The weekly chart of the AUDNZD is shown below, it looks like a very tradable pattern that highlights two missed opportunities. The pair is showing a 5 wave impulsive move lower from the 2011 High followed by a period of consolidation lasting almost 4 years. That consolidation appears to have come to an end, we missed the trade at blue (E), we often miss the (E) wave of this triangle pattern as they often truncate. The spike lower in January caused us to miss the re-test of the bottom of the triangle, that spike lower caused us a few issues as it upset our momentum indicators. The pair now looks very bearish and we will look to trade the next pullback, we only ever trade pullbacks perefering to miss trades than sell at the bottom of a trend.
It was the RBNZ meeting this week and they did not follow the pattern of the rest of the world by turning more dovish which was in contrast to the Bank of Australia who made a significant dovish turn.
It is also worth noting that the AUD tends to be the whipping boy when the global economy takes a negative turn.
The economic surprise index for Australia has also taken a negative turn, this shows that the Australian economy underpreformed significantly in January which may have pushed the RBA towards its current dovish stance, further weakness on this index will help the AUDNZD lower
Interested in trend trading
Really poor retail sale from the US (we don't believe the figures, they contradict industry estimates) and oversold conditions mean a pullback is likely. As a result we have exited the trade for a 3% increase in equity.
lONG FROM 19.25
On the 19th of January we presented the technical reason for buying USDMXN, that technical pattern is playing out very nicely and we have taken a second long trade. We believe the pair has been consolidating for some time and that consolidation may be coming to an end. We have never believed that US dollar strength was coming to an end and expect to continue buying it in the future. The chart presented below is the updated one from earlier in January it is worth checking back to see how this prediction has developed
Trading the FX trend
We are trend traders which means we look for a price pattern that appears to be repeating and this patern is one of the clearest we have seen. Of course that does not mean it will be a profitable trade but if it is profitable the win will be much bigger than the loss. Of course trading the USDMXN is a costly business, the funding costs of this trade are large and so we will not be able to just let it run the way we are doing with the GBPJPY trade (currently pulling back but still up more than 10% of equity). It is likely we will trade it for a few days to a couple of weeks at most and keep trying to take small bites out of this trade as it develops.
Update Feb 14th, after one day the funding cost for this trade was $29.40! that is a load of money and shows why we dont want to hold it too long. The trade has done well showing profit of $225. (compare this to the GBPJPY short currently showing Funding cost of $45, but that funding cost is for 16 days)
If you are interested in trend trading you could have a look at a couple of companies that offer services in this area. We don't have any kind of service but the two adds on this page are worth checking out. Forex Trendy give great information about trends and Trend Mystery provide a trend based signal service.
Solid Trend FX trade
USDCAD has been a pretty reliable performer of late, it appears to be trapped in an ascending channel that has been in operation since Sept 2017. Last year we only managed to catch it once (green box sept 2018) but another opportunity may be close at hand.
Of course the economic situation is not as clear cut, the FED does seem to be turning a little dovish, at least that is the interpretation of much of the market and that may have led to the recent decline. Of course the market generally over reacts to anything the FED says so some kind of pullback is on the cards. Oil is a big issue for the CAD, we remain bearish on oil and identified in an earlier post a potential selling point for oil.
If the USDCAD breaks 1.28 then it could register a lower low which would negate this set up giving us a reasonable stop of around 200 pips and a good 3:1 risk reward.
Canada economic performance
January was a mixed month for the economy (viewing it with a currency eye) inflation picked up a little but retail sale, pmi's and manufacturing all ticked lower. The surprise index our preferred way to track the economy continued to look rather anaemic, continuing the turn lower that started towards the end of November. Of course most surprise index graphs are looking rather negative reflecting a glowing doom around the world economy
Short GBPJPY entered
It is our ongoing view that the market is incorrectly pricing the Brexit situation. The move higher following the government defeat was really significant and seems to reflect the view that any kind of hard Brexit is getting less likely. A number of commentators have even suggested that that the UK will not leave at all, those comentators are either working for the left of center guardian or simply do not understand British politics. A failure to leave the EU would tear the conservative party in half and they will not allow that to happen, the conservative party will unite around a compromise but that compromise will be a brexit. The chance of the UK remaining in Europe is close to zero, the party of government are unlikely to go for a second referendum and they are comitted to leaving and so leave they will. I think they are happy to leave without a deal but are likely to get one anyway, it will just make things easier for them. The effect of leaving will be crushing for the UK economy and the pound is going to suffer. We will take every opportunity to sell as long as that opportunity fits our risk reward criteria and has a technical situation in line withour plan.
