Interest Rates Rise – Impact on US Stock Indices?

 

BarroMetrics Views: Interest Rates Rise – Impact on US Stock Indices?

Non-Farm today and I am expecting a figure that is is at least on the better side of consensus (Consensus range: 162K to 240K, Consensus: 200K).

If I prove correct, that will clear the path for the FED to raise rates. That it would, provided the job figure produced no surprises, was made clear by Kaplan and Fisher. It was also confirmed by Yellen.

Let’s assume rates do rise. What effect will that have on the S&P?

I suggest very little in the way of a bearish reaction.

I see this current move as being the last leg of the   13-w bull market that started in 2008. It’s what I call an R2 move (parabolic rise) that is driven by sentiment. My sentiment tools rate the current move to be on par with the 1987 top. Gann Global has a possible date for the top in the time zone, March 17 to April 10.

However, I do think we’ll see a bullish reaction, given that the S&P is in a parabolic move up. Gann Global has a possible date for the top in the time zone, March 17 to April 10.  I’d like to see the S&P put on another 10% before I become overly bearish. In the meantime, I am keeping an eye on the corrections: a 3% drop will signal a top is in place.

 

 

Overcoming Bias 2

BarroMetrics Views: Overcoming Bias 2

Yesterday we saw how I have acquired a bias for the short side in the GBPUSD. By the way, this is inevitable once we form a view of the side that is likely to produce a low-risk, high probability profitable trade.

At this point, I analyse the pair with of my Trader’s Timeframe lenses.

The first step is to list my observations, then categorise them as ‘bull, bear, or neutral’. Following that, I look to integrate the information and assess the probability that the downtrend is likely to continue or change.

Before I move on to the next item in the analysis stage, ‘zone’ (where will I take the trade), I consciously look for information against the bias. This step seeks to ensure I am not suppressing information or falling prey to the heuristics that have proven to be my Achilles’ heel: representativeness, anchoring, framing and confirmation.

Let’s look at the ideas in action. (My trader’s timeframe is the 18-day swing).

In the GBPUSD, I have assessed a downtrend that is likely to continue to in the higher timeframes. Figure 1 shows the 18-day (red line), and 13-week (black line) and 12-month (green line) daily equivalents. They swing lines show the trends: monthly, quarterly and yearly respectively.

At first glance, the 18-day downtrend seems intact. If that were the case, my strategy would be to go long in the sell zone around the current swing highs, or upon a break of the most recent swing low.

But, when I actively looked for ‘long’ info,  I saw:

  • Since 2/28/2017, as the pair moved South, its ATR dropped from around 130 to 90. In Market Profile terms, the pair ‘is not facilitating trade’. In short, we do not see the price action that would suggest downside continuation. Most likely, if the longer-term downtrend is to prove itself, we’d first need to see higher prices.
  • The structure since 09/06/2016 has formed what I call a ‘rejection high, rejection low, value area 313’ – a label for a ‘bell-curve forming’ process.
  •  In this pattern, the next high probability move is:
  1. acceptance above the Value Area high at 1.2774 (red TPL) for
  2. a move to the Primary Sell Zone (1.3434 to 1.3210) of
  3. the structure bounded by 1.3448 and 1.1644.
  • However, if instead of an upside breakout, we see acceptance below the rejection low at 1.1985, we’ll probably see a re-test of 1.1644 and even more likely, its breach.

So, by looking for ‘non-confirmatory’ clues, I  have changed my initial views of where to take trades and the likelihood of an 18-d trend change. (A rally to the PSZ at 1.3434 to 1.3210 would break previous 18-d swing highs and thus negate the 18-d downtrend).

The process may seem complicated. But, as with most habits, it’s only difficult at the beginning. Once internalised it becomes second-nature – though I still use a check-list to ensure I consciously cover all bases.

We’ll never totally eliminate the biases occasioned by our mind’s unconscious reasoning – nor would we want to because they serve an invaluable function. But, by being self-aware, we can reduce their adverse influences when their use would lead us astray.

So, over to you: what are you common biases?

(By the way: ECB rate decision announced tonight at 16:30 HK time – may stimulate an increase in the ranges [at least of the majors and European crosses])

FIGURE 1 GPUSD 18-day and higher swings

FIGURE 2 GBPUSD 18-day swing

 

 

Overcoming Bias

BarroMetrics Views: Overcoming Bias

I was asked to give an example of overcoming bias, especially confirmation bias. I’m happy to oblige.

Let’s look at the GBPUSD.

You’ll recall that some readers (and I) made good money anticipating Brexit (see BarroMetrics Views: Brexit, A Trade Post Morterm).

