This Strategy Seems To Make More Sense
Was Friday’s dramatic
sell-off in the Dollar (DXC) a simple case of buy the rumor; sell the
fact, on the heels of the economic data, or was it indicative of something
else? At this stage there is no way to draw a definitive conclusion, the stock
market seemed to shrug it off to a large degree, but our old friends the gold
stocks came roaring back. It may be time to re-establish some trading
positions, yet the DXC will need to be
monitored further before jumping in. In the meantime, I will maintain my “core”
positions in the gold stocks, specifically, NEM,
WHT, DROOY,
CDE and a few other low priced issues. I
suspect however, that the lame price action seen in the
DXC earlier this week has passed, and that will
mean some good intra-day set-ups again in NEM.
On Friday, I mentioned that I wanted to review
some of the recent developments in FX. The action on Friday serves as a great
backdrop for today’s piece (Note: this was written on Sunday morning, before the
large overnight moves). As mentioned above, the DXC
took a hit, never getting close to the 94.40 level, which is the gap price from
early October after the G7 meeting in Dubai. So, for me, other than the early
morning short in the EUR at 114.15 on the
heels of the blistering jobs report for a quick gain down to the 113.80 level,
the currencies charged higher the rest of the day.
So, we have a situation now where the longer-term
shorts that have been mentioned in recent weeks, that are inversely correlated
to the DXC, are now in need of some
reflection. Do we stick with the plan, which is so critical in FX due to the
trending nature, or is there an imminent trend change occurring? Again, it is
far too early to tell, I suspect that Friday’s action is an air pocket, nothing
more. Let me explain further, since this will address the multitude of
questions I have received from readers recently regarding FX.
When I started to get involved with FX in January
of this year, it was natural for me to approach it with the same style I did
with stocks, seek short-term price patterns, execute, get out, book the profit,
or cut the loss quickly. It was not long before I realized this market was not
designed for short-term trading. This, in retrospect was good. Why abandon, or
better yet, take away any focus from my bread and butter
HVT when I could potentially have FX trades
working in the background based on longer-term technical analysis and solid
macro research? This has proven to be a wise choice. A friend/colleague of
mine who heads up an FX desk at a major bank in Boston told me the same thing,
“My guys on the desk, the guys who see and know more then most other FX
participants, have a tough time with short-term trading, the real gains are made
with solid long-term ideas and using technical analysis to pinpoint entries and
exits along the way.” This conversation too place in February, I took the
advice seriously, and it has had made a world of difference.
With that in mind, let’s look at a couple of
charts of some open positions:
As you can see this has been a good trade so
far. With the stochastic now beginning to turn up, do I cut this one, or pick
an absolute price point as my exit, a price that would clearly say, “The trend
is changing.”? Two answers:
1. Yes, pick a price, do not try to outguess the
market based purely on the oscillator, it usually will result in an early exit
from a strong trend
2. The macro picture has not changed. This is
what I am learning to be the key to FX success. Consider the following excerpt:
“The return on Japanese
assets relative to euro area assets has risen sharply in recent months. However,
Japanese investors have only just begun to shift out of euro area investments
(Chart 8, panel 1). We believe that Japanese investors will cut back on their
purchases of euro area investments in dramatic fashion in coming months. The
euro almost always falls versus the yen when Japanese bonds and stocks generate
higher returns relative to the euro area (Chart 8, panel 2).”
Source: BCA Research
In this example we have a situation where it
appears that the stochastic is on the verge of rolling over which indicates
further downside price action. Based on Friday’s action in gold, and simply the
big run in commodities year to date, the fundamental underpinnings for the
CAD versus the EUR
are also strong. At this point, let the trade run, in fact I added
to this position on Friday at 1.5224.
“The Canadian equity market is heavily weighted towards
commodity and resource stocks, which become super-charged as the global economy
gains traction. The euro tends to fall versus the Canadian dollar when Canadian
equities outperform euro area stocks. The Canadian dollar also appreciates
versus the euro when U.S. stocks are rising, which is the case at the present
time.”
Source: BCA Research
I hope that this explanation has helped address
some of the questions and give a better understanding to how I approach FX.
Naturally there are a multitude of ways to approach it but I think it is safe to
say that with the exception of trades done off of economic reports or Central
Bank announcements, a longer-term strategy seems to make more sense.
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As always, feel free to send me your comments and questions.