The weekly chart above is our bearish scenario, it shows an impulsive 5 wave move lower during the financial crises then a retracement wave black (x), from then the pair put in another 5 wave impulsive leg lower which we think is the first wave of either an a-b-c pattern or a larger 1-2-3-4-5 higher degree pattern in either scenario the target is around 80.00.
This is a really aggressive view not shared by the market but that is the point of our trading strategy, we are trying to call larger moves to make outsized gains knowing we dont have to be right that often.
This daily chart show todays trade, we entered according to our normal plan of looking for three wave pullbacks to time the entry and ensuring that momentum was in our favour. The trade seems like a good trend trade and we have good hopes for it. But please remember we could be wrong!! and we are not qualified to give investment advice this is just a record of what we are doing. If you are interested in trend trading, try pressing the link to forex trendy, its not a free service but it is worth every penny, try it out we really like it.
Our original view of silver had it completing its pullback around current levels and we sold on this basis. Price action has now changed our view, the move higher now looks like a 5 wave move, it is our experience that impulsive moves of this manner are almost alwyas followed by another 5 wave move and as a result we now believe that the recent rise is only the first leg of the cirrection higher. We have set the stop to zero and fully expect to that stop to be hit. It is worth noting that Silver has a tendency to produce a double top with the fith wave failing to make a new high, if this is the case we will continue to hold and allow the breakeven stop to activate should the third leg higher get going. US dollar weakness continues at present but it is still too early to say a new trend has developed, of course we are always mindful that trends starting in January have a habit of lasting throughout the oncoming year. We will be watching the USd closer than normal over coming weeks, if it is a change of direction we would like to be in early but we dont want to sell a fake move and lose money.
Short WTI inline with long term view
It is our view that the price of oil is in terminal decline and will, by 2030, approach zero or at least less than $10 a barrel. The reasoning here is clear, the world is moving away from fossil fuels. Many countries and car makers have already said they will be electric only sometime in the 2020's, renewable energy powers more and more electricity and new power stations being built are never oil fired. On top of this is the increased potential supply, everytime OPEC try to cut production, or some geopolitical event catches one of the emerging market economies dependent on oil, the US shale producers simply fire up production and make some hay whilst the sun shines before closing the pumps and going back into hibernation. $60-$65 seems to be the price point that generates a frenzy of shale gas production in the US and that pulls price lower almost immediatly. As a result of all of this we are only looking to trade Oil lower and look to the charts to time our entry.
Above is our weekly chart of WTI oil, it shows a long bear trend defined by the blue trendline, the waves count nicely to that trend line with impulsive waves lower and corrective waves higher. We did trade at purple (Y) but unfirtunately exited early at the orange trendline but we did meet our 4:1 risk reward criteria. Having broken the bottom of the rising channel (orange on the chart) which looks like a bearish flag pattern we think the next impulsive wave lower has begun, the chart shows it going to zero but that is a little aggressive!
Potential Oil trade
Above is the daily chart in oil, it counts the recent move down in 5 waves and assumes it is the first wave of the new leg lower, if so we can expect a bounce, that bounce has already made it to the level of the previous wave 4 ( a common Elliot wave rule) but we would like to see it get high enough to test the trend line it broke earlier, that will also get price to $60 where we expect US producers to increase production.
One potential problem is the Mexican hedge, Mexico managed to hedge its 2019 production for $55, it cost them billions of dollars but it means some large institutions think that $55 might be as low as it goes this year. Still if it gets over $60 even a sell back to around $55 would represent a good return.
Where to trade the GBP?
Lat weeks short GBPUSD closed for zero, the set up no longer seems clear cut but our bearish view of the pound remains undiminished. The surprise index on the economic blog keeps us looking lower for the GBP but finding a place to trade it is becoming difficult. GBPCHF might offer a great opportunity.
GBPCHF technical analysis
The weekly chart above shows the pair stuck in a multi decade bear trend the last leg of which seems incomplete, a small triangel has appeared that looks very bearish and should it break could have price moving to the bottom of the range formed in 1973. If the last 5 years of sideways continues then the downward trend may come under threat. The daily chart offers some evidence that a short maybe at hand
What could be bearish flag pattern (the orange channel) appears to have broken down and been retested allowing a new blue downward trendline to develop. That blue line was retested on Friday and appears to be holding, the wave projection suggests that the current move lower could reach 1.15, from current levels that would offer an 8:1 risk reward.