After the ‘flash crash’ (red arrow, Figure 2), I decided to take the pair off my radar until the effects of the crash had dissipated.  I felt that the move had not only taken out all the stops that would have provided some directional move (around the 1.3000 level),  it also meant that the GBPUSD would need time to digest the volatility.

That was over five months ago, time enough for the effects to be forgotten. So recently, I placed the pair back on my watch list. When I do that, the first thing I do is the answers to two questions:

  1. What is the trend of my trader’s timeframe (18-day swing representing the monthly trend)?
  2. Is it likely to continue or change?

The answers provide me with my strategy (go long or short or stand aside). And, my first step to clarify the strategy is to review my long-term and 12-month swing charts.

Figure 1 is a long-term monthly chart going back to 1900. I suspect it is a spot monthly of the futures market because the prices and dates of swing highs and swing lows don’t quite match up with the FX data. Nevertheless, the chart is useful for perspective.

Notice from the chart:

  • There was a sideways market starting in Sept 1992.
  • Last year the GBPUSD broke out from the 25-year old congestion pattern last year.
  • The sideways pattern was the Value Area of a larger swing high (Nov 80) and low (Feb 85). Market Profile theory suggests that we should have seen an upside breakout (i.e. above Nov 07 high). The fact we broke down suggests a move to at least the Feb 85 low and probably a break below it.
  • We saw a similar idea in action with the upside failure breakout in Nov 07. The breakout ought to have fueled a move to the Nov 80 high. When it did not, we could say that was a high probability we’d see the Jun 01 and Mar 00 lows and probably their breach – the downside breach is what we saw in 2016.

Figure 2 shows the congestion pattern displayed with my FX data from MarketAnalyst

  1. I have marked the swing highs, and lows, with a tool MA calls Time Price Labels (TPLs).
  2. The two green rectangles identify what I call FTPs – possible areas of resistance and more: prices on corrections tend to be drawn to these zones more than they are to spike highs and spike lows.

The two charts provide the background, the context, to my trader’s timeframe (18-day swing line representing the monthly trend).

My conclusions are that the trend will probably be down, and likely to continue: a downtrend established by a break below a 25-year old pattern does not reverse in 12-months.

My conclusions also form my bias.

More tomorrow.

FIGURE 1 Long-Term Chart GBPUSD

Chart through the courtesy of ChartStore

FIGURE 2 12-M Swing GBPUSD

Chart through the courtesy of MarketAnalyst

The Sale – S&P in Bubble? 2

BarroMetrics Views: The Sale – S&P in Bubble? 2

One of the main lessons I seek to drive to drive home to those attending my seminars is to ‘see the other side’. When you do this, you bypass a host of biases, e.g. the confirmation bias, and the anchor bias. By ‘see the other side’, I mean review your analysis with the assumption that it’s incorrect: what would happen if the alternatives prove true?

In The Sale – S&P in Bubble?, I took the view that an S&P top would occur later than Dent was predicting. In what way could I be wrong? Well,

  1. It may not occur at all. That poses no danger to my longs – the current trade management strategy would take care of the situation.
  2. It occurs earlier. This situation does pose a danger.

With (2) in mind, let’s look at the possibilities.

What evidence do we have that the S&P’s recent trajectory suggests a top?

I like to use Gann Angles when measuring acceleration. The MarketAnalyst software allows me to set the price-time ratio scale so that I can compare different times and instruments.

Figure 1 (log chart) shows the 13-week bull runs since the 1994 low. We see:

  • The run from 2009, showed an acceleration when compared to the two previous, and
  • The current run off 8/28/2015 low has accelerated again.
  • Indeed, the run since the Trump election (not shown) has again accelerated and is now above the 75-degree angle (1×4 for Gann enthusiasts).  This sort of move usually marks a blow-off, last move up of a structure.

Gann Global runs a newsletter that looks to identify possible tops and bottoms using prior stats and applying Gann’s ideas. In a recent public webinar, it suggested that there was a confluence of dates to mark a significant top (correction or final to be determined) in the time zone March 17 to April 10.

To identify if projected top has taken place, Gann Global uses the recent S&P pullback of 1.9% (2278-2233 cash S&P) as a trigger. I’d also use that corrective structure as a guide, but I’d need to see a move to 2224 before I’d say that the top is in.

So, how to use this info?

Watch the angle of ascent into the March 17 to April 10 period. If we maintain above the 1×4 or accelerate above it, I’d tighten my stops. If we reduce to the 1×2, I’d maintain my current strategy.

So, if you are long US stocks or US stock indices, how are you managing the trade?

FIGURE 1 S&P 13-week with Gann Angles

 

 

 

The Sale – S&P in Bubble?

BarroMetrics Views:  The Sale – S&P in Bubble?

