Black Swan

BarroMetrics Views: A Black Swan

Sometime in October or November, Italy will be going to the polls on a referendum called by Renzi. The referendum is for Renzi’s structural constitutional reforms. If the referendum succeeds, he’ll be free to carry out what appears to be much needed economic changes. If it fails, Renzi will step down – at least he has promised to do so. And, if he resigns, we may well see a parliamentary election that leads to Italy leaving the EU.

Unlike the UK, Italian participation in the EU is key to EU’s continuation. It is one of the core members and the third biggest economy. An Italian departure would lead to a break-up of the community.

What are the chances of Renzi losing the referendum? The polls suggest it is too close to call. And unlike the UK, I don’t follow Italian matters closely – so I have no personal assessment to rely on.

What I do know if there is a populist party, the 5-Star Movement, which has promised to withdraw from the Euro Zone if elected. It has won mayoral elections in Rome and Turin and is running even-stevens with Renzi’s PD party in the polls.

A loss to the 5-Star Movement under current conditions may well be the Black Swan that will bring about a decline in world stock markets.

We’ll see.

 

 

Whither the Summer Hols?

BarroMetrics Views: Whither the Summer Hols?

The doldrums should come to an end with most US schools returning towards the end of August. Moreover, the Non-Farm Payrolls are due on September 2. Given the conflicting views expressed by the FED chiefs on the US interest rise, the Non-Farm will be an important guide to the September FED meeting outcome.

Figure 1 shows that the S&P is at an inflexion point. A bullish-conviction bar close above 2242 will return me back to the 2009 strategy: long or out. A bearish conviction close below 2101 provides an Upthrust Change in Trend of a quarterly magnitude.

2016-08-24_18-15-42 S&P

FIGURE 1 13w S&P Cash

 

 

Thank Goodness for the Cable

BarroMetrics Views: Thank Goodness for the Cable

August is traditionality a tough month for traders. With the US summer school holidays, come light volumes, and directionless trading. This year GBP came to the rescue. Courtesy of Brexit, we have seen a strong downtrend develop.

Today the continuation of the trend will be either confirmed or rejected at 16:30 HK with the release of the UK employment numbers – expected to come in unchanged (4.9%) from last month.

Yesterday’s CPI led to a strengthening of the GBP when it came in at 6% rather than 5%. Pundits expressed surprise at the slight higher number. I don’t know why. In my view, Carney had telegraphed the inflation number when he told us that the BOE would continue with QE even in the face of higher inflation numbers.

I also believe that his comment also implied that the other measures of the UK economy would be worse than normal.

Yesterday’s rally allows a shorting opportunity. With expectations of an unchanged number, the GBP ought to give back the gains it following the CPI  – at least until 2:00 am Thursday (HK time) or 2:00 PM EST when the FOMC minutes are released.

I expect the minutes to show bearish inclination to raising rates. If so, we may see the GBP rally. The structure of the rally will indicate whether or not we have another longer-term shorting opportunity. I’ll cover that tomorrow.

While shorting the GBP (I prefer the GBPUSD pair) is strategically easy; tactically it is less so because it involves a time window between 4:30 PM Wednesday (HK time) to around 1:00 am Thursday (HK time). Given the time window, we’d need to take a position ahead of the number. Executing this entails additional risk.

I’d cope with the risk by taking a position size of no larger than half normal size and seeking to cover if the number comes in better than expected or within expectations.

The target would be around 1.2877 or exiting at 1:00 am, Thursday  (HK Time).

 

Fed Rate Rise September?

BarroMetrics Views: Fed Rate Rise September?

On August 3, Jerome Powell gave some interesting comments at the Brooking Institution conference.

Powell is a member of the Federal Reserve Board of Governors. He told the Finanical Times that “he favoured a ‘very gradual path’ for any rises as US economic outlook was dogged by global risks”.

Note however, that the comment was before the better than expected Non-Farm payrolls number of August 5.

Will that cause him to change his mind?

I think not. He as been consistent is saying that the rate rise ought to be done gradually. I rate him as a ‘1 Dove’ although Bloomberg rates him as ‘neutral’ (See Fed Hawke to Dove Scoreboard)

 

A GBPUSD Short

BarroMetrics Views: A GBPUSD Short

Back home and the jet lag? Well, slowly getting better. The first day, I went to sleep at 5:00 a.m. and got up at 12:00 p.m. Hopefully today will be better.

While in New York, I took a short GBPUSD ahead of the BOE rate decision.

Figure 1 (13-week swing chart) was the basis for my decision. Brexit resulted in a downside breakout from a congestion that started on January 23, 2009.

