How do you trade? $$

General note on how I trade.

And place to discuss your own trade approaches.

A short discussion note to explain my trade plans and also to know bit more about yours. 

What I trade?

I am only trading emini S&P 500 futures these days. Once I get bit more time on my hand I would like to analyse and trade some popular stocks and other liquid futures and forex. I do look at all major markets once a week for longer term trade perspectives or to plan some swing trades. I only trade US markets as the timings suits my work routine. 

What time frame?

My usual style is to trade positions for longer period/swing trade if I can identify a trend and can position myself to ride it. For day trades, I only plan and trade the regular trading session for e-mini S&P 500. The overnight session acts as a good guide to what is going to happen in the day session. Remember trading is always about finding the right zone. I start and publish my day trading plan for e-mini around 0730-0800 CET before the futures pits open for trading. Most of the pre-open news like employment numbers, other important announcements are already out by this time and you get a feel of how futures are reacting. Here is how I plan my trading day  

From Tokyo With Love

Case study for deleveraging and demise of carry trade

While the equities have not achieved much as the crow flies the USDJPY pair has a good story to tell for the power of deleveraging. Now when you think of Japan, you would imagine the spectacular collapse of the Nippon star, decade long deflationary cycle and developed world govt with highest debt to GDP ratio. Not an example of something which will inspire currency confidence and hence appreciation. But look at USDJPY (look at other pairs EURJPY, GBPJPY or NZDJPY as well) and you will find that after hitting a high of 147 in 1998, JPY is been in a constant down trend and broken out of a massive flat bottom apex in a classic fashion. So what is causing the whole world to buy JPY? Not a deep desire to buy Japanese assets but simply the desire to unwind a carry trade position. On back of envelop basis, if you had borrowed 147 YEN in 1998 and sold that to buy 1 USD and invested that USD, you would still be sitting on that 1 USD asset today (+ dividends etc). However that 1 USD would only get you 83 YEN today so you are short by nearly 64 JPY. That’s a big loss you are looking at.
Japanese Central Bank has made threats of interventions but I would think that they learn from the experience of our friends at Swiss National Bank who finally threw out the policy of intervention (and failed to stop the rise of CHF). I would think intervention if any would be short lasting and opportunity to buy YEN at weaker prices. I feel the significant low of 79.70 will be broken though that level is likely to offer some support and can be used a first target. I expect once 79.70 is broken, YEN would reach mid 60s level against USD towards Q1 2011. Against other currencies like EUR and GBP the results can be further spectacular. Yen is in a well defined downward channel and an interesting play on world that is deleveraging.

Not too far : As the crow flies

S&P 500

If flat tops bring market drop, we have a big one at our hands. S&P 500 is simply trading waters since March 1998. Today it stands exactly the same point it first crossed on the upside in March 1998. Nearly 12 years and nothing. And as far as current financial year go - nothing. This is the last quarter for S&P 500 to set a direction for the year as a whole and if prevailing 9 months have anything to go by, there is no clear trend still. The volatility has been grinding down progressively and the implied correlations across asset classes are slowly approaching 100%. The underlying risk in the markets is building up and severe price moves can occur to adjust for the ground realities. For a breakout trader, this is a point of extreme patience. Bigger the range, greater the breakout as they say. When it could happen, no one knows but it would certainly be a big one.

JPY has been rising steadily, even in the face of threat of interventions by BOJ. USD is also looking to breakout upwards after a recent pullback. These point to the continual deleveraging going on and corresponding destruction of outstanding debt. The US national debt may be increasing but the overall debt (govt + private) is decreasing fast and that is deflationary and constant source of worry. Commodity prices have started moving up for grains, softs and metals bur crude oil and energy sector looks poised for a correction down.

I am closely watching the foreign exchange markets for emerging signs about trend which is likely to break the range bound trades in other markets. If USD, JPY and CHF can continue to attract bids, it would be bullish for GOLD and Bonds but bearish for equities and consumption linked commodities. Meanwhile, waiting and waiting…

2010 – The year of Forex?

Will smiling US Dollar dominate most of 2010

UPDATE : 6th Aug 2010 - I was simply adjusting border on the picture and this post has come up on top. This is nearly 7 month old post and please read it accordingly.

