Friday, September 25, 2009

Is it really Friday?

First, a word cloud based on the text of the FOMC minutes from Wednesday. I hope you had a chance to read the lighthearted take on the minutes I posted a couple of posts ago. This word cloud tells me that their most frequently used words are federal, committee, economic, and markets. Why am I not surprised?

I’m still in the AUD/USD (currently at 78 pips) and USD/CHF (currently at 38 pips) trades from yesterday. The USD/JPY trade stopped out at 20 pips profit. GBP/JPY stopped out at a 40 pip loss and I’m currently short in this pair with my stop at breakeven. Since the AUD/USD and USD/CHF both have stops at a profit point and the GBP/JPY is at breakeven they are “free” trades. Traders love those things because once the stop is at or above breakeven you can't lose money or are profitable. But I’m in these trades thinking bigger things could happen. Whether they will or not is the question.

Today began looking like one of those days when the USD could continue to strengthen. Why? Equity futures are bidding down. Plus there’s lots of buzz and chatter out there about how the equity markets have seen their highs and a turning point is here. Of course some of those buzzing have been saying this for at least six weeks or so, some longer. Much in the area of market prediction is downright silly. That said, I do believe the market provides clues and markers for those alert to them. Seeing them requires awareness, something I’ll write about this weekend.

Ten days ago I did an Elliott wave count on the EUR/USD. I’ve updated it in the daily chart below. The trouble with Elliott Wave is that when you’re in a correction it’s difficult to reach agreement on what it is until after the fact. This makes it less than tradable in most cases. But I do believe it reflects a market psychology. I still believe we’re in wave C of a correction on the daily chart. Once the Euro reached past 1.4720 I put a sell order in at 1.4849. My thinking was that it would reach towards its September ’08 high of 1.4868. It climbed only to 1.4845 so it didn’t quite reach the order. Frankly, I’m a bit surprised. A sell order I put in place this morning at 1.4712 was just triggered. I’ll move my stop to breakeven (if possible—it can reverse quickly but it’s a tight stop so I won’t pay too stiff a price) as soon as it looks as though it’s going to continue down. I won’t be troubled if I’m taken out since there may be one last push up. In any case, the pair is looking a bit top heavy.

Besides that I went long the pound this morning at 1.5987. I don’t have time to include the chart right now but I have a tight stop on it.

None of the above are trade recommendations. Remember that trading involves substantial risk. My hope is that by posting this analysis on some of the trades I take, people can start to learn an approach for themselves. The biggest part of trading is handling emotions and this is something I'll be dealing with in future posts.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

Thursday, September 24, 2009

Thursday (9/24) trades


I was stopped out of my Ozzie long yesterday. This morning, after studying the charts, I decided to short it. I know; I know. It sounds as though I’m waffling on this pair—mostly long but now short? What’s up with that?

Well here’s the thing. While the pair is in an overall uptrend, it’s waffling too. It had that lovely consolidation range (.8543 - .8676) from early September until last week when it broke out, pulled back, and broke out again. One premature or false breakout I’ll accept. Two and I begin to get suspicious. It’s back inside its range (a peek a moment ago showed .8627).

I decided to short because:

1) Two upper candle shadows reached .8788 and then fell back (This later became a double top because it broke below the lowest low between the two tops (in this case .8703) but I didn’t know that when I placed my short trade at .8738.) I was more concerned with the upper shadows that meant higher prices were being rejected.
2) The strong black candle that happened before the last little uptrend. This showed me selling pressure was coming in at that level so when price returned to that level I thought it might happen again.
3) The pair was stumbling at the same price it had stumbled at on the first breakout
4) There’s still negative divergence on the chart between price and RSI

Since then of course, there has been confirmation of the double top. A calculation of what the price objective could be based on that would be .8616. It reached that point so I lightened my short by a third to take some profit and moved my stop to a small profit stop. When it reached 100 pips profit I took another third off the table. If it definitively breaks the trend line from mid-September (it’s already broken the one from the beginning of the month), I suspect it will at least return to the bottom of its range. Maybe more. Last week I wrote that I believe the .8500 levels are significant and that the pair could have big moves in either direction it took itself to. I still believe that. Here’s the 3-hour chart (the little downward triangle is my short entry):


When people pile on against the USD they really pile on. It’s been in a whale of a downtrend. I wrote last week that there had to be a dead cat bounce in there somewhere. This morning I took a long position which is currently up 75 pips but I’m not picking out any Prada’s with my profits just yet. The equity market needs to start dropping for me to feel comfortable this is going to run. Will it? Some people think so. Reasons I took the trade were:

1) The lower shadows showed the market was rejecting those lower prices
2) Positive divergence between price and RSI on the 3-hour chart
3) It took four candles to get to the low of the prior long white candle on the 3-hour chart
4) I was at a support point so I could go long with little risk

