Using contrarian indicators

So, a few weeks ago, when the S+P hit 666, the world as we knew it was over.

Now, the markets are closing at their highs, even though the bad news and earnings continue to roll out. Having only 663,000 new people claim unemployment insurance is considered a good thing...say what?

It's like the Yankees. They started out 0-2, and everybody wanted to call the National Guard in...now, they are 3-2...and people are acting like we're in the playoffs already.

So, I decided I was would look at my own charts, research my favorite Greenback analysts and sites and see if I could confirm if this rally was the beginning of the end or not. (I am pretty sure we are going to test the lows we made, but I have to be unbiased.)

I started this account in January, and every day I am more fascinated with the powerful links between FOREX and equities. Always looking for something new, I discovered the contrarian indicators page on Daily FX...really interesting (if you're in to that sort of thing.)

The one thing that you will recognize is the importance of thinking opposite the herd. Pay particular attention to how high the sentiment is for the Euro, and what they say about that. (We might consider this the first indicator that equities are done for now.)

Learning from mistakes

Learning when to stay out of the market is extremely important...and just as important as being profitable. Learning to trade only according to indicators that you have already determined as crucial to your trading...priceless.

...and useless to me, because I didn't follow the rules. I think I may have worked myself into a trade that will take longer then I want to to get out of. As you can see by my statement, I went long the US/Yen a couple times too much. And ironically, if I had just waited until the pair went down to the 34 EMA (which I just talked about on Thursday!) I wouldn't have to deal with such a large drawdown and potential loss. The trend is up for this pair, I will just have to wait longer.

Also ironic, in a note by Bradley Gareiss of FX360, he placed a short on the pair precisely when I went long...his T2 target is 98.07.

What price level does the 34 EMA I talked about meet the pair? 98.07.

Extremely conflicting indicators

The other day I felt that the CAD/YEN was a great intermediate trade. This is one of the pairs that totally defies my bearish view of equities, because the Canadian Dollar is a higher interest currency, and therefore a better place for people to put their money when they feel the bullish sentiments of all the 'riskier' markets e.g. equities.

(Not to mention that the low interest Yen is a place where people want to put their money when they are risk adverse.)

If you are bullish about equities, this is a pretty good signal, at least short term that they are continuing up. I charted this out manually. Below that is the way the pattern is supposed to look, so you judge...

Equities again

I read Jack Steiman a lot...and here's what he says about equities (S+P):

845 is now strong support down to 813. I do not expect the 813 level to be tested until we see 875. I don't think we'll go below 845 either until we get there. It could but the breach would be minimal in all likelihood. Once at 875 I warn you the easy money has been made overall. It doesn't mean the rally is over but the easiest part will have been used up. Only a loss of 800 ends this rally for the short term. If we get to 875 I'll be looking at 813 as definitive support. The next strong opportunity for buying will come off the 875 pullback so if you haven't done much yet, there should be another chance in time.

Over the years, I have learned a lot from him about how to read price levels, and he knows what he is talking about. However, even though he trades on both sides of the market, he has always seemed more a bull then a bear to me.

(I agree that the market finishing at it's high is strong...I just can't see us staying above 800 yet.) I will watch the VIX and my guess is that we open Monday higher, and then start our retreat.

Here are Jack's charts of swingtradeonline.com and he does make a compelling case for the bullish way.

...but then, we have a video with Adam saying it is going the other way and he visually shows you why. Guess that's why there are bulls and bears...BUT Adam's trade triangles have been a very important indicator from my trading arsenal (my accounts are up over 70% since Jan.)

Now comes the Greenback research! Let's see what we find that confirms a continued equity rally or argues against it. (Isn't this fun?)

Will this be the confirmation?

(Quick note...markets are closed in Europe on Monday.)

I guess I have this thing with trendlines. They definitely work well...the hard part is knowing when you have a breakdown or when it is false. The other day, I thought gold had a significant trendline breakdown...even Dennis Gartman said publicly he was going to get rid of his gold. However the daily stochastic does look oversold...so we'll see. Maybe the deflation arguement will keep gold down for a little.