USD appears to be smiling again. Dollar smile theory, as per Stephen Jen, predicts gains for the greenback during times when the U.S. economy is either in a deep slump or growing strongly, and underperformance for the dollar during times of moderate growth. Now I am not sure which part of the smile Dollar is moving now but I sense that a trend change is emerging for US Dollar against major pairs and 2010 can be the year the dollar shines again. 2010 could also be the year dominated by foreign exchange markets. The bonds markets are played by central banks and equity markets are not going anywhere.
USD had been a short play for most of 2009 but lately USD appears to have formed a bottom against all major currencies and made impressive first wave highs. Now the question is – is this due to year end covering into USD positions OR a major shift coming. Strangely enough, I do not see much fundamental reason other than massive short position in USD to back this strength in USD. But Oscar has always said that fundamentals always come out in the charts first and as the charts are today, USD is going up.
So how to setup trades for this scenario? I will be looking to buy breakouts from highs for USD (or low for other pair) with stops 3 – 4 Average True Range. I will also look to buy pullbacks in USD (or sell rallies for other pair) at key retracement levels with stops below lows (above high in case of other pair). I will update further on the trades as they develop.

Is this the end of the suckers rally from March 09 lows?

S&P 500 (ESu0) and other indices

Most world markets responded strongly from the March 2009 lows and the rally went on much longer than anticipated and killed many a bears. But with fundamentals disappointing for such strong expected recovery and crisis after crisis unfolding it does appear that the rally has run out its time. In the attached weekly chart of S&P500 index, it appears that:

- Top of the rally as 1219 was a key Fib reversal point for the down move from 1576-666. This indicate start of another big move down. It is quite likely to see lows below 666 but worth assessing that scenario after nearest support point is reached.

- Medium term top has been formed by Head and Shoulder pattern which has been completed. The projection from current H&S pattern down are looking like 950 – 850 region which is also a point where bulls can regroup and attempt to take the markets higher.

- The index is below 200d and 50d MA and 50d MA is about to cross 200d MA which is usually a strong bearish signal.

It would seem appropriate to keep selling the rallies until the pips squeak.

BP set for a fall?

British Pound (6Bu0) not BP (Formerly British Petroleum)

One can clearly see in a long term chart for British Pounds against USD that it is in a prolonged bear market since November 2007 after hitting the headline grabbing 2.116. After bouncing from multi year double bottom at 1.35-1.37 region, GBP did bounce back strongly BUT it was merely a correction in the longer term picture. The correction was completed at 1.7042 level and since then GBP is falling in line with its longer term trend.

At current juncture (1.47-1.50 area), GBP seems to be setting up for another short with a possible target in the 1.36-1.34 region possibly setting up a triple bottom. At current price level, the price is near 50 dMA and also near key half way back resistance levels.

As per current analysis in the attached weekly bar chart, fall to 1.36-1.34 region would complete the down move started from 1.70 region but I do expect that the longer term trend would remain down and after some quick corrective bounces, GBP would start further legs down with possible culmination at 1.25 and in extreme case parity (1.00) level in long term. But at this time these extreme levels are just some mental targets to be refined as the move develops.

When they are only half way up they are neither up nor down!

GOLD (GC) S&P500 (ES)

The markets are always divided into two camps, bulls and bears. The bear camp for a long time has been calling the top in the stock markets and wants to see S&P500 dropped much below the March 2009 lows whereas the bull camp is calling for bears blood. In between we have analysts who have created an alphabet soup of recovery (or expected recovery) U, V, W, L are quite common.

There is a case by bears for “Grand Super Cycle” of stock market reaching an end and a catastrophic drop coming in not so near future to take out all excesses since the Industrial Revolution. Bulls seem to discount that as “gibberish” and keep putting their faith (and money) on unstoppable expansion of global economies (barring timely set backs but not catastrophe) as human race has managed so far since the day they walked out of African plains as apes.

A minor flaw in Bear analysis is that it relies on S&P 500 as measured in US Dollar terms. This is good for few years but for longer term data, the effects of inflation, deflation and other effects starts creeping in distorting the picture. For the danger of valuing a market in a debasing currency, just look at the performance of Zimbabwe Stock Exchange. It might look great in local currency terms but would be pathetic if you take into account inflation and foreign currency terms.

