FOMC – Rate Rise?

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BarroMetrics Views: FOMC – Rate Rise?

Well, folks, it’s here: Thursday morning 2:00 am (HK time, 2:00 PM EST), the FOMC rate decision will be in.

Figure 1 shows the S&P (cash, daily). Following some suggestions of a Fed hike in September, On September 9, the S&P moved down 41 points – up from the average ATR of 12.7 points since the breakout on July 7. But, on Monday, Sept 12, it rallied with a range of 44 points.

Since then it has been moving sideways, bounded by 2169 and 2119.

There are two reasons why I doubt we’ll see a rate rise.

Firstly, at this moment, the US stock market is totally divorced from what’s happening in the US economy. Take the job front.

Figure 2 shows ShadowStats’s Unemployment calculations. You’ll see that while the SS number is flat, the official numbers are declining. In this scenario, I see Yellen, aware of the true situation, unlikely to raise rates until after the US elections. And this brings me to the second point.

Historically, the FED has usually raised rates until after the election results. For example see: “September rate hike would break Fed tradition during election year“.

If the FED fails to raise rates, we should see a rally in the S&P. The nature of that rally will shed light on whether the bull market is likely to continue.

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FIGURE 1 S&P Daily

2016-09-21_08-53-05-shadow-stats

FIGURE 2 ShadowStats Unemployment

You, the Market and the Times

 

markets-and-you

BarroMetrics Views: You, the Market and the Times

If ever there was a time when trading skills were required, it’s NOW!

For some time I have been of the view that a Black Swan event will shake the stock markets’ belief in Central Banks.

All over the world – from the US to China, from Europe to Japan – stock prices have divorced from the economy, and aligned with ‘easy money’.

Once this belief – that central banks can defy economic laws – is shaken, the central banks will be unable to prevent a correction that has been ten years in the making – ever since QE began in 2007. 

The question is how many retail traders are ready to meet the challenge.

In one sense, trading is relatively simple: buy lower than you sell. But, as my mentor, said: “The devil is in the details”.

Pete Steidlmayer’s equation for success was: You x Market Understanding led to success. The problem is both are difficult to come by.

Self-awareness, given human nature, is difficult because there is pain involved. Pain is seeing ourselves with all our flaws; and pain, if we elect to change.

Market Understanding is at least as difficult. There are so many conflicting ideas on how to interpret and respond to market information: from mechanical approaches to the esoteric ideas of Gann and Elliott.

What’s a trader to do?

Firstly recognise that our end of month statement, over time, will reflect the state of our knowledge and execution. If we execute consistently and fail to produce a positive return, our market understanding is at fault. That we can change.

But, if we fail to execute consistently, then we don’t know if it is the lack of consistency or our plan that is the reason for the losses.

So, the first steps are:

  1.  Formulate trading rules,
  2. Execute consistently, and
  3. See if, over a large sample size (30 trades), we generate a profit.

In this trial period, trade small. I recommend trading micro CFDs and FX where 100 pips will be only $10.00.  Once you have proven to yourself you can make money, you invest more capital.

So, where are you on the road of success – still flaying about seeking for that easy (doomed to failure) road to riches? Or are you ready to work for your success? Only you have the answer.

An Educator Gets Taught

education

BarroMetrics Views: An Educator Gets Taught

No sooner did I arrive in Singapore that I came down with a heavy cold. Not enough to send me to bed, but enough to affect my voice and energy levels. Still, I found the trip worthwhile given I learned something new.

We are now approaching Stage 2, Practical, Ultimate III. I have learned much – specifically, what I say and what is heard can be worlds apart. For example, I use a chart pattern learned from Bob Volman that I call an FTP.

The conditions for an FTP are:

  1. A sideways pattern in a timeframe e.g. a 5-period swing on a 290-minute chart.
  2. The FTP pattern appearing at the Boundaries of Congestion – either around the high or low of congestion.
  3. A breakout of congestion on the side the FTP occurs.

In this case, the FTP signals a valid breakout.

