Currencies – Second Choice for Returns

One of the main markets I look at besides commodities is currencies. It’s a tough one for me though, as it can be a fickle friend.

These markets like to trend massively in one direction, often whipsawing traders out of both sides when not trending heavily. As a mid to long term guy I like to get in on swings within those whipsawing ranges, if the trend continues to the side of my swing then I’ll raise stops, let it run and honour my stop. If it goes the other way, I’ll keep my risk to a minimum. Sometimes stops are visual, sometimes they’re calculated with ticks and pips. Either way, small losses-big wins.

I’d say (without any mathematical backup) 90% of my foreign exchange trades end up closing at break even or a loss. The other 10% gets closed out above purchase price, usually by stop loss or that other fickle friend; emotions.

Some people might find this incredibly reckless. But it works. The key is appropriate risk management coupled with some quick wit and a beady eye.

Quite recently, as volatility has began to creep back into markets and commodities are throwing people around, I’ve been digging deep on the foreign exchange markets. This was unintentional, and my reasoning behind favouritism to foreign exchange markets and lack of interest in equities (US or other) was due to my thinking that equities were stretched, liquidity low in terms of pull backs, plus some other personal reasons such as not wanting to actually buy all time highs – all the time. (Which now may change)

 

To the meat of it.

As many of you know I’ve been aggressively bullish the British pound since late 2016; if you had followed the media narrative you’d have missed out on a very orderly trend. It’s not my place to say who is buying up sterling and why, quite frankly I don’t care. Just look at this trend from that “fat finger” low in October 2016.

gbpusd1

GBP/USD, Weekly Candlestick

As can be seen in the chart above my long targets from the dates mentioned prior have pretty much been hit, we can’t be too picky with currency markets so it’s good to know your targets might be some pips out of measured moves (goes for any market really)

I still think there is room to move higher in Sterling and I am watching for the 1.618 extension of around 1.47 to be met. That being said, I shan’t hold my breath on it and have risk managed well.

B62

CME British Pound Futures, March-18 Contract, Daily Candlestick

Above are some daily levels that I have my eye on for now, currently holding a long trade at 1.3881 and a stop loss at 1.3923. With a bullish price objective of 1.43

For those of you who like to play the CurrencyShares trusts – Here is a weekly chart of FXB, The British Pound Sterling Trust. Currently targeting a Head and Shoulders reversal objective of ~149.50

FXB

CurrencyShares British Pound Sterling Trust, Weekly HLC Bars.

Next up is a trade I actually owe to Mike Bozzello, the community manager over at StockTwits.com While I have been bullish Swiss Francs for a while now, it was his analysis that led me to dip my toe in some Euro shorts vs Swiss Francs. You can see his take on it over in his stream, but here is mine.

EURCHF1

EUR/CHF, Weekly Candlestick

We can see that after a pretty textbook Falling Wedge Breakout, prices reached their measured move targets of ~1.83 – Also very close to the point at which the SNB sacked off its Euro ceiling and pulled the peg. What got me most was the very tight Rising Wedge from Jan-2017 to present. I am currently short Euros and long Swiss Francs via this set-up from 1.1789 and a stop loss set at 1.162. I am targeting the 1.10 area which lines up to a few technical points which are marked on the chart above.

EURCHF2

EUR/CHF, Daily Candlestick

The same pairing but in daily terms with some levels I have my eye on. Which are all visual.

The case for a bullish Swiss Franc is also a good oppurtunity to talk about Gold briefly, as I know some folks like to hedge their currency positions in gold.

Here is a chart of CME Swiss Franc Futures, a continuous contract. Some may know I was looking for a breakout of the 1.06 area, and we got it in big league style with a retest to boot.

6S

CME Swiss Franc Futures, Continuous Contract, Weekly Candlesticks

 

It is pretty clear to see from the chart above that a breakout over 1.10 would be, in my eyes anyway, pretty bullish for the Swiss Franc.

Below is a chart of CME Gold (continuous contract) priced in Swiss Francs. While this only shows a big basing pattern since 2013 (probably even longer if you disregard the top in 2011) It still gives us a good idea on why the two are worth looking at together, much like Gold/Yen, they move almost in tandem.

GC6S

Continuous CME Gold/Swiss Franc Monthly line, log scale.

This can be seen more clearly when the two are separated and a number of different Correlation Coefficient(R) indicators are applied.

FXSGOLD

Gold, CurrencyShares Swiss Franc trust, Weekly line

We can see that the short term R is choppy, natrually, but when we look at the longer, 20 Week rolling R that it could be safe to go long Gold on this pretty convincing breakout in Swiss Francs.