In addition, some other calculations I do suggest it might be bottoming. Bottoming is usually a process, though, and not an event. So this pair could stammer and stagger a while. Here’s the three hour chart:

I went long USD/JPY this morning. I’m not going to go into all the reasons right now except that it’s obvious it was at support and I could enter with a small stop. I’ve moved my stop to a small profit. I also went long the GBP/JPY because it was at an obvious support. That trade has been slightly up or slightly down all day. I’m watching it. Remember it’s in an overall downtrend and it’s always safer to sell rallies. But we’ll see. As I’ve written before, one mustn’t get married to a point of view. That means I can reverse if I find evidence to do so.

None of the above is a trade recommendation of course. Remember that trading involves substantial risk.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

A lighthearted look at the FOMC 9/23/09 statement

An acquaintance of mine, a currently high, formerly well-placed, government official, was kind enough to provide the following insider insights (his remarks are in the brackets) into the hidden meanings of the FOMC statement released yesterday. Of course I feel compelled to add that his interpretations and words are not necessarily meant to be representative of this blog writer's opinions. Enjoy.

Information received [We like Erin Burnett on CNBC.] since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn [I didn’t hear a cat; I didn’t see a cat . . .What bounce?]. Conditions in financial markets have improved further [The DOW is up and who gives a hoot about volume anyway?], and activity [foreclosures] in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit [Now that the car has run out of gas, its speed seems to have stabilized]. Businesses are still cutting back on fixed investment and staffing, though at a slower pace [Firings have slowed now that there are fewer employees to fire]; they continue to make progress in bringing inventory stocks into better alignment with sales [We are confident that empty shelves will be filled if people ever start buying stuff again]. Although economic activity is likely to remain weak for a time [our lifetime], the Committee anticipates that policy actions [Whatever it is we are doing] to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces [Whatever it is that our friends are doing] will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability [Whatever!].
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued [at least below Carter Administration levels . . . we hope.] for some time.
In these circumstances, the Federal Reserve will continue to employ a wide range of tools [We will throw everything we have at it; maybe something will stick.] to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent [maybe 0 percent and some kind of rebate . . . ] and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period [We’ll be lucky to get past Thanksgiving.]. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases [We’re running out of paper.] in order to promote a smooth transition in markets and anticipates that they will be executed [Better them than us.] by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets [As the smoke clears, our worst case scenario is that there will be more smoke]. The Federal Reserve is monitoring the size and composition of its balance sheet [After much discussion, we voted 8 to 2 that size would be 8 ½ X 11 and that the composition would be words and numbers in columns.] and will make adjustments to its credit and liquidity programs as warranted [We don’t know what we mean by this. Hey, what would YOU do?].
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

Wednesday, September 23, 2009

Out of the Guppie

Well, finally out of GBP/JPY at 90 pips profit. I have a small long in the AUD/USD but am staying out of trading until after the US rate decision this afternoon. Not that I expect any great news there but the markets are acting a bit squirrelly in my opinion. More to the point is that I'm traveling back to Florida this morning and can't give the trading the attention it deserves.

Tuesday, September 22, 2009

Ozzie and Guppy

You go, Ozzie! That’s what I feel like saying to this pair since it has broken out of its range yet again with a nice looking candle. But will it go? One encouraging sign is that it didn’t fall all the way back to the bottom of the consolidation range—it stopped well short of it which is bullish. The candles up since that point have been strong ones until the bearish piercing one that just completed. Note that it’s near the point where it fell back before some caution is warranted. It broke out overnight and in the early morning hours when I was sleeping so I didn’t take the trade on the breakout. What I’ll do now is see how it acts around this period before jumping in one way or the other. As I pointed out yesterday we’re still in an uptrend (since March) so the bias is to the long side. Here’s the three hour chart:

As far as the Guppy goes (GBP/JPY) it’s stuck in a small range as it tries to find its direction. In the chart below look at the beautiful symmetry of the moves and note that the second move up didn’t go as far as the length of the first one (I’ve marked the moves up with purple lines). I’m somewhat fanatical about proportion and symmetry because the market seems drawn to it as well. I’m still short in the pair (the tiny triangle marks where I took my short at 150.49). At this moment it’s at 135 pips profit. I still have my stop at a profit point of 80 pips at 149.69 and its high yesterday was 149.62 so that was a good stop. I may move it down a bit more since its high today so far has been 149.43. Whatever this pair now does, we know an important thing about it and that is that this narrow range of 148.06 (the low since I shorted it) to 150.49 is meaningful in some way. Otherwise it wouldn’t be hanging here. More to come. Note also how it rejects lower prices with long candle shadows in the past. It's not showing these here but that's not infallible. You have to combine things such as candles with support and resistance and other indicators before making decisions.