As for the Euro...take a look at this trendline from the EUR/Sterling and see if it has been violated (clicking on the chart gives you a clearer view):



I always wonder...at what point should we use a different pair as confirmation and when we shouldn't. When is it just a big institution taking a position in a trading range...and when is it a true reflection of news? (Elliot Waves suggest neither!) A trendline has to be touched a minimum of three times for it to be a trendline. The more touch and bounces, the stronger the line. The one above touched six times before being breached.

Respecting (the same) trendlines...part 2

Below is today's chart of the Euro/Greeny after my tense holding of all my shorts (clicking on the charts give you clearer views):



Below is the chart of the Euro/Greeny from a few weeks ago. I drew this (and talked about it) on March 21:



The ECB has yet to "officially" announce quantitative easing...I know what I am going to look to do.

Try this neat trick

I learned this about three weeks ago from a very successful trader...and it seems to work a lot. This is an excellent method for swing trades (that you identify with Fibonacci points) and on uptrends like in the chart below.

(Present time trade updates 8:01 p.m.)

I always use the standard 10, 21, 55, 100 or 200 MA's...but for some reason, implementing the 34 EMA is a really good short term moving average. Here is the chart of the US/YEN as I write. See all the bounces off of the 34? (clicking on the chart gives you a clearer view):

So...why all the games?

The other day, after watching Trichet's news conference, I got a little upset. I mean, if people are tuning in to see what you have to say...then just say it! Why the games? I guess he lost his voice until today:

The euro has come under aggressive selling pressure as the European Central Bank leans closer to Quantitative Easing. This morning, ECB President Trichet basically told the market that interest rates are headed to 1 percent while Governing Council Member Nowotny said that the central bank could start buying debt to ease the credit markets. Wellink added his 2 cents by warning that inflation could turn negative for a couple of months. The ECB is only making these clearly dovish comments because they want to send a message to the markets. In general, they like to prepare the markets for any major changes in monetary policy so as to reduce volatility when the actual announcement is made. Therefore the gradual decline in the euro over the past week is probably exactly what they were hoping for. The European Central Bank released their April monthly bulletin this morning and unsurprisingly the report repeated the same bearish message contained in the press conference given by Trichet following the most recent ECB meeting. We continue to expect the euro to underperform other major currencies ahead of the May ECB meeting.

This is why you have to know what you are doing with currency trading. The above suggests why my EUR/USD shorts were in such a precarious position for a while. They became profitable because the usually hawkish Trichet lived up to his reputation.

Account update..have a good weekend

Below is an account update...doing great and holding gold, regardless of drawdown. It is important to have gold for an inflation hedge even though I have to admit that the deflation arguement is also compelling...even Larry Summers can't tell what will happen (or he's scared to.) So if we do break the 200 SMA, I will repurchase the puts I sold a few days ago.

On it's own, this $100,000 account is up 65 1/2% since Jan 8. My other ($50,000) account is up 18% (Excel).

US/Yen...respect the breakout

Just saw an interesting segment on CNBC regarding the Wells Fargo's pre-announcement. The diverse opinions that are being expressed, as to whether banks have really been transparent enough, is fascinating. I don't buy this optimistic market today, and that's not because I am predicting a retest of old lows...

Lets just see if the S+P closes above the 845-60 area (with gusto)...if it does, then this market probably continues up (S+P is @848 as I write.)

Meanwhile Adam, who is also predicting a retest, just came out with this short video on the US/Yen. REMEMBER...this account is up over 70% (including all the puts and stock I sold at a profit...in large part due to Adam and the trade triangles.)

Note that, individually, their respective (Yen and Dollar) ETF's were just issued up triangles which I talked about not necessarily being good for equities the other day.

Talking Fibonacci...a good CAD/YEN swing trade.

