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

 

‘Harbour Waves’ in the Horizon VII

BarroMetrics Views: ‘Harbour Waves’ in the Horizon VII

Depending on what polls you look at, either:

  • The ‘remain’ camp is marginally ahead.
  • The ‘leave’ camp is marginally ahead.
  • Both camps are equal.

With all of these numbers, the ‘undecided’ have not been included. So, clearly, they hold the key. Which brings me the bookies odds………

Bookies frame markets firstly according to their evaluation of the chances of the candidates and then alter the odds according to the weight of money.

The odds started around 50-50. Now the odds are:

  1. Remain 1-4 (on) (75% chance of winning)
  2. Leave even money (50% chance of winning).

Given the pools, the ‘remain’ camp offer less than value; the ‘leave’ camp is just value. In Buffet’s words, there is ‘no moat’ – at least as far as the probs are concerned.

So why am I keen to take a position ahead of the results? Because of the potential return if ‘leave’ wins.  Assuming for the moment that the bookies’ assessments of the probs of camps’ winning are correct, the potential return is what makes the difference.

The ‘remain’ camp returns have been seen a strong move since June 16. Cable, for example, at time of writing, has moved up 8% (811 pips) in 6 trading days (about a week). Putting that range into perspective, the current ATR is (300). So we have seen a greater than weekly ATR move ahead of the referendum result.

If we look at calendar periods, the current weekly range is 411 pips, about 37% greater than normal.

With that in mind, let’s remember that our expectancy return is based not only on the probs of winning, but also on the possible return. So my assessment is:

  • Remain: Prob of success x Expected Return = X
  • Leave: Prob of success x Expected Return = Y.

Over a 5-day horizon after the referendum, I expect to see: if the ‘leave’ wins, a 20% drop in the Cable; and if the ‘remain’ camp wins, a 5% increase (given the move up we have already seen).

Of course, my estimates could be totally off or could be very accurate. But, this is a challenge we face with all trades.

The one thing I would emphasise: if you do initiate a trade before the referendum, keep your position size small. The size will be compensated by the increased volatility.

‘Harbour Waves’ in the Horizon V

BarroMetrics View: ‘Harbour Waves’ in the Horizon V

Chris asked: ‘Can you explain why the GBP will fall if the Brexit vote wins?’

Some economists suggest that an exit will cause the UK economy to falter initially and then recover. Others feel that the drain of an exit will take longer to recover.

I have attached two views as examples.

One thing is certain, legally, because of the treaty obligations, there will be a substantial unwinding period as laws will have to be amended and rescinded.

For me, the reason why the GBPUSD will fall is because no one is sure what Brexit will mean to the UK economy. And, since traders & investors abhor uncertainties they cannot rate, exit of positions is their usual response. To this, add the fact that most funds are long cable, and you have two good reasons for the decline.

My reasoning follows the same logic for my taking of small long Cable position at the open of yesterday. I felt there would be a switch back to the ‘remain’ camp as a knee-jerk reaction to Jo Cox’s murder.

If the referendum were to be held today, I’d be less confident of a ‘leave’ vote. But, the referendum is being held in 2-days. By then the Cox effects should have dissipated – if ‘remain’ wins, my ‘historical’ thesis would be proven wrong.

We’ll see. As of now, my small short Cable trade to be taken June 23 is still on track.

06-20 Global Counsel Impact Brexit

06-20 Woodford impact Brexit

‘Harbour Waves’ in the Horizon IV

BarroMetrics View: ‘Harbour Waves’ in the Horizon IV

The price action of the US stock indices suggests that a Brexit will send them into a tailspin.

So far this blog, I am going to look into my tea leaves and give you my two-cents.

The polls are some guide, but they have all been within the margin of error. So their absolute numbers are less useful. I rather view their levels as more an indication of momentum. As such, given the closeness of the polls, the last polls before the referendum will be a much better guide.

