The Key to HVT and FX in 2004
I often get asked the
question, “With everyone so negative on the dollar, shouldn’t the
contrarian view begin to take hold?”
It is a great question, the answer has several
implications as it relates to HVT and positioning in the FX market. Many years
ago I read a report that stating the following (paraphrased):
“Contrarianism works best at
turning points when the market is over-extrapolating past trends and is ignoring
signs of a change in the fundamentals.”
Everything I read and see does not indicate that
any fundamental change is afoot with respect to the dollar’s fundamentals. The
current account deficit is wide and shows no signs of abating, and there are
growing signs of inflation in the latter half of 2004. Secondly, yes, the
dollar is oversold, but that simply calls for only a bounce, not a wholesale
trend change. Bucking the trend is always a risky proposition. Lastly, the
dollar has historically moved in cycles of 5-7 years, if this holds true, it has
a ways to go.
As I mentioned in yesterday’s column, this has
implications for FX as well as
HVT. Gold, commodity based companies
(commodity country funds too, Chile, Russia, South Africa & Russia) as well as
oil and drillers have all benefited over the last several months.
For HVT’ers,
it is simply finding a sector that is moving, not which one is strong or weak.
Strength or weakness matters little for HVT, range and liquidity is paramount.
While yesterday was an odd day for gold stocks, they seemed to derive little
direction from the standard lead indicators. One day does not make a trend
however, and the sector will likely “loosen up” as the week unfolds.
Oil Service stocks were active and offered a
few decent HVT set-ups, volume is a little thin in this sector, however, if you
adjust your share size down, the lower volume does not pose a real drawback.
The other sector which continues to demonstrate decent range are the
Homebuilders. With this range come some pitfalls however. This sector is
notorious for providing numerous “air pockets” throughout the trading day.
I wanted to share these observations with you so
you knew what I am looking at presently and can perhaps isolate one to two
stocks in these sectors and begin to get a handle on the price action.
The solid gains yesterday were in the FX market.
As mentioned in Monday’s column, I was looking to establish positions in the
Yen (JPY), Euro
(EUR)and Swiss Franc (CHF). As of last
night, these are the current open positions:
Short $/Yen at 106.96
Short $/Swiss at 1.2384
Long Euro at 1.2681
I based the entry for these trades based on the
daily and weekly charts, but drilled down to a lower time frame to speed up the
entry. In addition, the position is put together as:
– A trading position (several hours to several
days)
– A core long-term position (several weeks to
months)
The “core” positions have generous stop loss
levels (200-300 pips), while the other stop losses are based more on
accelerating/decelerating momentum and the use of oscillators.
With regards to the Euro (EUR), we all know that
the EUR has borne the brunt of the dollars weakness during ’03. In fact, it is
up more than 50% since late 2000. Naturally, a continued rise may raise
concerns about the currency adversely affecting exports. The main reason that
the EUR has been the beneficiary of a weak dollar is that most major Asian
currencies are “pegged”. Unless these countries significantly revalue their
currencies (unlikely) look for the EUR to continue to appreciate if the Dollar
continues lower.
I get asked frequently what my techniques are for
establishing my FX positions. Oddly enough, with the exception of the
fundamental analysis, the technical aspect incorporates much of my HVT
techniques, but applies them to a longer time frame. While this may sound
straight forward, it is a bit more difficult in practice. The dynamics that
securities exhibit on 1 and 5-minute charts is quite different as you start
exploring daily, weekly and 120-minute charts. However, with enough time, you
will eventually start learn how to apply the techniques effectively.
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As always, feel free to send me your comments and
questions.