A few days ago, I felt that the CAD/YEN was a great intermediate trade that you should buy but avoid watching if you don't want ups and downs. Ultimately, this pair will fly...so here is a short termer within the trend. This is from another one of my indicators...'Russell at UMT'. I use about 6 or 7 indicators. (Clicking on the chart gives you a clearer view):



CADJPY has broken out above 80.40 on the daily as we have gone over numerous times in the room. After the breakout it ran up to a swing high of 82.85 in a very, quick explosive move that move went a little too far, too fast and now it is correcting that overbought spike up.

You can see on the chart above that each pullback spent very little time below 80.40. The rectangle on the chart is the buy zone or "accumulation zone". This is where larger accounts come in quickly and snap up offers in this area taking the price right back up.

As you can see good Fib support is at 79.95 at the bottom of the buy zone. If we can buy at 79.95 it could make for a good swing trade, possibly for a move much higher. If we do, it could turn out to be a decent trade with a bounce back to the 81.00 to 81.50 area.

Fibonacci lines...another priceless indicator

I already said that I was not going to trade gold any more...trading forex pairs is much easier to predict...which is ridiculous to say, considering that Forex trading is really difficult. BUT it is nice to know what you can expect from gold in the near term. So, if I have any aspirations of seeing my gold recover a little, I think we will need to start by having a 4 hour bar close above 891 or so.

See how the 38% retracement level was touched four times? Each time it bounced back. I use the great trade triangles and other indicators...but Fibonacci points are a killer way of trading because the levels you choose are likely the same levels other traders choose to make decisons at. So you can always expect selling or buying to occur at these points.

Strictly for the record

I am a big fan of Kathy Lien (bought her book) and I always quote her in this blog. Here's what she wrote about the Dollar today. The best part is what she says about Nouriel Roubini...

"The unconvincing rally in U.S. equities has helped the dollar hold onto its gains as Nouriel Roubini aka Mr. Gloom joined to the chorus of experts characterizing the recent turn in equities as a bear market rally."

I am only doing this blog to prove that I can be an excellent trader, and to keep a record of it (and also to answer any questions my readers have from time to time.) So part of the record has to be what I feel about the markets and why I make the trades that I do, not to boast. But I predicted this rally was going to be a bear market market rally a while ago on two different posts...this one and this one.

I think this is really suggestive of a down market

An undisputable fact, at least for now, is that the Dollar and the Yen are both considered safe havens to deposit money when traders don't want to be in equities.

Now, as I said in the last post, one of my reasons for thinking the equity markets look weak in the near term is because of the UP triangle that was issued for the UUP Dollar ETF. For a while now, the Greeny seems to trade opposite the equities.

Well ironically, we were just issued a new up triangle on the CURRENCYSHRS JAPAN ETF (PACF:FXY). So now we have two "safe haven" ETF's issued up triangles just today. Does that mean anything for stocks? I will trade accordingly.

Just couldn't resist!

So much for staying out of the market. I just bought 1 lot USD/YEN. Why?

• Traders had been taking profits in the Dollar this morning. At the same time the equities were very strong (I did not see the A/D line.) Now, probably because of the Fed minutes, the roles have been reversed.
  


• We were just issued a new UP trade triangle for the UUP Dollar ETF...and MClub is uncannily right about these things.
  


• If you look at the hourly chart, there are numerous bids being placed at the 99.30 to 99.60 area.
  


• The breakout we had the other day was very significant...and is very bullish.
  


• The equity markets look poised for a dip, as I showed the other day. That can benefit both the Dollar and the Yen. But against each other, the Dollar is showing a target of 103+. Adam just did another video on this, which I will post soon.

Account update...out of Forex markets until after Easter

Below is an account update...still doing very well. It is hard to trade gold, so holding it is a necessary evil. On it's own, this $100,000 account is up 65 1/2% since Jan 8. My other ($50,000) account is up 18% (Excel).

