Profit & Loss: Tough Lessons Learned

The last post, on March 9th, called for a short with a target of 112.98. The trade ran well past the target and I stayed in through the revised target of 108.50. That is where the good news stops.

As a result of failing to stick to my routine and treat trading as my business, I didn’t take profits, gave back the profit and proceeded to lose as I fought the market, stubbornly refusing to acknowledge the the trend had reversed.

Lesson #1: Commit to the Routine

Trading is a business. Fail to treat it as such and opportunities will be missed. At a minimum, I must post weekly. Failing to do so caused me to miss the obvious, that the trend was turning at 108.50 and that I should have reversed positions. Also, since I didn’t post the subsequent weeks, I missed additional reversal / entry opportunities.

Lesson #2: Be Clear of Mind

Personal issues have a way of dominating brain share. When those issues are unresolved, brain power tends not to be available when you need it. If, for example, these issues lead you to deviate from your program and routine, the results can be costly, as they were in this past month.

Lesson #3: Be Flexible and Adaptable

When the market shifts, acknowledge it and go with the flow. Don’t fight it. If you do, you’ll lose every time.

False Breakout Confirmed – Week Ahead: Fed Speak, Light News

Recap

Going into last week, we anticipated a pullback, bump and false breakout reversal back into the formation. We entered on the pullback to 114.50, rode the move up, but took no profits. Fear of missing out on a sustained breakout caused me to miss the powerful move back into the formation (and subsequent profits).

Lesson: Play offense, not defense. If fear of missing out on the breakout, set a contingency trade.

Monthly: Neutral; pullback to support at 111.35
Weekly: Bearish (retraced within formation); extended below MA
Daily: Extended below MA, flat MACD
4H: Heavily sold, due for a bullish bounce

Formations: Monthly & Weekly cup and handle formations in tact, threatening break below Monthly MA support.

Week of 2017/03/19

There is very little news expected this week other than lots of Fedspeak, including Chair Yellen on Wednesday. Thursday and Friday are news days. That said, Trump’s budget, which would include the Border Adjusted Tax, is what would move this pair out of the formation. It’s possible that we could be waiting until August for action on the budget.

Most Likely Course of Action (Projection)

From a technical standpoint, we’re right in the middle of the range. The post-Fed move was so aggressive, that we’re left extended on the Weekly and Daily charts, and due for a bounce. Interestingly though, the Weekly MACD is beginning to look like a bearish breakout is forthcoming, perhaps foretelling a lack of action on the budget and punishment for the USD until action is taken.

Given the absence of an opportunity in the middle of the range, we’ll play for a bounce off the bottom of the range and expect support from Chair Yellen on Wednesday. There is a possibility that she could talk the pair into a collapse and break below support. That could get ugly.

Trade

Buy limit 112.015, sell stop 111.26, profit target 112.98

Update

  • Monday, March 20, 9:17pm
    Theresa May, British PM, puts support under the dollar by stating that she will trigger Article 50 on March 29.
  • Tuesday’s speakers include New York Fed President William Dudley, who speaks at 6:35 a.m. in London, while Boston Fed President Eric Rosengren speaks in Bali, Indonesia. Kansas City Fed President Esther George speaks on the economy at noon and Cleveland Fed President Loretta Mester speaks at 6 p.m. ET on the outlook and communications. I expect this to provide further support for the USD.
  • House Republicans are expected to vote Thursday on the Affordable Care Act’s repeal and replacement. This signals the first of many necessary steps for fiscal reform as directed by the Fed.
  • Weekly looks nasty and the Daily doesn’t look enticing for a long position. The 4Hr is oversold and may bounce to resistance at 113.30. If so, I’ll sell because it’s early in the week for a reversal, which usually occurs on Wednesdays. This could rally in time for a Wednesday reversal lower on Chair Yellen’s comments. While political risk is providing some support, Brexit is still another week off which provides time for a full retracement to Monthly support around 111.

