intermarket analysis

Nikkei Weekly – One Ugly Candle

Forex Kong 5 Comments

I’m gonna make this quick as to get something else posted here before this site turns into a soapbox.

As per suggestion some days ago – the Japanese stock market has most certainly “corrected”. Unfortunately I got cold feet before the weekend and trimmed my positions considerably – only banking an addition 2-3% as opposed to the amount needed to purchase the yacht I’ve had my eye on. These things happen, – and I am no worse for it. Shoulda , coulda , woulda has no place in my trading, as the opportunities continue to present themselves in bountiful fashion.

I will sit patiently throughout the day, and allow volume to pick up from the “anemic state” we’ve floundered in over the past week. I’m not exactly sure where the hell everyone went – but assume “running with bunnies” and “gargling chocolate”  may have been on the list of activities.

In light of the sell off overseas – and its implications with respect to “risk aversion” – all is unfolding exactly as planned.

Come closer little rabbit – I’ve got some stocks I’d love to sell you here, come closer…a little closer…that’s right – just a little closer  – BAM!

Im 100% cash yet again – with orders in place “should JPY continue higher”.

 

Black Swan – Cyprus Blows Up

Forex Kong 25 Comments

What happened in Europe yesterday is yet further proof that nothing has been done to repair the underlying fundamental issues surrounding the EU Zone financial crisis .

For those who don’t believe the government is prepared to take extreme measures that may include the seizing of retirement accounts, cash savings or even gold, look no further than Cyprus, the latest recipient of bank bailouts.

As of this moment, citizens of Cyprus are scrambling to withdraw funds from their bank accounts after the EU, with agreement from the Cypriot government, announced they will decimate funds held in personal bank accounts to the tune of up to 10% of existing deposits.

The European Union has made the determination that the people of Cyprus are now responsible for the hundreds of billions of dollars in bad bets made by their government and bank financiers, and they are moving to confiscate money directly from the bank accounts of every citizen in the country.

Could this be the black swan event I have been looking for in prior posts?

EU Zone Catalyst – USD Saves Face

I expect things to get pretty interesting here this evening as  markets get moving – and look to interpret the news. We will keep a very close eye here later this evening and into the early morning on Monday, as this “news” does line up pretty nicely with my previous posts  – and suggestions of getting to cash and exiting markets mid March.

This “could” certainly be a catalyst in my view.

Trade wise  (if indeed we get a strong move on this news)  I would be looking to dump USD shorts immediately and reverse these trades – as well get long JPY, dumping the commodity currencies…….pronto.

Market Direction Uncertain – USD No Help

Forex Kong 7 Comments

I’d have to say this is the first time in my entire trading career  where I’ve seen both the US Dollar and US equities rise together –  for such an extended period of time. The USD has been up up up some 25 days and running now – while stocks continue to grind higher as well. Something is obviously up.

The USD as well as the JPY are (under most conditions) recognized as “safe haven” currencies (as absolutely bizarre as that sounds) and as risk presses on and stocks move higher – these are normally sold. When risk comes off – flows head back for the ol USD as it is still the world’s reserve currency.

So are the big boys already building positions in USD in preparation for a larger correction/world event/news flash?

Looking at the calendar – I had planned to be in 100% cash as of the middle of March with expectations of such an event, and here we are….. only two days away. Obviously I can’t say for sure – but it would make a lot more sense to me that stocks would correct here as opposed to the Dollar. After this many days moving higher – we’ve got to see a little “zig” in that “zag” at some point.

So….with several open positions (small positions thankfully) I will likely plan to watch closely over coming days and even throw on a couple stops (which I normally / rarely use) in order to keep my self insulated from any “global disaster”.

Short of that…..perhaps things keep chugging along a while longer , and indeed the USD does finally make a turn down – and stocks continue there “blow off top”.

Trade safe here people. Market direction IS uncertain.

SDR's First – Then The Gold Standard

Forex Kong 3 Comments

Special Drawing Rights (SDR’s)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries official reserves.

Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to around SDR 204 billion (equivalent to about $310 billion, converted using the rate of August 20,2012).

So in other words – the U.S has a printing press, the ECB has a printing press, Japan’s of course, Great Britain’s got one and the freakin International Monetary Fund ( operated primarily by a small group of “financial elite) can rattle off “SDR’s” and distribute them (as freely tradeable currency) to its members – at will.

This will clearly be the next step in resolving the current global financial crisis as the printing continues.

With everyone devaluing their currencies at the same time ( and Central Banks suppressing the value of gold as a price spike would undermine the entire plan) it’s very likely that the next “crisis” event will simply be “papered over” with the issuance of “SDR’s” and the “can kicking” will continue down the “global road”.

Anyone expecting some “massive rise in the price of gold” overnight –  is likely in for a longer wait in that……the “paper game” has miles to go before your “$7000 oz” will be realized. As well – if you live in the U.S, I’d look forward to any large profits being made  subject to a “newly formed gold tax” – likely in the neighborhood of 80%.