The pair then bounced off the Linear Regression Primary Buy Zone and retraced to 1.34789. I consider that retracement to be a retest of a 5-day swing magnitude.

If I am correct, we should now see a move to the 5-d Primary Buy Zone at 1.28774 to 1.27810 (Figure 2). At time of writing, the Value Area low at 1.30186 is providing support. A daily close above 1.13253 will provide a ‘death zone’ buy signal and will suggest that the high at 1.3480 will be breached.

So, the 1.3253 level provides a basis for a ‘line in the sand’ stop for the shorts.

There you have it:

  • Entry
  • Stop
  • Profit target for the 2nd third (Rule of 3).

2016-08-08_11-43-48 GBPUSD 13-w

FIGURE 1 13-week GBPUSD

2016-08-08_11-44-19 GBPUSD 5d

FIGURE 2 5-d GBPUSD

Up or Down? II

BarroMetrics Views: Up or Down? II

Yesterday, I provided the technical context. Today, let’s consider a possible trade.

Figure 1 shows the 290-min GBPUSD. We see a possible running correction. If this view is correct, we’ll see the lows at 1.27912 established on July 6 taken out.

Figure 2 shows the alternate view: the move to 1.3102 was a correction to form a measured move up.

The BOE decision tonight will determine which view is correct:

  • A rate cut will lead to Figure 1;
  • A decision not to do anything will lead to Figure 2.

I rate the chance of at least a .25 cut at 67% and have made plans to short the GBPUSD should that come about. A ‘no-cut’ decision, means I stand aside.

2016-07-14 GBPUSD 290-min 5-p (1)

FIGURE 1

2016-07-14 GBPUSD 290-min 5-p (2)

FIGURE 2

Pairs in CrossHairs?

BarroMetrics Views: Pairs in CrossHairs?

There are two forthcoming events that should determine the near-term direction of the GBP. Before I come to the two, let’s have a look at the USD following the Non-Farm.

The number was a very good one over 50K above the consensus number. In the past, such a posting would have sent the S&P down and USD strongly up. Yet, on Friday, we saw a stronger stock market and flat USD.

I thought perhaps we’d see the USD take off this morning, but so far nary a whiff of bullishness.

The best explanation is the markets believe that the FED will not raise rates in July and will not raise rates in 2016. So, if I am looking to short the GBP, I need to focus on what will move the GBP.

And this context brings me to the two events:

  • July 14, the BOE to lower rates?
  • July 29, the EU bank stress test. I am interested in the Italian results.

I expect the BOE to cut rates. The news since Brexit has not been good, e.g., consumer confidence took a big hit (UK Economy Showing Brexit Effects).

It seems to me that putting aside the knee-jerk reaction to a decision to leave rates unchanged (GBP up), the sentiment is such that, in the days that follow the BOE decision, the GBP will head south –  on the basis that Carney failed to show support for the UK economy.

If he does cut rates, the GBP will head south.

Whatever the BOE decision, it will leave the GBP exposed to the July 29 stress tests.

I expect that the July 29 report will place great stress on the Italian banks. (See Essential Repairs). Renzi has said he’ll resign if the referendum fails. Accordingly, he needs to keep the Italian public onside. Now, if a main Italian bank, e.g. Monte Pashi looks likes crashing out, retail investors will lose big time (Essential Repairs).

In the event the bank threat comes to pass, I can see Italy bailing out its Banks whether or not Germany likes it. Such an Italian move would threaten the existence of the EU. The resulting uncertainty will cause a further decline in the GBP.

Let’s see what happens………

 

 

In Hibernation

BarroMetrics Views: In Hibernation

The FX markets seem to have retired for the winter – well, perhaps that’s an exaggeration. But, we can say they are in a state of hibernation. I see it as the calm before a storm.

Let’s see what the European and Aussie pairs have been doing…..

At the airport yesterday, on the way home, I was met with the FT headline:

“Renzi ready to defy Brussels and bail out Italy’s troubled banks”. (see attached for the full story).

I was expecting to see a reaction in the GBP and Euro crosses. Instead, there was nary a response. This morning I read:

“Italy denies report on EU bank bailout revolt”.

The attached shows a one-line rebuttal with no details. Perhaps the denial was the reason why the FX response was so muted?

But, then we have the AUD situation. The elections are on a knife’s edge – a hung Parliament is a real possibility. But, instead of the drop we’d expect to see on ‘uncertainty’, we see the AUDUSD post a reasonable rally of 106 pips.

What then would be the reaction once the results are known?

The stillness permeated into the US stock indices.

The S&P had a very quiet day forming a DOJI after three strong up days and forming right on resistance levels. A pause before the next hurricane?