As always with the GBP, political concerns are the issue. Mrs May will present her Brexit plan again, it will be the same old same old and it wont get through, It is becoming binary now either Mrs May keeps controla nd the UK leaves without a deal or Parliment gets control and the chance of a hard brexit drops to zero. Whichever way ot goes expect some significant moves, two risky for us to trade at the moment but when the situation clears we will be looking to seel the Pound
Trading the end of wave 4
USDMXN is a really volatile instrument that does tend to move in a trend, we traded it twice last year and the final trade from the (C) in the chart worked really well delivering a 4:1 risk reward. We are now considering another trade from what might be a reaction from the bottom of a triangle pattern (orange on the diagram). In Elliott wave language this might be the end of wave E from a contracting triangle and if so could lead to a significant rise to new all time highs, we are not looking for that just our more normal 3:1 risk reward. We will put our stop loss just below the rising wedge and the take profit below the black trend line showing the top of the triangle. As always we will monitor these levels and the price action and could exit the trade if we decide we do not like the look of the price action. In line with this we closed the Silver trade today for a small profit (only 2% of equity), the price action looks more and more like consolidation rather than a top forming and an alternative wave count suggesting this is just the first leg higher looks more likely.
Swap and roll
USDMXN long is an expensive trade to hold, the interest rate differential makes it loss making to hold it in this direction but the trend is pretty clear but, as a result, we will not hold it for months just days or at most a few weeks. We don't generally like trades like this one but the opportunity seems greater than the cost or the risk.
Please remember this is just our thoughts, it is not trading advice and a s a result you must do your own analysis before trading.
Short XAGUSD is inline with our views
Silver plays a number of roles, unlike Gold it does have industrial uses and so part of its price is about industrial production, its price still moves more like a precious metal than anything else and precious metals have two fundamental drivers. The Us dollar and Risk sentiment, when things look good people move there money into stocks and out of precious metals and as Silver is priced in US dollars if the dollar goes higher Silver typically goes lower.
You can see from my recent post on stocks that I think they have turned higher already and I am still a believer in the USD. Our fundamental belief at Bagehotsway is that markets trend and that trend is more likely to continue than change, as a result we are always looking to buy dips and sell rallys in trending markets. Silver would seem to be a good opportunity.
.Silver has been in a downtrend since 2011 a bottom will eventually be found but we dont know when. We will just keep selling bounces until we are wrong. The most recent leg of the downtrend began in July 2016 when a bounce to $21 fizzled out, we estimate that the trend lower that started at that point should reach $13 so it still has some way to run.
The recent bounce, which was very aggressive appears to have met resistance in our selling box at the red horizontal trend line that has been both support and resistance of late. A small triangle pattern has developed, just congestion really, but that is not a reliable turning signal.
Another important part of our trading strategy is sentiment, we do not like trading with the crowd. Every advert from the brokers now say around 80% of traders loose money, so if most people think its going higher then it is probably going lower, the general market view is that the dollar is going lower and silver higher, thats adds confidence to our view.
Please remember this is just our view, we dont sell signals or advice we just say what we are thinking.
Price has moved lower as expected after a period of sideways indecision.
Short GBPUSD again?
Selling the GBPUSD was a very good trade in 2018, we went short in September and didn't close until December. It delivered a 3:1 risk reward for a 27% gain in equity which was really nice. In this blog post I am thinking out loud about takling the trade again before the Brexit vote happens in the commons later today.
As you can see from the chart we have a reasonabe technical set up, the pair seems to have been rejected once a gain from the trend line that has defined the pair since our September trade and the (A) -(B)- (C) wave pattern we are forecasting is along way from complete, The final target is 1.15 breaking the 1984/2016 lows
The pair is a long way from our usual green box buying area but we don't like that area, the price for the box was dictated by the recent spike lower and the pair would have to break the trend line to get there. We prefer a short at these levels and a stop above the trendline (thats if we take the trade.
The economics in the UK dont look pound favourable, the Bank of England forecast two rate rises this year but I dont think anybody is buying that, the economy is clearly slowing as the retail market sufferes and brexit worries cause a lack of investment and companies re locating out of the UK. Inflation has been high in the UK above target, mainly caused by the depreciation in the pound but recent events are causing it to slow. The UK government put a price cap on energy and oil values are down. Pressure on the high street and compettion in the supermarket arena are going to cause inflation to dip below target in the near future. That will reduce pressure on wages and start a downward inflation spiral.
Its that damn brexit
If it wasn't for the brexit issue I would take this trade, but the volatility of the pair and the risk of large movement makes it really difficult to trade the GBP, the vote is a nightmare fo the Uk. The government will lose by a siugnificant margin but what then? A significant Brexit delay and possible second referendum will be pound positive for a while but it is only putting off the inevitable. The damage is done, the GBP is going down but can we get the necessary risk reward to trade it. At this moment we are not sure and sat watching the price action wishing we were not so conservative!