Fed Week, Budget Submission + Debt Ceiling

Recap
Monthly: Bullish
Weekly: Bullish (closed above formation resistance and averages)
Daily: Extended above MA, possible pullback to MA early week
4H: Slightly Bearish; closed below resistance, modest pullback

Formations: Monthly & Weekly cup and handle formations in tact, both still near bottom of handle and poised for breakout.

Most Likely Course of Action (Projection)
Expect a hike this week since the market now fully expects it. All eyes will be on their dotplot forecast regarding the rate of future hikes. I expect the Fed to put the onus of future hikes on Congress and the Trump administration for substantial fiscal reform.  Chair Yellen’s comments will provide cover for fiscal reform on Medicare and Medicaid, and the Administration will have the summer to push those measures through as part of the Budget Reconciliation Process. Social Security reform, a top priority for the Administration although they’ll never admit it, cannot be passed as part of the Budget Reconciliation Process.

Since the market already expects the hike, we could argue that the currency has already priced in the move. Given the fiscal uncertainty, I expect a pullback to the Daily MA early followed by a move to resistance at 115-115.50 and a subsequent drop when Chair Yellen puts the fate of future rate hikes on fiscal reform.

That said, in the case that Congress chooses to push through the Border Adjusted Tax, the American version of the VAT used globally, we should expect a dramatic appreciation in the USD. For that reason, I’m inclined to raise my profit target above monthly resistance until it’s clear that no vote will happen this week.

Trade
Buy Limit @ 114.50, Profit-target 115.50 or better. Stop loss at 114.

Update: Tuesday, March 14, 10am

  • Monday
    • Pullback to MA as expected
    • Entry within three pips of the bottom at 114.50
  • Tuesday
    • The market expected Theresa May to announce that Britain had executed Article 50 to exit the EU. The announcement instead was to reiterate that Article 50 will be triggered by the end of the month, with emphasis on “end”. This resulted in a selloff of USDJPY due to relaxed political risk.
    • Additionally, the news cycle is setting the expectation of a more hawkish decision on Wednesday. I expect the opposite. We’re looking at a hike that prompts a selloff rather than a bounce.
    • To that end, my stop loss is moved to break even.
  • Wednesday: Fed Day
    • I was right about the false breakout and drop back into the formation. Unfortunately, I played defense instead of offense and did not go short. The pair is now firmly back in the formation where I expect it to remain for the next couple months until Trump’s team can get business tax reform through Congress.

Fed Punts to Congress on March Hike

In the last two weeks, traders have dramatically shifted their views on the likelihood of a March rate hike. Just two weeks ago, the chance of a March hike was around 20%. After today’s much anticipated speech in Chicago, expectations surged to 97%, according to Bloomberg.

Two weeks ago and until today, I was in the “go” camp for a March hike. I still think it’s possible, but if it happens, it’ll be because President Trump and the Republican Congress delivered something phenomenal to address job growth and reduce long-term debt obligations.

In the past few years, Chair Yellen cited the economy, China, and Europe as impediments to rate hikes. In today’s talk, she went out of her way to explain that international concerns have abated and shifted the focus to Congress. Now, it appears, Congress is the only impediment to future rate hikes. Which means…

She’s punting. To Congress.

It should be noted that she has consistently pressed Congress on fiscal reform, especially in the past two years, however today she went out of her way to repeatedly mention Congress and express how “disappointed” she was that fiscal risks, which we’ve known about for “decades,” have been heretofore ignored.

With that said, I expect Congress to act – on a border tax, on Social Security, Medicare & Medicaid – in the next couple weeks – and without notifying anyone of their plans ahead of time.

What would prompt such wild and unlikely speculation?

March 15th is Debt Ceiling Day. The Office of Management and Budget (OMB) is now led by the former Tea Partying Congressman Mick Mulvaney who favors using the debt ceiling to win budget concessions.

To that end, anything dramatic, especially in the case of the tax code and entitlements, would have to occur within the first 100 days of his Presidency. After that, Congress shifts into campaign mode. Also, don’t expect to hear anything about this in the press. As President Trump has repeatedly said, the press is the enemy. At least in the case of actually enacting entitlement reform, he’s right.