I am tracking the polls in Excel. I have attached a copy in case you are interested.

There is one aspect that has not publically been canvassed: the history of the UK.

Much has been made of how wrong the polls were in the Scottish referendum: the polls said the leave camp were set for victory, but lost In that referendum, I took a set against the referendum results. The reason: the lessons of history.

The UK has had a history of internal strife that has never resulted in a split. I took a set against the polls because I could see no reason why the Scottish referendum should prove any different.

History on Brexit has other lessons. The Brits have been fighting the French and Germans (at times allies with one against the other) for centuries. Brexit is essentially the same battle. I can’t see the Brits choosing to remain given the closeness of the polls.

Assuming the polls remain within the margin of error, on June 23, I’ll be taking a short cable position on small size (25% of my normal size). The reason for the size is I expect that if I am wrong about the result, I’ll probably see a 300-pip against me as soon as the result is known.

On the other hand, especially if the polls shows the remain camp in ascendance before the referendum. A Brexit is likely to see an over 600-pip decline. The reason for the reaction would be the hedge funds exiting their long cable positions. It’s unlikely the retail punter would be in the game – though some may seek to join the party if the polls continue to shift to remain camp.

Brexit Polls Tab 2016-06-18

 

 

Evidence of a Top?

BarroMetrics Views: Evidence of a Top?

I have espoused the opinion that a top in the US stock marker will occur no earlier than late 3rd quarter 2016 to end 1st quarter 2017.  I have also suggested that the investor faith in the FED has to be undermined before the bear can be given full effect

Yet……

Figure 1 shows the S&P following last night’s FOMC (and Figure 2 shows the DJIA).

Based on what you see, you’d have thought that the FED  had disappointed the market expectations. Instead, it delivered everything the stock market could have hoped for and perhaps a little more.

  1. Rates remained on hold.
  2. The accompanying statement was more dovish than expected:
  • The amount of rate hike for 2016 went into reverse.
  • The US growth projections were revised down.
  • In her press conference, Yellen omitted the comment that the FED would be looking to raise rates in the coming months.

So, the question must be asked, is the belief in the FED, coming to the rescue of a bear market, diminishing?

My view is no. I think it’s more a question of the Brexit decision weighing on the market.  We’ll have a better handle once the Brexit referendum is known.

06-16 NVD

FIGURE 1 S&P

06-16 NVD DJIA

FIGURE 2 DJIA

 

 

 

‘Harbour Waves’ in the Horizon III

BarroMetrics Views: ‘Harbour Waves’ in the Horizon III

QE managed to create a floor under US stock indices since its inception in 2007. In the process, it widened the income gulf to the point that has almost extinguished the US middle class.

Despite the FED’s avowed intention to stop QE, it has effectively continued it by keeping interest near zero, and by topping up maturing bonds. In other words, QE has stopped growing, but it is being maintained.  There also seems to be a belief permeating the US stocks that if it throws a sufficiently large tantrum, the FED will reverse its policy.

Perhaps that explains the belief permeating US stock players that if they throw a sufficiently large tantrum, the FED will reverse its policy.

That’s the context for Brexit.

In my view, the adverse economic effects of Britain leaving the EU cannot be contained by the FED – no matter how much money it creates. Brexit will be one ‘unexpected events’ Pete Steidlmayer spoke off – an event that changes the fundamental structure of the market.

If this proves correct, then my view of a bear market beginning in the last quarter 2016/furst quarter 2017 will be proven wrong. The bear market will happen earlier.

How likely a Brexit?

Polls rate it a 50-50 chance (with the ‘leave it camp’ a nose in front). Financial pundits (like Bloomberg) point to the difference in one-month and one-year volatility and take the view:

  • Because the one-year is not showing a massive increase, the markets believe Britain will remain. And,
  • Where markets and polls diverge, we ought to rely on the market judgement.

The pundits do have history on their side. But, this time, they’ll probably be proven wrong. We’ll see.