I received a couple of emails challenging my assertion that the S&P is in a bubble. Rather than write a couple of blogs about my reasons, let me refer you to Dent’s excellent book pictured above.

In The Sale, Dent not only provides seven guiding principles for identifying bubbles, but he also sets the four cycles he uses for making his predictions (Figure 1).

This is a must read book for any trader-investor.

Dent’s view is we’ll see a major bust late 2015, early 2016 that will accelerate throughout the rest of 2016 into early 2018.

With that idea, I now disagree. I say ‘now’ because it wasn’t too long that I’d have agreed.

But, I have taken the view that Trump has changed market sentiment enough to upset the cycles. Postpone, for how long? I’m not sure, but it would have to be long enough to produce the disappointment necessary to reverse the bullish sentiment. So, it’s have to be a postponement for at least a year, perhaps two.

Just how bullish this sentiment is can be seen from today’s HK FT headlines where the 300-odd point rise in the DJIA was attributed to the belief that the FED will raise rates(!!??). It wasn’t long ago that the pundits were attributing every pull-back to a rate rise.

I wonder what they’ll say if we do see a rate rise in March (still unlikely in my book) and stocks dip? For me, clues of a bubble are when all news is seen through the lens of a rising market. We are seeing that at the moment.

My strategy remains, ‘long or out’. If long, reduce position size, use trailing stops and allow large slippage stop fills.

FIGURE 1 Dent Cycles

Broker Selection

BarroMetrics Views: Broker Selection

One of the most important functions we have as traders is finding a broker that we can rely on and feel confident in: that we won’t lose our hard-earned if they close.

For retail traders, there are only two jurisdictions I like: Singapore and Switzerland.

  • Singapore because MAS has a sterling track record. In the collapse of MF Global (2011) and Refco (2005), not a single Singapore client lost money.
  • Switzerland because the Government guarantees deposits up to 100,000.00 CHF. The drawback in Switzerland is the only licensed broker I know of is Dukascopy. I’m told, by my students and friends, that small accounts experience unacceptable slippage on stop orders.

I am not commenting on London’s FCA registrations because I have no experience with them. In the US and Australia, clients of failing brokers have lost some or all of their deposits. It’s true that in these situations, the brokers had failed to place funds in segregated accounts, in breach of regulations (e.g. MF Global), but the net result is the clients lost money.

Here is a link to an excellent article by Forex Peace Army on the subject:

http://www.forexpeacearmy.com/community/threads/how-to-select-a-forex-broker.2333/

Self-Awareness & Trading

BarroMetrics Views: Self-Awareness & Trading

Read what passes for education, and you’ll see that it focuses on METHOD – find the ‘right method’, and your fortune is made. Unfortunately, nothing could be farther from the truth.

That’s not to say any old METHOD will do. Our Method must have a positive expectancy. But while METHOD is necessary, alone it is not sufficient. We need to have proper Money Management and the discipline to make the best decision possible in the circumstances. That said, it doesn’t mean our decisions will always be correct. They need only be correct enough of the time to give us a positive result.

Let me give you a concrete example of what I mean. First, some context.

Since late 2014, early 2015, I have adopted an early exit strategy during ‘ebb phases’.

The result has been beneficial. My average drawdown dropped to 3%, and max drawdown dropped from 28% to under 10%. Moreover, my annual ROI improved, with 2016 being my second best year since 1990.

This year, the results have not been great. For closed out positions, I should see around -3.8% for Jan and Feb. clearly I am in Ebb Phase.

I started today with two open FX positions, the AUDNZD and NZDJPY. Of the two, I was most confident that the NZDJPY would run to target at around 72 (Currently around 80.75)

But this morning, in the 290-min equivalent of a 5-day swing, a buy signal was triggered (Figure 1, green arrow). In turn, the buy triggered a liquidation of the short position.  I do plan to reenter the short position on a downside breakout below 80.44 or a rally to 84.40 to 83.50.

Here’s the thing: I was most reluctant to exit.

I had convinced myself that the trade was solid and we would see 72 at some point without first seeing 83. Confirmation bias raised its ugly head, and I was seeing all sort of reasons why the buy signal would prove incorrect.

I did exit where I had pre-planned if the buy signal was triggered.

It may well prove, with hindsight, that the profitable decision would have been to hold rather than exit. But, we don’t have hindsight. We merely have the info in front of us; we can only make the best decision we can in the circumstances, given our knowledge and skill.

Why am I making such a song and dance about this?

Because in my coaching, I see the students berate themselves for making decisions that was ‘wrong’ only in hindsight! Then, they make a decision that breaches their rules  – and that decision is made because of the what had happened on  the last trade – compounding their error. And they wonder why they are long-term unprofitable? (!!)