As I predicted, I made a nice profit on all my Euro/US shorts, even though I had been down significantly. I even said to short more!

Gold up...but who cares!

I read this in the Cabot Newsletter...and it is so true:

(Talking about equities)...So while other investors may be patting themselves on the back with their gains over the last few weeks, I am more interested in the bigger picture that is unfolding. And the more pieces that fall into place, the better gold is looking.

I just saw a cartoon that shows Bernanke, Geithner and our president operating a printing press somewhere. We can make fun of this crazy spending, but the prevaling opinion is that it is necessary. However, gold will be the alternate currency for many when all is said and done.

So, yes, the yellow metal does pose a drawdown risk in my account, but it's very hard to trade. That being said, not having it as an inflation hedge, is silly...so I won't trade it anymore. I'll just hold it.

Put profits

Earlier in the day you saw that I sold all my gold puts (along with a losing short covering.) All 15 contracts were sold at $31.50 (down from $39.40, after this rise started.)

I started buying them at the end of March (as I explained, we ended up with 5, not 2.) Then, I added ten more later.

Total profit is calculated as follows:
5 contracts purchased at $18.50= $6,500
(minus commissions.)
10 contracts purchased at $26.90= $4,600
(minus commissions.)

These profits are in addition to the currency statements I post all the time. One of the reasons why this account does so well is found when you click the link below this:

A good reason why I sold my gold puts

Here's a chart of the QLD...which is a an ETF that represents the equities. This chart alone shows that it is likely that people will rotate their money out of equities and into either gold or the Dollar (or both.) We also got a new down trade triangle issued. (Clicking on the chart gives you a clearer view):

LOOK OUT BELOW...part 2?

Adam came out with a pretty bearish video on the equity markets the other day...and just now we were issued a new down triangle for the NASDAQ, which is been acting the strongest of all of them. Alcoa just came out with worse then expected earnings...(we have a few weeks of this,) so this could co-incide:

Gold puts sold

Taking profits here on all my gold puts...and will repurchase if gold goes below the other day's lows. Statement update soon. Gold at $880.

Account update...Over 70% since January

Here is an update of my main Forex account. On it's own, this $100,000 account is up 65 1/2% since Jan 8. My other ($50,000) account is up 18% (Excel).

For those who have been following the account for a while, you know that on March 31 I bought 5 puts @18.50 (May 900's) on my gold holdings. Then, once it broke $894/oz., I did 10 more puts @26.90.

So here are the option prices' prices with the day's change in green. The additional 10 I bought were also up. So,while I hold my gold as an inflation hedge, I am protecting myself, and keeping the equity in the account at the same time.

The problem is, unless I get LEAPS or something like that, I will have to cash these out before expiration. Also...WE ARE RIGHT ABOVE THE 200 SMA. That could be a good spot to take profits on some puts.

For the Euro bulls...

If you are one of the ones that thinks the Euro/US has corrected enough here, and it will go higher, you may want to read this by Michael Sacchitello...who is a very good trader.

13:12 04/06 EURO-DOLLAR: Techs, from SMRA's Michael Sacchitello;
Short-term - As EURUSD tests the $1.3366/$1.3343 confluence, oversold
hourlies may help foster a bullish opportunity. Pending a break above
$1.3580, however, bears maintain the upper hand.

The next significant signals might occur above $1.3580 (potential for a new leg up to $1.3739/1.3858) or below $1.3287 (opens gap to $1.3166/1.2957).

