BREAKOUT!

BarroMetrics Views: BREAKOUT!

Home! I got back on Sunday evening, and I am walking well. Tomorrow, I’ll have 20-20 vision; for the moment, the vision is adequate.

When reviewing charts on Tuesday morning, two strong rejection tails (Jan 19 and Jan 23) stood out (Figure 1). In each case, there was an early sell-off that was rejected by day’s end. This pattern usually suggests ‘in the know buying’ when seen near the boundaries of congestion, especially when the Steidlmanyer Development Formula suggests a breakout is imminent.

Tuesday’s (Jan 24) US trading saw the start of a possible upside breakout. (Figure 2). Wednesday’s (Jan 25) trading saw the breakout. (Figure 3)

However, that does not mean I was aboard. I have not traded the S&P since 2008. Under the circumstances, my regime is to first 3-4 days of simulated trading and to acquire the stats I use.

So, what now?

I’ll look to trade the retest (if it occurs). Normally we’ll see a retest in the controlling timeframe within 6-16 days following a breakout. I trade a retest only if I see a pattern I call an FTP.  Figure 4 shows the FTP and the Zone retest, 2278 to 2275. (Note the data here is the CFD data unlike the cash data in Figures 1-3).

What if there is no retest? Then I look for a continuation trade.

Tomorrow, I review the conflict I raised in ‘All Hands on Deck’ and ‘New Era 2?”

FIGURE 1 S&P Weekly

Figure 2 S&P Daily

Figure 3 S&P Daily

Figure 4 S&P 240-Min

Fear – The Trader’s Nemsis

BarroMetrics Views: Fear – The Trader’s Nemesis

An examination of my trading results shows that around 80% of my results are in the ‘win-some, lose-some’ category i.e. they have only a small impact on my annual ROI. It’s the other 20% that make a difference where my profits and losses are larger than expected.

For some time, I have focused on reducing the losses in the 20%. And, as that has improved, so too has my bottom line.

The EURUSD is an example this strategy in action. Given the setup, I had certain expectations for the price action if the trade was to be profitable. When that did not happen, I exited.

All this makes sense, right? Yet, once in a trade, we resist early exit. Why? Because of fear. We are afraid that we exit, only to have the market then move in our favour in a humongous way! Worse still, we are afraid that we’ll sit on the sidelines and miss the move; or enter late and have the market move against us as soon as we enter. And, with the nature of trading, all those things can and do happen.

But, if we examine our results, we’ll see that despite the occasional trades where we do sit out a large move, the early exit produces a much-improved ROI.

So, the question arises: how do I overcome my resistance?

The answer is through preparation. By taking a few moments to visualise our actions if ‘x’ occurs, or does not occur, we are more likely to follow-through.  This strategy has certainly worked for me.

Inflection Point – EURUSD (3)

BarroMetrics Views: Inflection Point – EURUSD (3)

Figure 1 shows the entry for my planned short position (1.0593).

One of the key requirements I have before entry is to ask two questions:

  1. “What does the market have to do for me to remain in a trade?”
  2. “What does the market have to do for me to exit immediately?”.

The answer depends on the setup. In this case given the possible negative development setup, the answers are:

  1. I need to see a continuation of the directional move within 3-hourly bars after entry.
  2. A strong directional bar up within 3 bars after entry.

We did not see (2). But, we also did not see (1); so I’ll exited the trade at 1.0607 (yes a loss of 14 pips) (Figure 2).

Tomorrow I’ll look at the rationale behind the stratgey as well as the main barrier to implementing it.

FIGURE 1 290-min EURUSD

FIGURE 1 60-min EURUSD

 

 

Inflection Point – EURUSD (2)

BarroMetrics Views: Inflection Point – EURUSD (2)

Figure 1, the 290-mins EURUSD shows that so far the EURUSD is still in balance.

The green reactangle shows the 1-period swing sideways price action that began on Friday. I am awaiting to see acceptance below 1.0612 or acceptance above 1.6830 before taking a position.

The odds, at present, slighly favour an upside breakout. The pair had a chance to breakdown on Friday in the US session but there were no sellers below 1.605. The same can be said this morning when the pair open-gapped down and then rallied.

Let’s see what happens.

FIGURE 1, 290-min EURUSD

Inflection Point – EURUSD

BarroMetrics Views: Inflection Point – EURUSD

Firstly, a note to say I am going for eye surgery today. If all goes well, my next blog will be Monday.

Turning to the EURUSD -it’s at an inflection point.