I thought the pattern was relatively straight forward and simple. That’s not the feedback I received via the practical exercises:

  • Some just got the pattern wrong.
  • Some had the right pattern but ignored the location of the pattern.
  • A few got it right.

The great thing was the exercises allowed the attendees to adjust their mistakes.

It got me to thinking. How effective are two and three-day seminars as teaching tools when unaccompanied by practical classes?

So what’s your experience with two and three-day seminar?

Stalking

Bengal tiger stalking, Panthera tigris tigris, Western Ghats, India
Bengal tiger stalking, Panthera tigris tigris, Western Ghats, India

BarroMetrics Views: Stalking

Currently, I am stalking a short trade in the GBPUSD. The question at the back of my mind is whether the setup will complete before FOMC on September 21 (EST). The reason I have that question is: I doubt the FED will raise rates so there should be, at least, a knee-jerk rally for the GBP. Not a great scenario for shorts.

That said, I thought I’d share some of my thoughts on the subject.

Figure 1 is the cash futures for the GBPUSD going back to inception. We see that it recently broke out of a range that began in 1985. Currently, it appears to in a retest, consolidation phase. Is the retest complete?

Figure 02 seeks to answer that question. I am using the 290-min chart instead of the daily, to show the detail better. It shows that the GBP hit the Primary Sell Zone and sold off. Normally, I’d have been looking to sell in that zone. But not this time. Note:

Figure 3 shows why. You want to note:

  • The swing up began off 1.2864 on Aug 2015 as part of the congestion structure that began on July 16.
  • The sloping black and red lines are the linear regression bands I use to measure momentum.
  • The first red arrow shows that:
  1. The current high (to the top of the Primary Sell Zone) occurred on 09-06. It had at least equal momentum to the high marked by the blue arrow.
  2. For this reason, I chose not to short the pair because I am looking for a new high or at least a retest of Sept 6 high.
  • The black and red lines show my preferred price action before the retest of the high. Ideally, the GBP will drop to the Value Area High (Blue line and light green rectangle) before rallying.
  • The second red arrow shows the earliest date for the new high if we are to see momentum divergence.
  • The exercise shows that if I am to see momentum divergence, the new high needs to occur around Sept 13 or later.
  • However, unless I have at least 5 trading days before FOMC, I’ll wait for the decision before seeking to enter.

2016-09-08_06-11-56-gbpusd-01-12m-futures

FIGURE 01 GBP (monthly)

Chart through the courtesy of Chart Store.

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FIGURE 02 290-min GBPUSD

Chart through the courtesy of Market Analyst

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FIGURE 02 60-min GBPUSD

 

 

Do You Have What It Takes? 2

BarroMetrics Views: Do You Have What It Takes? 2

Motivation Dream Deadline

Yesterday I left you with a question: how do ensure that we operate from a foundation based on greater pleasure? I asked that because doing so ensures we maintain our motivation.

To answer that question, we need to delve once more into our human wiring.

  1. What drives our actions? The imbalance of pleasure and pain.
  2. What creates pleasure and pain? A thought gives rise to a feeling which gives rise to an action. That action produces results that lead to a thought etc.

The result of our actions tends to be determined by how closely aligned our perceptions are aligned with reality. The closer aligned they are, the more likely our results will bring us what we want (and that means pleasure).

It’s important to note that ‘our reality’ is the ‘out there as seen by the in here’.  Our perceptions determine what is real for us. If our reality is out of alignment with the way things are, then we are unlikely to get the results we want.

For example, if we believe that trading success is guaranteed by doubling down, then we are likely to go broke before we get rich.

The other mistake is to confuse reality with our thoughts. For example, we are long the S&P and the market suddenly dives. The reality is the market is moving against us, and we are losing $x.00. That’s it. If we catastrophize or indulge in wishful thinking, we are making our thoughts a reality – a reality that exists only in our mind.

What is the reality? It is that the market is moving against us, and we are losing $xx.00. That’s it. If we catastrophize or indulge in wishful thinking, we are making our thoughts a reality – a reality that exists only in our mind.