How about you? How self-aware are you? Does self-awareness help or hinder your trading?

FIGURE 1 NZDJPY 290-min

 

 

A Nervous S&P Trader

BarroMetrics Views:  A Nervous S&P Trader

Long and uncomfortable – two words that best describe me at the moment.

Why? The three attached charts tell the story.

Figure 1 is a weekly chart with 13-week swings (quarterly trend). Notice that the weekly ranges before the Trump breakout increased the average true range and volume. This led me to the conclusion that what we were seeing was a distribution pattern.

The Trump victory on 11/11/2016 saw an upside breakout. At the time, the question raised was whether we were seeing an unexpected (in which case a new uptrend had started) or a surprise event (in which case we’d see a rejection of the new highs and the start of bear).

The price action following 11/11/2016 (Figure 2) persuaded me that we had seen an unexpected event and that a new uptrend was in place. More, given that Trump’s policies were unlikely to deliver on his grandiose promises, the current uptrend could be classified as a bubble in the making.

What was it about the price action that led to this conclusion?

Well, two things:

  1. The shallowness of any sell-off, and
  2. The directional persistence following each pause. (Figure 2).

The reasons why I am ‘a nervous’ long is also shown in Figures 1 & 2. Notice that the Trump breakout is unaccompanied by a healthy increase in volume and range.

Figure 1 shows that we have seen this pattern before, the QE effect, especially the period 2012-11-16 to 2014-09-19. That was a two-year uptrend when the S&P ground up on below normal range and volume, increasing some 50.69% in the process.

My plan is to reduce position size and tighten my stops to manage my long trade. The last thing I want to be is lackadaisical and have Black Monday (1987-10-19) surprise me.

FIGURE 1 S&P Weekly

Figure 2 S&P Daily

The Art of Learning and Trading – The Journal

BarroMetrics Views: The Art of Learning and Trading – The Journal
In all the years as a trading coach, one of the most difficult ideas to get across and have the retail client execute is the keeping of trading journals – psych and equity. The second? Getting them to learn from their failures and successes.
Part of the issue was the format I was using – somewhat clunky, and many of the routines had to have separate entries. A new software has some out that does away with these difficulties.
Once setup, the trading journal outputs the stats we need as well as insights into our psychological behaviour. Let’s look at some of these:
  •  Its ‘Emotional Analytics’ function pinpoints the emotion/emotions affecting your trading results.
  • Its ‘Tilt Meter’ identifies the mistakes you are continually repeating.
  • The ‘what if’ (Alternative Strategies) shows you how your trades would face fared using different entry and trade management techniques.
  • It has all the stats we traders need, and the graphical displays are excellent.

That’s just a small sample of what Edgewonk does. The bottom line is you now have no excuse not to keep your journal and no excuse not to learn from it. Doing will improve your profitability.

Certainly, the designers have done all the can to make the software useful and supportive to the trader.  I like it so much that I’ll be bundling it with my courses. By the way, if you have taken any of my courses, and would like a copy, let me know. We managed to secure a 20% discount for bulk purchases.

I like it so much that I’ll be bundling it with my courses. By the way, if you have taken any of my courses, and would like a copy, let me know. We managed to secure a discount for bulk purchases. Note that this offer is available for past and present students only.

Opps I almost forgot. The current cost is USD 169.00 and the URL:

https://www.edgewonk.com/

The Art of Learning and Trading

BarroMetrics Views: The Art of Learning and Trading

“The key to pursuing excellence is to embrace an organic, long-term learning process, and not to live in a shell of static, safe mediocrity. Usually, growth comes at the expense of previous comfort or safety.”

“…..successful people shoot for the stars, put their hearts on the line in every battle, and ultimately discover that the lessons learned from the pursuit of excellence mean much more than the immediate trophies and glory. In the long run, painful losses may prove much more valuable than wins—those who are armed with a healthy attitude and can draw wisdom from every experience, “good” or “bad,” are the ones who make it down the road.” (Josh Waitzin ‘The Art of Learning’)

Two great quotes and both applicable to trading. In essence the first says to succeed, we need to move out of our comfort zones, and the second says success comes from learning from profitable and losing trades.

As my coaching expertise has grown over the years, I have found the truth of both statements prove itself time and again. Those who attain their trading goals are those who exhibit both qualities. Those who fail have usually been reluctant to engage in either.

But, let’s say you are willing, what actions do we need to take in pursuit of the improvement?

Well, my first bit of advice would be to get a trading coach…..

The second, acquire the habit of keeping an equity and psych journal, then acquire the habit of learning from your entries. Again, this is easier said than done; but, technology has come to our rescue.

More tomorrow…….