A reasonable alternative would be to pay attention to S&P500/Gold ratio, assuming (and a separate discussion required on this assumption) GOLD as stable store of value. I had written a note about this subject late in March 2009 here discussing the S&P500/Gold ratio. There I posed the following questions

a) Stocks are very cheap relative to GOLD (i.e. at the level they were nearly 20 years ago) and time to buy stocks.

b) Stock have dropped like stone and there is no faith left in these pseudo measure of wealth and time to pile into "real" assets like GOLD.

c) At least one of S&P or GOLD is overvalued relative to the other and therefore an inflexion point can be in offing.

Since then the ratio has started heading up, after hitting low in March 2009 indicating a faith in Stocks (over Gold). However over longer term perspective the current trend in S&P50/GOLD ratio is down (since 2000). On Elliot Wave perspective, the 5-3 wave correction appears to be over and therefore there is a point in the case that March 2009 was indeed the longer term bottom for the stock markets (in Gold terms) and even if a severe correction is in pipe line, the current direction points to stocks outperforming GOLD for some time (until the ratio is 1.81 – 3.125 range). That could mean Gold is due a severe correction and/or stocks are due a severe ride up (at current price of Gold, it implies S&P 500 at 1810 at least – taking out its all time high).

These appear certainly “mind boggling” at current stage but just to get the perspective, imagine this analysis in 1984 when the ratio was .45 and people who were long S&P short Gold made 12.10 times return in GOLD terms. I (accidently or by good fortune) was able to ride a very small part of this curve in 2007-2008 being long GOLD, short S&P500 and still managed to do very well in that trade.

So what appears as next steps: There are the following trades:

i) Sell Gold, Buy S&P500  and put stop loss at S&P500/GOLD ratio of 0.86

ii) Buy Gold, Sell S&P500 and put stop loss at S&P500/GOLD ratio of 1.81

iii) Buy GOLD, Buy S&P500. Even in the severe down turn in stock, this trade has only lost 4% since 2000 peak.

iv) Sell Gold, Sell S&P500. This is opposite of trade iii) and therefore with inverse performance.

Like before, I still do not have a firm bias as to which trade to take but I know that there is money to be made in this trade if traded correctly. I will take a cautious position on trade ii) with some hedges built with options in case it goes against me. I would also like to do more analysis on this subject. I could only get data up to 1984. I am sure the truth is out there if I try harder to get data going back a lot further but my laziness is getting better of me. Any readers want to present a table of closing numbers for GOLD and S&P500 for years before 1984?

Winter of discontent or Santa Claus is here again?

key levels – indices, Grains, OIL, Currencies, Bonds, Metals

WARNING – I could be spectacularly wrong here. Do not follow blindly and jump out on signs of trend reversing. 

It has been an exciting summer for many and as far as markets go, it was quite a choppy session. However a clear pattern is visible in all developed world markets (and much earlier in the Developing World – India/China/Brazil etc) and that of an abundant return of confidence.  Markets have rallied without a significant pullback since March 2009. It is bit tough to find a fundamental reason for such strong recovery when the underlying economy is still on crutches but who said markets are rational.

Autumn and Winter 2009 could be a great period for current trend as the Markets are now setting up into a vacuum zone as Oscar calls it.

Starting with a bullish stance in June 2009, I flattened my positions and took a bearish stance for rest of the summer expecting a correction which so far did not materialise to the extent I was expecting. Recent price action leaves me flat on my positions once again looking for next set of trends to build on.

A NOTE OF CAUTION – it could very well be a summer low volume play and the markets could very well reverse drastically on down side and the whole bull market hoopla turns out to be an pouncing opportunity for bears who return after summer vacation. After all the world has not changed much and there are still several reasons to start selling. Caution is required going into early part of September. Also I do not see this as start of a secular bull market, instead I see it as last legs of the current trends. Possibly we will have new chapter/direction later on the in the year.

S&P500 (ESu9/z9)

The case for bulls is quite strong and I feel we are in the final leg of the up move from March before a long term correction/pullback sets in. My key projection level on upside range from 1066 – 1229. A very wide zone I agree but some are key milestone targets where I will be tempted to watch the action (or move stops higher).

Current Position – Small Long (1025 area)

Bias – Build Long position on breakouts and pullbacks. 972 key level to watch on downside with stops below that level.

Nasdaq 100 (NQu9/z9)

Nasdaq has been much stronger compared to S&P500 and if the bull market is continuing, it should likely to benefit more on the upside. But given the same reason, Nasdaq had been butting against the key sell level (1633) for a long time and it should remain above this level for me to comfortable about the longevity of the bull market. So NQ will be my key barometer on this breakout market. My projections are 1633 – 2040 range (again very wide) but I have some intermediate levels to keep an eye on.