Have you considered that “the power’s that be” already have this worked out?

Blow Off Top – Retail Bagholders

Forex Kong 10 Comments

I’m throwing this out there now – more so as a warning to newcomers.

My “risk barometer” being the SP 500 / Dow Jones Industrial Average is cranked about as high as one can imagine – given the current global state of affairs. We are now looking at levels not seen since the highs, prior to the massive crash in late 2007.

One can only assume that right around now, every retail investor on the planet has heard of the “massive upswing in markets” and has just as likely received word from their local shyster (ooops… broker) that now is a fantastic time to buy – as to not “miss out” on the opportunity to make a quick buck.

Looking a few days / week out – one could very well see what I refer to as a “blow off top”. A market phenomenon where large numbers of retail investors chase prices in a frantic scramble to “get in” before the opportunity has passed and the ship has sailed. Unfortunately this is right around the same time that Wall Street is unloading its last few shares (at insane premiums) to the poor unsuspecting newbies – blinded by greed, stumbling over themselves to snap up whatever shares they can.

I’m not suggesting their isn’t money to be made (seeing market leaders such as Apple down 55 bucks looks like a buy opp to me too) but I am putting out a strong reminder that – this is how the markets work. You are the last to buy (at the top) and then will generally hold (until you can’t stand it any longer) only to then sell at the bottom. The big boys will “buy your fear” and “sell your greed” all day long – as retail investors continue to do what humans will do.

Does this at all sound familiar?

Take heed….watch these markets like a hawk here at the highs….thank me later.

Risk On – How To Trade For Profits

Forex Kong 6 Comments

I am often a day or two early – but rarely RARELY a day or two late.

When assessing “risk behavior” one needs to look across the board at a number of currency pairs, and evaluate which are indeed exhibiting strength – broadly. A “quick jump”  in a single currency pair is absolutely no indication of a change in trend, and a silly little tweet or headline from a newbie blogger – even less.

No single currency trades in a vacuum , and with each and every move in one – there is an equal and opposing move in another. Identifying those currencies associated with “risk” and those associated with “safety” is paramount in formulating  a fundamental trading plan. 

I never trade a commodity related currency against another – and rarely (if ever) trade a safe haven against another. (Although as of late with the “devaluation war” in full effect – I am actively pitting one against the other – yes.)

Simply put – money flows out of risk related currencies and into the safe havens in times of risk aversion…and the opposite (into risk related currencies and out of safe havens) during times where risk is accepted.

This evening I will leave this with you – to  discern which is which, and invite your questions or comments in putting this very important piece of the puzzle in it’s place.

Kong gets loooooong risk.

 

Intermarket Analysis – In Real Time

Forex Kong 25 Comments

Lets start with the currency and work our way backward through a couple of charts to see if we can put this all to use.

The US Dollar continues to exhibit a pattern of “lower highs” coupled with the current fundamentals (the printing of 85 billion new dollars per month) suggesting to me – further downside is certainly in the cards. A lower dollar leads to higher prices in our commodities market right? – which in turn puts pressure on bond prices and interest rates.

(Short of looking at individual currencies vs USD specifically – $DXY will suffice for this example.)lower USD Forex Kong

The entire commodities complex clearly bottomed in June, and has taken a nasty pullback to an extremely solid level of support. As the USD rolls over – we can expect higher prices in commodities.

The $CRB is now at levels of support

The $CRB after bottoming in June is now at support.

The symbol “TLT” tracks the price of the U.S 20 Year Bond. As the price for bonds falls the rate of interest paid rises (the price of a bond and its yield are inversely correlated).

20 Year Bond prices appear to be falling

20 Year Bond prices appear to be falling

Lastly in this wonderful chain of events we look at the SP 500 (or futures symbol /ES) and see that if indeed the intermarket analysis holds any water – a falling dollar creates  rising commodity costs, in turn leading to inflationary pressures pushing interest rates higher and bond prices lower – eventually spilling over ( as businesses begin to feel the pinch of higher borrowing costs) and lastly effecting equities.

ES_Forex_Kong_Trading

SP500 Futures are nearing levels of resistance.

Now please keep in mind that these things don’t all happen “on the turn of a dime” – but all things considered it would appear that this is the scenario currently playing out in markets – as the dollar printing continues, commodity prices start to rise, bond prices turn lower (and interest rates higher) – and lastly we will see a reversal in equities.

I am still sticking with the timeline of late Feb to early March where I envision the stock market to start making its turn, as we can clearly see that the chain of events unfolding is leading us in that direction – likely sooner than later.

I don’t necessarily expect stocks to “crash” as we have to keep in mind that the FED will do anything in its power to keep prices elevated  – but as the forces outlines above begin to take hold – “sideways to down” looks far more likely than any type of rocket to the moon. 

Intermarket Analysis – Putting It Together

Forex Kong 6 Comments

Imagine if you will the “Global Commodities Market” much like you would your local farmers market. Vendors from far and wide, there with their goods on display and priced to sell. You’ve got corn, sugar, coffee, wheat, beef, gold, silver, copper, oil and even some live cattle there in the back. Everything a person (or a nation) could ever need, all there in tidy rows – neat and organized, ready to go.