This is a frustrating week for me as a trader. Other committments keep demanding attention and I'm spending little time with the charts. But that's part of life and I'll be able to get back to it soon.

None of these are trade recommendations and trading involves substantial risk.

©Dianne L. Fecteau. No part of this can be excerpted without the author’s specific written permission.

Monday, September 21, 2009

Watching AUD/USD

The AUD/USD started weakening a bit at the end of last week after it broke up from its consolidation range earlier in the week. As of just a moment ago the buy price was .8622 so it’s back inside the range of .8543 to .8676. Remember that I wrote that breakouts from ranges, in particular, can be premature or false. There’s no way of telling right now what the real story is with this pair. Here’s the 3-hour chart showing weakness—it violated the 62 EMA it had been roughly using as an uptrend line plus the uptrend line I drew on the chart. It also violated the RSI uptrend line.
None of this weakness means the sky is falling. But it does indicate some uncertainly. So, I have to do what most traders need to do if they’re going to be successful. I have to wait until I get some more clues. Meanwhile I canceled the remaining buy order I had in place, was stopped out of the long I had from .8723, and bailed out of the filled buy order at .8678. So I’m flat. I bailed because I don’t like the weakness it’s showing and don’t have enough positive clues to wait it out as I did when I wrote about the GBP/JPY last week (a trade I’m still in by the way; I’ve set my profit stop at 80 pips)
Overall, it’s important to remember that we’re still in an uptrend and have been so since March. That’s six months. It could be just an intermediate uptrend (according to DOW theory) before a downtrend resumes. So this could be the resumption of the downtrend but I don’t have proof of that or even any overwhelming evidence that would let me assume it to be true.
What clues will I look for that will shape my opinion of the pair at this point?
First, I still believe the consolidation range is important. That means if it breaks upward again from that range I will take another long position. I may try a tiny long if it falls to the bottom of that range as well with an extremely tight stop. There’s also an uptrend line from the daily chart coming in at .8475 so that area is significant. But if it definitively closes below the bottom of the range and the uptrend line I would start to think the trend has changed and would be looking to sell on rallies.
For the time being I have to wait and see.

Sunday, September 20, 2009

Loss aversion

Being willing to take a loss is key to being a successful trader.

Why? Because no matter how detailed your analysis you can't nail it every time. There are often going to be things you miss. In fact, I've heard numbers that suggest that those with a high win/loss ratio (more winning trades than losing ones) actually make less money than when the reverse is true. The reason is that those latter traders are willing to take many small losses but when the profits start they don't close out the trade too quickly. The ones with the high win/loss ratio are taking smaller profits aren't generating the dollars in profits to more than slightly offset their losses.

Unfortunately, many traders hate losses. Hersh Shefrin wrote in his book, Beyond Greed and Fear, that a loss has 2 1/2 times the impact on a person than a win does. It's not the loss itself but the feelings that accompany the loss. The sense of being responsible for the loss causes pain. Self esteem issues come into play. These feelings, powerful and negative, affect decision making. The result? Traders let losses continue to run or sometimes don't get in on traders because of the fear of loss.

You can't trade without losses. Period. When you have a loss the market is actually giving you some valuable information. Getting to the point where you can accept that information is the challenge. I've pointed out before the need to reverse on information (not always but sometimes).

How do you minimize the losses? Certainly by keeping stops small. How do you keep stops small? By carefully finding your entry points. How do you do find the entry points? Ah, that's the big question and traders have different approaches.

Support and resistance is one way. That's what caused me to buy the GBP/JPY earlier last week taking a nice profit and then selling it in the latter part of the week, a trade I'm still in where I've already locked in profit. It can work and it's so very very simple. Anyone can do it. But it doesn't always work. Especially after three or four times of reaching a level, the pair can get through. When it does, it takes out your stop. That's when you have a loss. Those are the losses you have to be willing to take.

What if you have a series of losses? Even small losses, repeated frequently enough, can erode a trader's self confidence to say nothing of his or her capital. I've had, and still sometimes have, times like this. Sometimes it's just because you're radically out of step with the market. For example, you're a trend trader and the market starts going sideways. Or you're an S&R (support and resistance) trader and the market starts trending. Or it's because the stars are wrong. (Don't laugh--some traders, not all of them unsuccessful, take the movement of planets into account). But mostly, as Shakespeare wrote, the fault lies not in the stars but in ourselves.

You can take a cooling off period. Re-evaluate your approach. Re-do your analysis. But when this is done and you get back into the market, you're still going to have to take losses in order to be successful.

"Success is the ability to go from one failure to another with no loss of enthusiasm," Winston Churchill said. That is true for traders, but only if you keep your failures (losses) small.