Our confusion of ‘thoughts for reality’ tends to surface when our fight, flight or freeze instincts are triggered. So, the best ways to deal with this primal fear:

  • Learn to accept uncomfortable thoughts and feelings for what they are – automatic responses to external events. Be comfortable with discomfort.
  • Prepare as best (and as extensively) as we can for ‘surprise’ and ‘unexpected events’ – by pre-planning our responses.

For example, Let’s say I envisage that I short the GBPUSD at 1.3307. And, no sooner do I get my fill, that the pair rallies to 1.3397.  How would I react?

I picture firstly how I would feel, then secondly, how I would react. I tell my students to ask, after entry, ‘what does the market have to do to prove me wrong?’ And to answer that question by ‘seeing’ their response is as

I tell my students to ask, after entry, ‘what does the market have to do to prove me wrong?’ And to answer that question by ‘seeing’ their response is as much detail a possible.

Through preparation and anticipation, we overcome the effects of ‘fight, flight and freeze’. Using the same process, we can ensure that the ‘pleasure’ side of the equation outweighs the ‘pain’ side. And in this way develop our grit to attain our goals no matter the barriers.

Do You Have What It Takes?

BarroMetrics Views: Do You Have What It Takes?

 

Pleasure Pain Gracia Scale

Angela Duckworth calls it GRIT. She argues that grit is more important than talent. Sure, talent gives us a leg up, but in the end, we succeed or fail by learning to do the right thing at the right time.

While I don’t disagree with her, I believe there is a pre-cursor to grit. And what is this precursor: motivation! This is especially true for traders.

Let’s examine this idea a little deeper in the next couple of blogs. I’ll be assuming that our trading plan has a positive expectancy if only we execute with some consistency,

In Pleasure and Pain, I introduced Gracia’s Pleasure-Pain Scale: the idea that we act only when an action’s (Pleasure of Action + Pain of Inaction) > (Pleasure of Inaction + Pain of Action).

The question I was asked is how to increase Pleasure of Action etc., and decrease the Pleasure of Inaction, etc.

There are a couple of ways.

The first is to make our ‘why’ (why we undertake an action) as strong as possible. I cover this subject in some detail in Live the Life of Your Dreams.  The second is to make the Pleasure of Action immediate and thrust the Pain of Action further into the future.

As humans, we are wired to opt for the immediate rewards ahead of future ones. Thus, when our flight, fight or freeze is triggered, we gravitate to taking any action to ease the discomfort. It is painful and uncomfortable to sit with a trade that is going against us. At that time, it is also painful to analyse the incoming market information and ask: ‘Early exit? Or should we wait for our stop to be hit?’ So, we act to ease the pain and discomfort rather than make a decision on our best guess based on the developing market the information.

I call these ‘impulse decisions’ and more often than not they result in our deepest fears. You know, don’t you, that behind our decision-making process is the fear that whatever we do will lead to a loss (pain):

  1. If we don’t exit early, the market stops us out for a full loss.
  2. If we exit early, the market does not hit our stop and reverses to a profitable conclusion – except we longer have a position!

So, what can we do to keep our commitment and motivation going? I’ll consider this question tomorrow.

 

Non-Farm and Rate Hike

BarroMetrics Views: Non-Farm and Rate Hike

Tonight we have Non-Farm at 8:30 EST. It has a direct bearing on whether the FED will raise rates in September. My view is it would prefer to raise them after the elections (Nov 8). For this reason, I expect the number tonight to be at the lower end of the consensus range. If I am correct

If I am correct, the FED can delay raising rates in September and pass the buck to the December meeting (Dec 13 & 14). The November meeting is schedules ahead of the elections (Nov 1 & 2).

What about economic reasons, rather than FED desires, for raising or not raising rates?

Attached are articles from Larry Levin, Seeking Alpha and Wealth Daily. Links to the sites are the bottom of the page. You’ll see some of the arguments for both sides.

Good luck tonight with Non-Farm trading!