It would be incredily remiss to not mention the almighty Dollar so I will touch on it briefly, because as a technician it is clear as day the trend is down, and I will continue to have a bearish bias towards Dollars until I think that has changed.

Here is a daily chart of ICE Dollar Futures, the March-18 contract. Some levels to watch for and note.

dxy

ICE Dollar Futures- March-18 contract, Daily Candlestick

While I do notice candlestick patterns, I see no reason to be overly long from on Friday Bullish Engulfing. I need consistent higher lows and conviction in the moves higher. My upside for the Dollar is 90. Over that and I’ll consider some scaling in of other positions. Still need 95 to be completely obliterated for any real long term upside potential to appear in the Dollar.

To re-cap, I am Bullish Sterling with caution, tight stops and the understanding I may need to nibble a lot longer for bigger upside.

Long Swiss Francs and that won’t change until I see us back in a 1.06-0.99 range.

Long Gold on the Dollar weakness and positive correlation to the Swiss Franc

Short Dollars because it’s in a downtrend, and I don’t buy downtrends.

Have a good week and as always do not hesitate to reach out with any questions or differing opinions. After all, that is what makes a market.

Stay tuned for a post coming up on what I am learning about the credit markets. We’re going to talk about yield curves, credit spreads and bond prices and what effect they have on commodities.

Regards,

A.M Dickie

As with any site like this, please do not seek to make any returns from any ideas or commentary herein. It is for documentation purposes only.

Advertisements

Closing for Christmas

It seems funny that my first post on my new blog should be one about how I am closing up shop for the Christmas period.

While some may think this is because of some arbitrary seasonality reasons, it is simply because I am too busy seeing family, climbing in this great British winter we’re having and generally just needing a break. Which is healthy for any trading strategy.

That being said, I am still holding a profitable Gold short that I will explain in detail shortly. First I want to briefly touch on what I am looking at for the New Year so I can (try) and hit the ground running.

Since I look at a lot of commodities, and they have broadly and largely been getting hammered. I tend to keep a close eye on the dollar. While I am still bullish dollars for now, a lot is weighing on that sentiment and where we might be at the end of January.

ICE Dollar Index Futures March-18 contract as of the date of this post closed at 93.02

A loss of 92-91 would likely be sign of bearish continuation in that down channel from early 2017. to 90 and lower. Over 94-95 and this contract will likely get rolled over in my portfolio.

While the Head & Shoulders reversal has given a false signal, it could still be argued by the die hard chartist it is still intact in a more complex or “unbalanced” way.

DXH18

The Bloomberg Softs Index compared to the Spot Dollar Index would suggest we’re still in a decision making period and it could be either side by the the end of 1Q18 – That being said, I am still bullish US Dollars and see no reason to be bullish a heavily shorted market like most commodities. Here is some charts that may showcase both arguments.

BCOMSO-USD

The Bloomberg Softs index above can be seen to have made a higher low from that October 2015 low.

The same cannot be said for the Grains Index. Which is trading at it’s lowest level ever at the time of writing.

BCOMGR

It is interesting to note the large RSI divergence in these commodities. Which has historically lead to some quite large runs. Remember, history is not a reason to place a trade.

The Bloomberg Agriculture subindex shows this quite well over a long period of time. Also trading at it’s lowest level ever.

BCOMAG

To sum up these charts, I’d like to see the Dollar to continue to strengthen, and for commodities to continue their series of lower lows until the first half of the New Year. This would confirm the loss of what once were potential bases in things like Wheat, Corn, Cocoa and Sugar and maybe open up a signal to short so we can possibly profit from this move.

One trade I still have open and may possibly roll over is the short in Gold.

I truly believe that the downtrend in Gold is not over and there is to be continual sideways to downward pressure. I cannot speculate on a time frame for this as we’ve been here 5+ years already.

I initiated a short position in Gold December-17 on the 12/05/17 at 1262 at 4% risk to total account capital. Shortly thereafter, as per my rule I immediately trimmed half the position at 1243 and lowered my stop to 1257.

Since this is now an incredibly low to no risk trade I can dwell on wether to roll it over if it survives this possible retest of prior support or continue a new short position on the next most liquid contract.

Gold – December 17 Contract.

GCZ17

Gold, Continuous Contract – Weekly.

GCSPOT

Huge base? We will have to wait and see. 1400+ is the close Gold bulls require in my personal opinion.

I am going to close out here by wishing you all a Happy Holidays and a profitable New Year. Any questions, please see the “Contact” section at the top of this page.

Regards,

Alistair M. D.

As with any site like this, please do not seek to make any returns from any ideas or commentary herein. It is for documentation purposes only.