Current Position – Small Long (1635 area)

Bias – Build long position on breakouts and pullbacks. 1560 is key level to watch on downside with stop below that level.

Nikkei 225 (Japan)

The benchmark index of Japan has seen the mother of bear market and has seen decades of decline. In some sense Japan has witnessed the effects of a bubble burst and deflation, things which western world is panicking about today and also most central bankers are trying to avoid. There are however signs that finally after decades of savings, Japanese consumers are waking up to spending. Any global turn around should help.

My current projections on Nik225 are 12000-12384-13000. Break below 9600 will negate this analysis. I do not have any trades on.

CORN (ZCz9)

On my EW analysis, the current bear markets in Corns appears to be over and 300 level in Corn should act as good floor to build positions on. Fundamentally, there is abundance of Corn crop but I feel that is already priced in the markets. Inflation fears and rising crude oil should support Corn at these levels and possible shoot it higher. However end of bear market does not always mean start of next bull market and very often Elliot Waves are not accurate in exact levels (they are good for direction though). In terms of my trading plan, I am starting with key level long dated call options (360/470). Failure of a key short level at 344 could help me come into the trade properly.

Current Position – Flat

Bias – Start with longer dated options on key levels. Look for a short setup failure before getting long with stops below 310.

Wheat (ZWz9)

Wheat on the other hand does not confirm that the down move is over, though it is at support level here. Some of my silly (it seems now) see wheat all the way down to 317 level. I am not prepared to back such a bold bet as of now but instead I would look to sell breaks below current lows. Can act as a good hedge against the corn options.

Current Position – Flat

Bias – Small Sell breaks below lows (485) or watch for action along with Corn/Soybean

Soybean (ZSx9)

The most volatile and exciting of the grains complex is also the most fickle. Best used as a leading indicator for other markets or short term trades. So far I do not see any long term trends. 1180 are likely near term targets if the bullishness continues but none worth putting a fat trade on. Best to be traded on day by day basis.

Crude Oil (CLv9/z9)

Like other commodities complex, crude oil has also shown the return to bullish momentum since bottoming out at $35. From the EW perspective, the Crude should be heading to 88 – 95 region. The pattern with negate on the breach of $58 level on the downside. However given that crude is now trading at 74, the risk rewards are 1:1 on such trades and not worth putting a big position. Need to wait for next big wave. I will continue to trade on day by day basis if opportunities arise keeping the broader direction in mind. The whole energy complex except Natural Gas (NG) is setting up for this bullish formation and worth keeping an eye.

Dollar Index (DXu9/z9)

US Dollar appears to be heading for completing its last wave of down move which can take it all the way down to 72 – 75 region. Considering we are around 78-79, there is not much risk:reward in left in long term trade so worth playing on the downside on short term basis. If DX moves up to 82 I will need to think of a different scenario but until then I am not a dollar bull. Mostly on sidelines watching the fun. 

Along with Dollar, I feel GBP is another currency to sell in coming days and month. It seems to have topped and has a long way to go down.

T-Bonds (ZBu9/z9)

Bonds are one market which is sticking out like a sore thumb. If the world trouble are getting over, the interest rates should start heading up, especially the long term interest rates. And for a long time, I am of the view (which had been quite profitable) that the long term bull market in govt bonds is OVER. But current setup points that most bonds (T-Bonds, German Bunds and even UK Gilts) are looking up. The central banks are keeping the market distorted. Banks are also buying bonds instead of putting the money in economy to repair the damaged balance sheets and keep cushion. Or they are simply setting up for a juicy short somewhere up there. In all cases, I am on sideline watching them wearily. Hopefully some clue will emerge soon.

Gold (GCz9)/Silver (SIz9)

Gold and Silver markets have been consolidating in a range for better part of this year. Best is to play them on range breakout basis. For Gold, I am watching 966/900 level. Breakout above could lead it to 1220/1350 level. Breakout below could target 840-740 area.

Silver is in similar predicament and similar levels to watch for breakout are 15.40/12.40

Cocoa (Cz9 on liffe)

Cocoa is setting up for upside breakout once again. Buying dips and breakouts with stops below 1700 is the plan currently.