  1. Figure 1, a 13-week swing chart (quarterly trend), shows that a bullish-conviction close above 1.0652 will trigger a buy signal.
  2. Figure 1 also shows we are currently seeing a retest of the breakout that the form of a weekly sideways pattern bounded by 1.0652 and 1.0339. Acceptance below 1.0339 will confirm the downside breakout.
  3. If the downside target is confirmed, the first target is 50% of the width of the sideways pattern, 0.9836.
  4. Figure 2 shows a 5-period, 290-min chart (1-day trend) that may have formed an Expanding Terminal. It’s not perfect. I’d prefer to see a move above the ‘ac’ line and then a bearish-conviction close below 1.0612 (290-min bar) without a bullish conviction close above 1.0683.
  5. Note that the 290-min extends the buy trigger to 1.0683 from the 1.0652 suggested by Figure 1.
  6. I would be a buyer only on a daily bullish conviction above 1.0683 that is then confirmed by a weekly bar.

FIGURE 1: 13w EURUSD

FIGURE 2: 290-min, 5-p EURUSD

Welcome to 2017 – Denouement

BarroMetrics Views: Welcome to 2017 – Denouement 

Well, I was wrong about the Non-Farm number. It came in at 156K (just above the lower end of consensus {151k to 210k}). But, then why did the USD rally?

For the second month in a row, rather than raise the Non-Farm Payroll number, the US Bureau of Labour Statistics reported a massive 4% rise in average hourly rates.

This was the second consecutive “outsized 0.4 percent rise in average hourly earnings….. The year-on-year rate is now at 2.9 percent which is a cycle high. A 3 percent rate and above is widely seen as feeding overall inflation.” (NASDAQ Economic Calendar).

So, the 4% had the same effect as an above average consensus Non-Farm number.

Let’s see if we see a continued USD rise today.

The S&P gave a clue to the answer I am seeking. We saw a strong rally. If we see another rally today, I’ll have to put aside my long-term misgivings and go with the price action.  The upmove on Friday, in the face of a Non-Farm suggesting an interest rate hike, indicates we are in the initial phase of a growth cycle rather than in a terminal phase – the Trump election was an ‘unexpected event’ rather than a ‘surprise’.

ADP Meet Nonfarm Payrolls

BarroMetrics Views: ADP Meet Nonfarm Payrolls

Yesterday, in the EURUSD, I was looking for a below average true range day. The scenario was looking spot on until the ADP came out below expectations. The EURUSD promptly put on more than a 100 pips following the news.  That was quite a response.

Presumably, the EUR buyers came in because they believed that the Nonfarm number tonight would reflect the ADP. The question is how accurate is the assumption.

The only work I could find is a study done by Forex4you, “Can ADP Be Used to Gauge Non-Farm Payrolls?

The author drew two conclusions:

  1. There is no statistical correlation between ADP strength or weakness and the NFP. A strong ADP may or may not result in a strong NFP.
  2. There is a statistical correlation between two consecutive months. For example, if we have two consecutive months of rising ADP, we’ll probably see two two consecutive months of rising NFP. Note that the correlation relates to direction, not magnitude. So, last night we saw a week ADP following a strong prior month. The prior NFP was a so-so number, so we should be seeing a weaker NFP. Last month’s NFP was 178K, so this month, based on this idea, we should have a number weaker than 178k.

Or should we?

The study merely states there is a correlation of statistical significance i.e. the correlation is greater than chance. But, as a trader, I’d like to know how great a chance.

In the study we saw 47 from a sample of 77 that showed correlation i.e. a 61% probability. That sounds impressive until you consider that a normal return (what I consider a 50-50 bet), is 67% to 33%. Viewed in this light, the chances of a weak number based on this study is still no more than 50-50 bet.

Is there a better way to assess what the NFP will be?

Long-term readers know that guess at the number by asking: “what would suit the FED – a better, consensus or below consensus?”.

Given that the FED has just raised rates, I doubt if it would like to see below consensus number. It would probably like to see a number near the higher end of consensus range. The range for tonight is 151k to 210k with consensus at 175k.

My guess, the number will come in above 175k, nearer 210k.

How to trade NFP?

I certainly would not have taken positions this week ahead of NFP. Instead, I’ll wait for the number and sell (or buy) any retracement on stronger (or weaker) than consensus range.

Welcome 2017 – US Stocks!

BarroMetrics Views: Welcome 2017 – US Stocks!

Summary: Is the Trump election an unexpected event or a surprise event? If an unexpected event, then the business cycle suggests that the price action before the elections will prove to be accumulation; if a surprise event, the price action before the elections will be the terminal phase of a bull market that begin in the 1980s.

The question is not an academic one.

Rates will rise in the US next year. The pace at which they will rise is the question. If Trump’s election was an unexpected event, the rate rise will not derail the upward momentum. If it is a surprise event, the rate will rise will cause a bear market.