I have been out of the markets since Brexit because I wanted to see how the markets would respond. I think it’s about time I started preparing for the next trade.

Renzi ready to defy Brussels and bail out Italy’s troubled banks — FT

Italy denies report on EU bank bailout revolt

US Stock Indices to Make New Highs?

BarroMetrics Views: US Stock Indices to Make New Highs?

A quickie post, folks.

The weekly ES (E-mini futures, nearest futures month) is showing an interesting pattern (Figure 1): if we see a bullish-conviction close above 2064, we’ll probably see a move to 2075; and a bullish-conviction above that price will see a move to 2118.

I am waiting to see if there is a sell-up at the price levels. I’ll be looking for:

  1. A LRB momentum divergence (Figure 2) i.e. a new price high that provides a lower momentum high; and
  2. A MDD volume setup (see Figure 3) i.e. an up day on selling volume. The setup occurred yesterday, but since I did not have a resistance level, I ignored it.

It’s worth repeating that have to occur at the designated resistance levels for me to take note of them.

2016-06-29 weekly es

FIGURE 1 Weekly ES

2016-06-29 60-min chart

FIGURE 2 LRB 60-min ES

2016-06-29 MDD_24hrs

FIGURE 3 MDD ES Pit & Globex

Brexit, A Trade Post Morterm

BarroMetrics Views: Brexit, A Trade Post Morterm

My blog will be patchy this week. I’ll be in for a minor procedure on Tuesday, June 28; then from June 30 to July 4, I’ll be engaged in preparing for the seminar I’ll giving on July 2 & 3.

I received a couple of posts asking if I could go through the trade process for the Brexit trade.

Sure, happy to oblige. But, first let me say that this was one of those trade were I was just in sync with the market. Perhaps it was because I was also coaching some friends on what to do that contributed to the synchronisation. It’s the first time I have used ‘whatsAPP’ to give trade recommendations.

The trade context is well set out in the posts here. So, I won’t repeat why I  looked to take the trade. Suffice to say I was looking to sell 100k GBPUSD ahead of the Brexit results. The 100k was a small position (my normal size is around 1M to 2M). The blog entries also explain why I reduced my size.

My original plan was to sell between 5:00 to 6:00 am HKT on June 24. But, at 14:13, I took the view that the cable was going to head south. So I sold 100K at 1.47682. At 14.20, I Whatsapped: ”

“Sold cable 100k 1.47682”. 

Now if you read the blog, you’ll know that I was not planning to place a stop. The reason being that in high volatility times knowing where to place the stop is very difficult. Hence, the reason for the small size.

One of those being coached asked: “Where to put stop?”

I replied: “The stop is the result of the referendum”. 

At 15:01 I messaged:

“The pop to new highs on low volume has changed my entry structure. So, I’ll exit current shorts above high vol node (1.4758) at 1.4767 (offer).

This strategy will be scratched at 10:00 pm UK (5:00 am HK). So if buy not filled by 10:00 pm UK, will run the 1.47682 short into referendum

If filled will sell 100k at 10:00 pm UK.” (10:00 UK is 5:00 am HK).

Figure 1 shows the entry and exit (red arrow entry, green arrow exit).

I awoke at 4:30 a.m. A poll result showing that the ‘remain’ camp had established a 4-point lead sent the cable up. I waited till I I saw some selling and sold 130K. I had not expected cable to get to 1.50 and so decided to sell a little more.

I Whatsapped: “Sold this morning 1.49623″.

At 742, I closed off 300K at 1.44139 to reduce the loss if the referendum went against me. One of my coachees (the one who asked where to place his stop) then Whatsapped to say that he had been stopped out in the 5:00 a.m. run. This price action is typical action during high volatility days.

I closed out the 100k position once it was clear the referendum had voted to ‘leave’. At 12:27, I messaged:

Cut all my positions at 1.3307″. 

Takeaways:

  • During expected high volatility days, stops are not a useful means of loss prevention.
  • Better is to reduce position size so that an extreme move will still not decimate the account. If cable had gone against me and my close out was the same as my profit, I’d have lost 1.3%.
  • Trying to get on board once the train has left the station exposes us to wide spreads. At one point one broker had a spread of 10 pips and another 12 pips. Another reason why keeping size relatively small is important.
  • Don’t be greedy. On days like these, once the uncertainty is removed, expect to see a profit-taking reaction. (My reason for exiting at 12:25).
  • Finally what do we do now? My recommendation – stand aside for a few days. I’ll give my reasons in the next blog.

06-24 30-min GBPUSD

FIGURE 1 GBPUSD 30-min