HOME WORKS (JULY 2009)

General Markets

Traders, the home work page for July is here. As usual, please click on “comments” to add your home work or read other comments. The “post your home work” link is updated to take you to July 2009 page now.

I had a wonderful time doing and following home work and it has really helped my analysis skills. I have also started posting my home work trades results online. The account was positive for the month of June!

As usual, you can subscribe to post comments via any blog reader software (like Google reader). Select the drop down option on the right hand. Also when you post comment, there is an option to subscribe to follow up comments via email.

Happy trading.

VS

Correction! What correction?

S&P500 (ESu9)

Sell up to 932, Stop above 957, Target 810-780

Fashion is like swine flu, easy to catch and difficult to understand and it tends to take over a clear mind. Recall when you last heard the "green shoots" and now it seems every one is talking about it. So much so that the real meaning of "green shoots" when it was first used is almost forgotten. We are talking about the impressive spring 2009 recovery in world markets and Indices have not looked back after hitting their lows in March 2009 (in case of Asian/Emerging markets the lows were since in Oct-Dec 2008 period). The rally has taken many pundits by surprise. They were talking it down all the way up, first calling it a bear market blip, then a bear market correction and then a bear market rally. But markets needs no pundits and the rally did march on. The green shoots were firmly in ground.

Now that most pundits have become a firm believers in those green shoots that they are overlooking their lawns. The green shoots appear to be overgrown and need a good mowing.

The rally which started in March 2009 appears to be halting at key technical levels as the supply of good news seems to be drying up. The weekly S&P500 seems to indicate a double top. Also the MACD on daily charts have started showing signs of fatigues.

The markets are divided in two camps, those who missed the rally and waiting for a chance to jump on and those who were lucky enough to climb at start and looking to get out with fat profit. And there is no doubt that a lot of money is sitting in low yield "safe" accounts and that wall of money can hit the market any time.

Given this outlook, I still believe in the rally which started in March 2009 and if the money on sideline start coming back into the market on pullbacks, we can soon see next wave (wave 3 which is usually the juiciest) of this bull market. But for that to happen a healthy correction is needed.

I expect a pullback to 810 - 780 region on S&P500. This would likely to bring down the cyclical PE ratios near enough to the lows of the previous bear cycles. If market could hold this area, the next bounce up should take us to 1126-1234 region. However if the green shoots get burnt by excess fertilizers or scorching summer sun, March lows could easily be taken out. This indicates that these markets are delicate and nimble trading is required.

I am positioning myself for the pullback with a cautious shorts, hoping to hop on to the next bull wave soon. It would be interesting to review the situation when we are in the next buy zone. Since this trade is technically a counter trend trade (the major trend is still bullish), a safe way to play this is also via options (850/810/770 Sep 09 PUT). If a profitable position is created and pullback materialises, 810 puts can be sold and then shorted to create a risk free butterfly.

Why MacAllan is giving me a headache and squeezing Orange Juice

General Markets

MacAllan* indicator - dedicated to the famous trader Allan who considers MACD as his other child - is a bit devious indicator for entering a position. But it is quite good at pointing out divergences and possibly indicating exit points (or tightening of trailing stops) once it starts showing divergences from the prevailing trends. 

I do not use many indicators in my trading, I mostly look at the price and moving averages but I have started watching MacAllan for some time after discussions on this subject at Oscar's premium room. I see that many a times MacAllan actually signals turning points in a trend. Especially if it is preceded by a H&S pattern in MacAllan with prices making new highs all along (opposite for short). This divergence would mean that prices are ripe for a turn down and if that coincides with my fib based projections or profit targets, I would look to trim or exit altogether leaving a minor runner or a limited risk option/butterfly position.

Since the turning point in March 2009, may markets have rallied without a pause, and that itself is giving me a cause of concern. On top of that now MacAllan is pointing to bit downside on these markets. It has caused me to exit most of my long term positions for the time being and in some markets I am actually reversing trade. Following is a brief review on markets where MacAllan is giving a hangover.

ZSn9 : 

Beans have had quite a run up and now looking exhausted, especially old crop (July) contracts. MacAllan has turned down as well after indicating the divergence. I am looking to actually take short positions in ZS for short term with stops above highs targeting 1102 at the first instance.

ZMn9/Zon9 :

Similar situation as bean but much exaggerated. Better short than beans. 