So look out for some major changes by March 15, which means that you should be long the dollar at the market open, but likely short until then.

Here’s where we stand on the Daily chart for now. You can see that I’m short the USD.JPY and plan to be so for at least a few days or longer. Entry is at 114.10 with a bottom of the range target of between 112.02 and 112.82.

USD.JPY Observations – Double Cup & Handle

When making observations about a chart, I do my best to leave judgment aside and only observe. On the Monthly chart, I see one of the very best chart formations for extended, aggressive breakout: the classic cup and handle formation.

Diving into the next time frame, Weekly, I see the same formation; I’ve never seen a double cup and handle before. This could get interesting – or it could be a perfect setup for nothing to happen as a result of currency manipulation on part of the Trump administration.

(In case you’re wondering, President Trump, not China or anyone else, has taken center stage on the currency manipulation front.)

On the Daily chart, there is less conviction: a mild melting up that really could go either way. The last few days of uptick are a 50% retracement of the down move from Wednesday to Friday of last week when gains were taken after Fed Chair Yellen’s remarks about a possible March rate hike.

I’m long, as evidenced by the green on the chart. The USD.JPY (Dollar Yen pair) will strengthen aggressively this year, but the question is when. Traditionally, tax reform, which the Trump team has promised, takes some time as it weaves through the House and the Senate. However, the new Omnibus Budget Director, former South Carolina Congressman Mick Mulvaney, is the Tea Partier who led the push for a 2013 government shutdown over refusal to lift the debt ceiling. He’s also a proponent of overhauling Social Security and Medicare in order to permanently set the nation on a fiscally sustainable course. To that end, any changes to the tax code, such as the Border Adjustment Tax or to Social Security are likely to come through the Budget Reconciliation Process, which requires only a simple majority, limits debate and requires that all measure be revenue neutral. If this administration has the gumption to actually do this, and I believe they do, the currency will rocket higher just as Brexit prompted the British Pound to drop like a ton of bricks.

More to follow on this. It’s a matter of timing.

We’re Baaaaack! Market Monday: April 4, 2016

Eight years after starting this blog in 2008, the Federal Reserve has raised rates only once, in December 2015. The .25% rate hike coincided with a Wave 5 top on the monthly chart of most emerging market currencies, including the Dollar / Ruble (USD.RUB). Of these currencies, I’ve selected the USD.CAD (Canadian Dollar) and the USD.ZAR (South African Rand) because of their chart formations.

Weekly USD.CAD

20160404 USD.CAD Weekly Short

The Dollar Cad is set for a Wave 3 Elliott Wave move. In order to protect against a missed drop through support, I’ve set a sell stop with a sell limit set above the market at weekly resistance.

Prognosis

The Bank of Canada issues a rate statement in two weeks on 4/13 at which point I expect the BOC to sell strength in the Canadian economy. Until then, after the strong US jobs report on Friday, a pullback to weekly resistance is possible. I’m positioned for both outcomes.

Market Monday: Aug 4

Tired bulls get wobbly at the top of the hill. That’s what we’ve seen over the past couple weeks. While bulls climb a wall of worry, they usually take a break in the form of a correction. Three years into this ride, we may finally be getting that long awaited correction. That said, the SPY came to rest at weekly support. Monthly support is still a few points away. Should we break monthly support, we could be in for a more prolonged correction. Keep a tight eye on your positions.20140801 SPY Daily 20140801 SPY Monthly 20140801 SPY Weekly

Market Monday: June 9

It’s been a month since the last post. Since then, then market has broken through the double and triple tops. Long term charts give the all clear although we’re still a bit extended. Stop losses should be set below current short-term moving averages.

Ride the bull!

20140609 QQQ Monthly 20140609 SPY Monthly

Charts by OptionsXpress.

Market Update – Record Close!

Yesterday’s record setting rally could set up the market for a renewed rally provided that we close out the week above resistance.

20140513 S&P Daily Market Snapshot

Don’t jump in just yet. The weekly charts are still ugly. As previously discussed, the risk is still to the downside. Wait for the weekly close to jump in.

20140513 S&P Weekly Market Snapshot