$1.3497 61.8% of $1.3580 to $1.3359
$1.3448 38.2% of $1.3580 to $1.3359
Current level: $1.3387
$1.3366/1.3345 04/03 pivot, 50% of $1.3114 to $1.3580
$1.3343 03/31 corrective top
Support $1.3287 20-DMA, 61.8% of $1.3114 to $1.3580

The Greeny

If you remember the chart we did a few weeks ago, we determined that support was around $83.30 for the Greeny, and it held a pretty decent gap, which was bullish. Here is the other trendline that we have been drawing...just updated. I present to you below the 'outcasted' dollar:

ecb news

If you are looking for more clues about the state of the Euro and whether we are headed towards 125 OR we are going to break the double trend line talked about in a couple of posts. This from MarketNews:

12:14 04/06 ECB: ECB's Nowotny says there's room for another move on refi, 1% limit, overnight deposit rate should not go to zero. Sees weak positive growth signs, close to a trough, but when crisis is over, monpol must react fast and strong. Remarks come from a Rtr interview.

I don't know. It's like a puzzle. I mean, what is he saying? Interest rates will go down (and thus weaken the Euro) BUT the economy is slowly getting better (125 is a fair level for the Euro/US?) This is why fundamental analysis should be used, but only to support technical.

Update euro and gold

On March 21 I wrote that the Euro/USD was at a double resistance level...well, it seems to have held, even after this large move we had higher in the pair. Now, I have ferlt that we were going to correct (thankfully) BUT the qustion still remains, will the Euro continue lower?

As you guys know, I wasn't a big fan of Trichet's conference, and you have to wonder if they are hiding something, based on his games the other day.

Lastly, I did purchase those additional puts on gold...unless I am very much mistaken, this break in support is real.

Swing Trading Part 2

Swing trading only works when there is fear or greed. Yesterday, I very much wanted to go long on the Euro/Yen, but I couldn't, because my limit was at 132, and we never hit that unfortunately. We had a nice rise (which is now coming down again along with most of the Euro's.)

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We are getting close to 50% retracement on the Euro/US Fib chart I drew earlier. I have been successful with my added shorts, and the existing ones are obviously getting closer to 'sellable' at smaller losses (if I choose that route.)

Gold and Euro update

Euro/US has started to retrace. I have traded accordingly, which you will see in the statement soon.

Fortunately, I am still holding my gold puts. And now I have now bought 10 more (874) for a total of 15 put contracts. (10 @ 26.50)

Dennis Gartman out of gold?

For the second time in three weeks, I took a second look at my gold puts that I bought a couple of weeks ago. At first, I was going to take a $4,200 profit...

Then I was going to sell half of it, in case gold continued to fall...Then, I decided to wait until gold opened a couple of hours after the currencies. To my surprise we showed weakness from the start, and along with the IMF news, I made the right decision to hold on. I no longer feel this is a test. That break of the trendline I talked about the other day is for real!

Now this excerpt from oilngold.com:

Dennis Gartman, author of the Gartman letter, said the news from the G20 meeting and the IMF could be bearish for gold prices. In his letter, he said that if prices drop below $894, he could get out of his entire position.

Mike Glaser, futures broker at LaSalle Futures, is still not convinced that prices are going to drop sharply. He pointed out that there is still strong support between $880 and $890 and that the threat of the U.S. government printing more money will continue to support prices.

"I haven't seen how all the money they have printed is supporting the economy. I don't see it improving the housing industry and I don't see it creating jobs," he said. "I think in the long term it will just devalue the currency and create an inflation environment.

The 34 ema in action elsewhere...

Here is a picture of the US/Yen just after opening a few minutes ago:

When you click on it, you'll see that the pair opened down (profit taking from last week?) and started filling bids at the 34 ema I just talked about. I just bought a small size, in case it consolidates further.

Wait for the Euro/Yen trade...

If we get a pullback in the Euro/Yen to the 132.30 area, it will be a good buy. Another term for this is a 'swing trade.' Its a way of trading that I am still learning about that is based on pullbacks in any trend. So when people are taking profits, and getting out of their positions, the pair naturally corrects and makes a natural entry point into the same pair.

The system I use uses a 34 EMA, and much more often then not, that's where the new buying (or shorting) will come in (Clicking on the chart gives you a clearer view):



The bottom moving average, closest to the banner, seems like a good entry point to a pair that closed at a six month high on Friday.