ES:

One can see H&S completed on ES MacAllan. It has still not turned negative but once it goes negative, it looks like a good short.

HG:

On a longer term perspective, HG MacAllan has formed H&S. It is still positive but once negative, I will look for a significant pullback.

OJ:

Orange Juice is now getting squeezed. I have taken a short position at 91.50 given MacAllan has turned negative after a distorted H&S. I will look for possibly 83 region on that short.

SB:

Sugar did not even make H&S on MacAllan. The run was extended in Sugar and therefore it is quite ripe to fall. I had started building position in 15 Puts and now I am taking outright shorts with stops above the high (16.05). 

KC:

Coffee MacAllan has turned negative but H&S is not formed. I am cautiously short on Coffee as of now via certain option positions. Run to 125 level is possible.

* MacAllan is nothing but our simple MACD indicator but it is more fun to call it MacAllan. It is also of course a famous Scotch whiskey. Try Mac 18 for best pleasure.

General Musings : Markets Review of key levels for position trades : 2009-06-07

My Development as a Commodities Trader: General Musings : Markets Review of key levels for position trades

I have closed or trimmed most of my long term positions at the start of June 2009 as commented on the previous post and I am now sitting on sidelines on most markets looking for new trends or setup to establish new positions. The market seems to be divided between two camps now. Those who got on the turn from March 2009 and now torn between hanging on or getting out and those who missed the whole turn and now waiting for second chance. The breakout from the ranges so far has been on the upside so that seems to be the prevailing trend but there are signs that the bull might be getting tired and may be setting up for a bear ambush. I am watching, safe from my perched up position before deciding on jumping on bulls back or joining the bear attack.

INDICES:

There is no doubt that equity indices have shown a great bounce from March 2009 bottom and in case of Asian Indices (HSI/China H Share/India) the bottom was marked in October 2008. The prevailing trend is still bullish and breakout have been on the long side of the range. That indicates that there is still a further run pending. Therefore I will still trade them from long side. 

HSI:

Based upon fib and Elliot waves, I feel we are possibly in middle leg (wave 3 of wave 3) of the bull move from March 2009 and I see that culminating at 23790 sort of level. HSI is likely to show stronger move compared to US indices given that HongKong dollar is pegged to USD but the economy is pegged to China/Asia. So a small pop in US can be a full blown bubble in HongKong (on the same like a small gust in US turns to a full blown typhoon in HongKong.

Current Position - Small Long

Bias : Add on dips or breakout.

Buy : Breakout of 19000 stop 1500 pt below or pullback to 17000-16000 region

Stop : Below 14000

Target : 23790 with 21300 res.

INDIA NIFTY50:

Indian markets have shot up a lot after the election results and held up strongly on those gains. That is a bullish sign and I am quite certain that India could be the first market to take out its all time high established at the peak of bull market. However in the current level, I am not able to come with a sensible risk/reward setup for entry. 

Current Position - Flat

Bias : Looking to buy small long on dips if other markets are holding up.

CHINA H-Shares:

The Chinese markets are in a short ambush zone and any wobble in world markets can derail current rally. However the fundamental trend looks strong and we should be able to see 14200-14600 if the breakout occurs from current levels. 

Current Position - Flat

Bias : Stay out and watch.

Short Korean Market can be good market neutral hedge if Long other Asian markets.

FTSE:

FTSE's attempts to breach out of 4500 have so far been thwarted by aggressive selling. The MacAllan is also not looking great in FTSE. For bullish trend to continue, 4500 needs to be convincingly breached. I would expect FTSE to see 5240 - 5280 upon breakout. But as of now, I am out.

Current Position: Small long with trailing stop (below 4250)

Bias : Wait for breakout above 4500.

ES:

S&P500 has at least broken to the upside consistently from its ranges and put on a good performance so far. However it is getting closed to ambush short levels and momentum appears to be getting tired. The rally from March 2009 is without a significant pullback and some players would be watching for that before the start of next bull wave.

Current Position - Small long via June 950/1000 Call options.

Bias : Stay out and watch.

NQ:

Of all US indices, Nasdaq 100 appears to be most strong and with strongest trend. I would remain on long side of NQ for sometime. MacAllan is in danger zone for long but still not turned negative so I feel there will be one more leg up, possibly to 1553-1642 level. 

