts to come up with a longer-term approach to trading spot FX.
There is a nagging problem presently in the
equity, bond, FX markets and among major exporters: the falling value of the
dollar. Up until now it has been seen more as a nuisance that a structural
problem. Now, it is becoming clear that it may be a very big problem. How else
does one explain the following events/comments just this year:
– Saudi Oil Minister, Ali al-Naini; “The level
of the USD is a concern, that is all that I can say.”
– Twin budget deficits that require massive
amounts of foreign capital simply to operate each day
– Asian Central Bankers considering denominating
more of their foreign exchange reserves in Euros
– Abnormally low interest rates in the US versus
other G-7 members (Japan excluded), this offers little yield to investors on top
of currency loss when translated back to domestic currency
– Despite a 7.2% increase in the price of West
Texas Crude since September, the dollar had dropped by 13%, negating any profits
earned by OPEC
These are not meant as bearish opinions, these
are facts, but I mention them for a far more important reason. Fundamentals do
matter in FX. So, for those of you who have come to disregard fundamentals (in
equities I would not blame you), in order to succeed at longer-term FX trading,
you need to know the story behind the chart. For me, it allows for far more
conviction on a per trades basis. I have more to hang my hat on than simply
some inanimate trend-line or Fib level.
With that in mind, review some of the trades I
have been mentioning lately, first, they all go with the trend, no bottom
picking or top calling. More importantly though, there are some real solid
reasons that these currencies “should” be stronger relative to the dollar. Most
other currencies sport higher interest rates and have far better domestic budget
situations.
I just finished watching the opening of Kudlow
& Cramer. Say what you want about the show, it is a always enjoyable.
However, tonight I tuned in to see one of my favorite commentators, Bill
Fleckenstein. As usual he was an unashamed realist (mistakenly called a
pessimist by many) but more importantly he was the only one of the three guests
that could articulate his argument. Whether he is a right or wrong is
unimportant, he has done his research and has a plan. The other talking heads
simply offered cliché type lines, “Saddam will bring back the Santa Claus
Rally.” Wow that is deep, where do I send my money? Just my 2 cents on what
some are saying about the macro picture.
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As always, feel free to send me your comments and
questions.