2016-09-02 Why Fed Raise Rates Sept SeekingAlpha

2016-09-02 Levin Rate Hike

2016-09-02 Rate Hike

Brexit?

BarroMetrics Views: Brexit?

Today, the Markit/CIPS purchasing managers’ index for the sector moved up to 53.3 from July’s figure of 48.3. This data is on the back of previous stronger than expected employment and CPI.

Figure 1 shows the 15-min GBPUSD chart. Notice the gap that occurred just after the news.  Figure 2 shows the rally within the backdrop of the sideways price action since July 6. Notice that today’s action retraces the down move following Yellen’s August 27 comments.

For me, the price action sets up the GBPUSD for a high reward short. If we don’t see a retracement down tonight, we have weak longs in the market – any Non-Farm number better than consensus will cause nervous longs to exit and thus causing the current up move to reverse.

Of course, the reverse is also true. A Non-Farm number below consensus will be accompanied by more upside.

Tomorrow I’ll have supporting arguments and contra-rise for a rate rise. The next test on the horizon for the USD.

2016-09-01 GBPUSD 15-min

FIGURE 1 15-min GBPUSD

2016-09-01 GBPUSD 290-min

FIGURE 2 290-min GBPUSD

Raise or Not Raise?

BarroMetrics Views: Raise or Not Raise?

The USD spiked against the commonly traded pairs on Friday, August 26 after Yellen said:

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”

Note that she did not say that rates would rise in September. Indeed, reading her speech, I could not find one iota of new information on the timing of the rate rise. Essentially she said:

Rates will rise if warranted by the data. At this point, the data suggests it could be possible rates at some stage“.

And so, we come to Friday’s Non-Farm. Consensus expectations range is around the 175k to 180k with the range at 125K to 215K (last month 255K).

If the figure comes our around 200k or more, there will be pressure on the FED to raise rates in September (if only for the sake of its credibility). Such a number will probably lead to a sharp rise in the USD and fall in the US stock market.

It’s unlikely that the FED will welcome this sort of ‘rate-rise’ pressure. It wants to raise rates so as to be in a position to lower them when the next recession hits. Also, it probably does not want to raise rates ahead of the election results. The Nov 1-2 meeting would be the ideal time (There is no meeting in October).

Long-term readers know that I see the employment stats as tending to reflect FED preferences. For this reason, I see Non-Farm coming at the consensus or the lower range of the consensus range. Such a result would allow the FED to bypass a September rate rise.

How would a consensus number (or a number at the low end of the consensus range) impact the USD and S&P? I’d expect that for Friday, the effect would be for the USD to decline and S&P rally. We may see the USD give up all the gains it made post-Yellen Jackson Hole.

Will I position myself ahead of the number? Nope. But, I will look to trade the GBPUSD and AUDUSD if numbers come out at the extreme of the consensus range.

Pleasure and Pain

BarroMetrics Views: Pleasure and Pain

The results are in: Traders 3, Students 1.

What???

The score represents the ratio of Traders over Students who have registered for Live the Life of Your Dreams, my ebook in organisation and goal achievement.

The ebook will be out September 30.

This week, I was asked what was the best book I have read on motivation. I must admit to having a love of reading, and, as a result, I do cover a lot of ground. You’d think I have difficulty nominating just one.

Nope, the best one is Jason Gracia’s The Motivated Mind. He provides a structured approach to getting things done. And, he has insights not available anywhere else.

For example: what are the elements of overcoming procrastination? Most authors say: The pleasure of success needs to outweigh the pain of action. 

Gracia takes the view that what is needed is this: (The Pleasure of Success and the Pain of Inaction must outweigh the Pleasure of Inaction and the Pain of Action).

The book is littered with gems and insights. Well worth a read. Best of all you can grab a second-hand copy for $0.58 from Amazon. New costs more, prices range from USD 28.15 to USD 32.71 (The Motivated Mind)

For the Amazon review lovers, attached are some comments from Amazon readers.

Customer Reviews