Current Position : Long with trailing stops below 1437 and a large risk free butterfly to protect 1300-1500 range.

Bias : Trail stops to lock profit. Small add long on day trading basis with break even runners to build current position.

GRAINS:

With the fall in dollar since March 2009, commodities have taken off, especially Soybeans. Other grains complex is catching up with this bull move. All grains complex has now crossed 200d MA which is usually a bullish setup.

ZC:

Corn (and Oats) are the laggard of the grains but they are now above their 200d MA which is bullish for them. 

current position : Flat

Bias : Small long on dips. Wait for breakout of 450 for next set of longs.

ZW:

Wheat look a bit extended at current level and I would stay out or look for small time shorts. I will also watch 600 level. Any break below 600 could mean end of current bull run for ZW and possibly opportunity for some shorts.

Current position : Small long with stop (below 600)

Bias : On sideline with view for possible short.

ZS:

Soybeans are quite overbought and also into a medium term short ambush zone. The old crop contracts have shot up as if there is no tomorrow but new crop (nov) contracts are struggling and not participating. 

Current position : long spread (short July/long Nov)

Bias : on sideline and look for possibly short in July contracts.

I view Soymeal (ZM) in the same light. I am long biased on soyoil (ZL)

ENERGY:

The drop in dollar and perceived recovery in world economy has shot oil prices back up and built a sort of enthusiasm in the energy markets. However the current rally does not appear to be demand driven and the inventories are still high in oil markets. 

CL:

If the economies are improving or inflation increasing, the oil market is likely to go much higher. The near term targets are 80 - 90 within sight of current level. However the market can fall equally quickly. I usually play oil market as insurance policies to my other trading positions with very limited risk. If some drastic moves happen I will be happy. Otherwise I will lose my risk premium but would possibly make money on other markets.

Current position : small long via options (Dec'09 Dec '10 100 calls). Also some Dec'09 30/20 puts.

Bias : Long with short holding period (mostly 1 - 2 days)

NG:

Out of the energy complex, NG has been the poor cousin so far for inexplicable reasons. So much so that now every one seems to be talking about it. The chart has started showing important signals which swing traders like and take up long position.

I have a small long position in NG and so far I am looking for a big move up. I will evaluate certain option position or butterfly structures if I find good price.

Current Position : Small long

Bias : Buy dip until lows are supported. Possibly look for option positions in Dec'09 6.5/7.5/8.5 calls with a view to establish a butterfly (long 6.5/8.5 calls short 2x 7.5 calls).

RB:

Gasoline achieved my medium term target and I am out of this market for now. I still see possible move towards 2.11 but as of now I will look for a better entry point.

Current Position : Flat

Bias : Sideline 

CURRENCIES:

Since March, the play has been short dollar and buy every thing else. However start of June saw a shift change in that trade and a possible indication of change coming in other markets.

DX:

USD has moved down to achieve my first target level but it has bounced from a possible double bottom area. I would think that this reversal is for real and we could possibly see a move towards 82/84 region before taking next dip again. I am not overly bullish on USD and would see this up turn to establish some good position in other safer currencies.

Current position : Small runner long.

Bias : Short but wait for pullback to run through until 82/84 region. Day trade on long side during the pullback.

EC:

EUR fell quite hard and on weekly it appears to have topped. It is also in possible short ambush zone and dollar reversal seems to confirm that. I will be cautious on EC longs here and instead look for possible test of 1.37 - 1.33 area before taking next long term position. I do however believe that EC would be ripe for all time highs against DX sometime this year and I will watch for right entry point for that trade.

Current Position : Flat

Bias : Sideline. Watch dollar.

BP:

BP could be one to play the USD strength because the currency rose without much fundamentals and has much to fall in case of dollar strength. Need to watch any breakout below 200d MA. 1.55 - 1.50 area still remain support for the longs.

Current position : Short with risk free butterfly protection on top (1.5-1.65-1.8)

Bias : Trade on day/short term basis on short side. Generally on sideline and watch dollar.

BONDS:

Bonds have broken decisively to downside and this is the most important indication of the time to come. The long interest rates are definitely on the way up and it is generally not bad for markets, in fact inflation could be the cure for the debt burden of western society. However inflation like cholesterol is of two kind. Good and Bad. Good kind raises assets prices, bad kind raises consumer prices. I am not so secure about our governments ability to manage inflation in such a way that only the good kind filters through. And that will be the key for all my long term trades.