Only thing is  – you’ll have to make a quick little stop to see me at the “foreign exchange window” before heading in……….. as you guessed it – all items are priced in U.S dollars.

With global trade in the trillions of U.S. dollars every year – and this “market” paying  taxes to the U.S. government. It’s a pretty good system for the U.S don’t you think? – Not to mention my little “currency exchange” on entry – (I’ll save this for another post and topic entirely).

The U.S. dollar and commodity prices generally trend in opposite directions. As the dollar declines (relative to other currencies)  the reaction can be seen in commodity prices.

Commodity prices have a direct effect on bond prices. As commodity prices escalate in an inflationary environment – so in turn interest rates rise to reflect this inflation. Rising interest rates and bond prices (TLT) fall. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well.

Putting this all together does take some time – but by monitoring even just the USD and the major currency pairs, a couple of commodities such as gold  or silver, the SP 500 and the 20 year bond (TLT) – the average trader at home should be able to get a handle on “what’s really going on”.  I spend my time in the currency window as I strongly believe that moves in other asset classes are first seen here – as the fx market is the largest and most liquid on the planet – dwarfing the daily volume of the NYSE by well over a 100 times.

We can look at a real world example next……..

Intermarket Analysis – Watch These Too

Forex Kong 2 Comments

So far we’ve seen that obviously I take a concentrated look at the major currency pairs, and look to find trends / movements within. The other “futures market symbols” listed yesterday give me the goods on the major commodities such as oil, gold and silver – as well a good look at what I refer to as my “risk barometer” being the SP 500 and the Dow.

Other Things I Monitor:

  • APPL (As a market leader – I always keep an eye on movement here).
  • XLK, XLE, XLV, XLB, XLI  and the entire family of U.S Market Sector ETF’s in this series.
  • EWA,EWC,EWD,EWZ  and the entire family of MSCI Ishares ETF’s in this series.
  • $TRAN – I watch the transports.
  • FTSE – I watch the London Exchange.
  • TLT – Ishares 20 Year Bond Fund.

Considering that I use two separate charting  platforms (one for currency trading and another for stocks and options) this is pretty simple to follow  – as the majority of these are listed in separate “watch lists” within the Think or Swim platform. A quick “click and a glance” and one can easily see movement across a wide range of asset classes.

I spend the majority of my time with the currencies on Metatrader 4, but this is the full list of most “anything and everything else” I make sure to keep an eye on day-to-day.

Next we can have a quick look at how to put some of this information together in order to formulate a reasonable idea of where the market is at – and possibly going next.

 

 

Intermarket Analysis – Things I Watch

Forex Kong 7 Comments

Intermarket Analysis:

The analysis of more than one related asset class or financial market to determine the strength or weakness of the financial markets or asset classes being considered. Instead of looking at financial markets or asset classes on an individual basis, this type of analysis looks at several strongly correlated markets or asset classes such as stocks, bonds and commodities.

I thought it might be of interest to some of you to get an idea of which symbols /markets / indicators / areas I monitor –  in coming up with my overall market analysis. Trust me, if you are only watching one asset class or concentrating on a particular sector or  a single market, you might as well put a blindfold on, tie an arm and a leg behind you – and head down to the beach for a swim – you are sunk.

Currencies:

I follow the following pairs religiously and could likely quote you the given price and recent price action summary without looking at the screen.

  • USD/JPY, USD/CHF, USD/CAD
  • AUD/USD, AUD/EUR, AUD/CHF,AUD/JPY
  • NZD/USD, NZD/EUR,NZD/JPY
  • EUR/USD, EUR/JPY
  • GBP/USD,GBP/JPY
  • CHF/JPY
  • CAD/JPY

These pairs are constantly monitored on every single time frame (from the monthly all the way down to the minute to minute action) – and a trade will be initiated in any one (or all pairs) at a moments notice. These pairs are viewed on the Metatrader 4 Platform that is available 100% free from many brokers online.

Futures:

These symbols may look a touch cryptic to some as they are not as commonly seen / used. Please look them up  – and yes..use them.

  • /GC –  (gold futures)
  • /SI – (silver futures)
  • /CL – (light sweet crude futures)
  • /ES – (SP 500 futures)
  • /YM – (Dow Jones Futures)
  • /NKD (Nikkei Stock Exchange Futures)
  • /DX (US Dollar Futures) – I beat alot of people up about watching this specifically as I trade/observe the USD against the majority of currencies on an individual basis – but yes…it’s on my screen.

I use the “Think or Swim” trading platform for all of my futures, stocks and options charting and would suggest you do the same as it too is 100% free and provides some incredible tools.

Other Symbols: 

This is getting a little long so I will break it into two posts, as I still havent explained much as to “what I look for” and how all of this comes together. Not to mention the 30 or 40 more symbols I need to list. So….watch for part 2.