In turn, I think the question will depend on whether Trump’s policies will create economic growth that will outpace an increase in the deficit, In short, the inflationary infrastructure spending will need to be paid for without increasing the deficit  More, Trump needs to find a way to reduce the deficit. Research has shown that Government spending multiplier slows economic growth while a reduction in Government spending tends to have a positive impact on growth.

The price action since Nov 2 has been equivocal.

From Jan 2016 to Nov 2016, the DJIA saw a 7% rise. After Nov 2, we saw a rise of another 7%. That’s great, right? Well, the problem is range and volume have been below normal. Usually, this is a sign of internal weakness.

Tomorrow’s Non-Farm may give us a clue. If we can see a strong rally in the face of a strong number, then we may have seen an unexpected event.

We’ll see.

Welcome to 2017 – EURUSD

BarroMetrics Views: Welcome to 2017 – EURUSD

I was asked to give an example of how to apply yesterday’s ideas. I have chosen the EURUSD.

Let’s summarise the main points of yesterday’s blog:

  1. The USD is an uptrend.
  2. The Xmas and New Year period usually show a contrary trend move as institutional traders take profits for their bonus.
  3. The USD pairs tended to have sideways corrections rather than simple, deeper corrections – showing the USD strength.
  4. I expected to see yesterday, the other time zones follow the US example and drive the EIRUSD down.
  5. I expect to see, today, a sideways price action.
  6. On Thursday I expect to see a small range day ahead of Non-Farm Payrolls.
  7. Friday’s price action would be determined by the Non-Farm number.

OK, let’s have a look at the EURUSD.

Firstly some context….

Figure 1 is the 13-week swing chart showing a downside breakout of a sideways pattern that started in March 2015. Under normal conditions, I’d say we have yet to see confirmation – there is no bearish conviction bar. But, under the present conditions, I am happy to assume that the EURUSD has broken out to the downside.  A weekly bullish conviction-bar close above 1.0620 would negate my assumption. A bearish conviction below 1.021 would confirm my assumption especially if accompanied by seven bars whose highs do not exceed 1.0618.

Turning now to the Xmas and New Year Period – Figure 2, Daily……

I’m going to separate the analysis into two.

Firstly, the pre-Xmas period that commenced on Dec 19. Note the sharp drop in true range from Jan 19. From Jan 21 to Jan 23, the EURUSD moved north.

Secondly, the pre-New Year, commencing on Dec 28 and ending Jan 30. Here we see a classic short squeeze. The instos were able to drive prices beyond 1,.0524 to trigger stops. Finding there was no continuation buying, the EURUSD sold off.

Figure 2 does not show it. But, the US was open for trading on Jan 2 and US traders drove prices down as they reinstated their short EUR positions. The other time zones followed suit on Jan 3.

Turning to today’s price action…Figures 3 &4, 60-mins

There are two possible resistance points where the high of today might form. From Figure 3, the current high 1.0433. But, for me, the more likely resistance that will hold, ahead of Non-Farm, is the Figure 4 zone, 1.0452 to 1.0490.

I believe the low at 1.0339 will hold until after Non-Farm.

I’ll post my Non-Farm view on Friday.

FIGURE 1 13w EURUSD

FIGURE 2 18d EURUSD

FIGURE 3 5d & 3d 60-min

FIGURE 3 5d & 3d 60-min

Welcome to 2017 – USD!

BarroMetrics Views: Welcome to 2017 – USD!

Summary: I expect to see USD strength to continue to at least end February.

The question is what effect will Trump’s election have on the USD? Before his victory, we saw a strong USD.  The initial reaction to the Trump victory was as USD sell-off followed by, on the same day, a reversal of the USD weakness for the USD to end strongly. This strength was especially notable in the USDJPY.

The pre-Xmas and New Year showed profit taking as institutional traders squared positions to take their bonuses. But, even here, we saw USD strength displayed: a sideways correction rather than a deep retracement.

Then yesterday, in the US time zone, (Asia and UK closed for holidays), we saw a resumption of the USD uptrend. I expect to see USD strength in the UK zone followed by some squaring of positions in the US ahead of Friday’s Non-Farm payrolls. That number will have an impact, but my expectations for it will be the subject of a blog on Friday morning (AEST).

For me, the key chart is the Asset Monetary Base (Figure 1). We are seeing a breakdown suggesting that the funds presently deposited with the FED are making their way to Main Street. If I am correct, we should see inflationary pressures by end February 2017. An inflationary increase normally means that US rates will rise (USD up).

But, will that be true on this occasion?

At this time (Feb 2017), the question will be whether we’ll see:

  • the expected inflationary pressures due to Trump’s proposed infrastructure proposals, (USD strength) or
  • will Trump’s trade policies send the US economy into reverse? (USD weakness). If this scenario occurs, we may see the FED return to QE.

We’ll see

FIGURE 1 Asset Monetary Base