ZB: ZBU9

Current Position : Small Short and certain option positions.

Bias : Add shorts on day basis with runners and target 112 - 110 area. Keep tight stops as fed can still surprise the markets.

METALS:

GC:

Dollar rise has brought GOLD down sharply with nearly 2 20$ moves in 3 days. That is extreme. However in the high inflation environment, I prefer to keep gold as insurance policy. A good way to build position in Gold is via long dated options on such dips. I have built position in Dec'09-Dec'10 1500 - 2000 Calls and would add to them over the period for dips towards 920.

Current position : Long via options

Bias : Add on dips towards 940. Stop below 920.

SI:

Silver has been stronger than gold and Gold:Silver ratio has dipped all the way to 62.54. If metals remain in bull markets, this ratio is likely to be squeezed further down as silver is a much smaller market. 

Current position : Flat with Dec 09 risk free butterfly top (16-18-20)

Bias : Buy on pullbacks towards 14.50-14.00

HOME WORKS (JUNE 2009)

General Markets

The HW sharing experiment seems to work successfully. I cannot express how confident I feel about my trading plans when other traders come with similar/same numbers. Also it allows me to relook at my work if others have differing view. So lets do it again in June. 

I think if you leave just one comment, you can choose the options to subscribe and follow on comments come automatically to you via blogger?

Or there is also an option to subscribe to all comment on the right hand side on main page which can be used for subscribing in most common blog readers.

Happy trading.

VS

HOME WORKS (MAY 2009)

General Markets

I usually do not trade markets for purely day trade basis. But I like to analyse the markets after close. After discussion with some fellow traders, I thought about writing the homework here (as comment to this post). This would keep a record as well as enable other traders to put their homeworks too. 

Happy trading.

VS

Gold is really getting interesting

GOLD (GCZ9)

Buy on dips, possibly all the way to 880 if required. Stop below 860 (or 800 if conservative). Target 1500 + on convincing break above 1000

In Jan 2009 I wrote about Gold chart making an interseting formation "Gold is getting interesting". After recent up and down, Gold chart has become really interesting from several perspectives. 

A) Gold will breach tripple top at 990 area if the up move continues. That is really bullish and can propell Gold to new highs. The good news is that no one is talking about it (news papers etc) as they seem to have given up on precious metals in light of recent stock market rally. So it can take some people by surprise.

B) Gold has also consolidated in an inverted head and shoulder pattern since March 2008. That consolidation is about to be completed and possible breakout is on upside.

C) on Elliot Wave perspective as well, Gold looks bullish. The correction pattern since first achieving 1030 high calls for the top to be wave 3, leaving final wave 5 in formation on long term charts. The fib extensions for the 1-3-5 wave and I of 5, III of 5 and V of 5 wave conincide around 1502 - 1540 area.

This setup interesting long term and medium term trading perspective for gold, one worth watching. The trade setups I mentioned in this post require larger stops and therefore good only for managing existing long positions OR with deeper accounts. However buying dips and trailing stops from key support areas on chart should also work on micro managed positions. It could also be worth taking position in longer dated futures (and waiting for price to reach your key points) and certain longer dated optiond around 1500 are still cheap, especially 1000 - 1500 - 2000 butterflies which give potential upside of 500 points.

General Musings : Markets Review of key levels for position trades

Various Markets - General Review

Markets trend - chop and trend again. It seems after the mauling in late 2007 - 08, and then chopping around for a while, many markets have shown some reversal of trends. This can be a goldmine opportunity to be able to catch a new trend in beginning or it can be part of a wider "chop" and reversal to predominent trend of 2007-08 (or more chop in the same trading range). Those who subscribe (or merely use) Elliot Wave theory might recall that bulk of the money is to be made in wave 3 (middle of trend). At the start and end of the trend, the markets are choppy and traders, especially those with lack of discipline tend to get chopped out. Especially for a longer term trading perspective, trying to catch the middle of the trend with trailing stop losses and use coverred options sell/target exit levels can be the key.

Since March 2009, many markets are showing some life and here is my review of key markets, my perceived general trend, and key levels to watch. Something to pass time on a long bank holiday weekend.

INDICES:

The rally from March 09 lows has been impressive. However this rally has been without a good pullback, i.e. retracing 50% or more but still avoiding taking out the lows. So a pullback may be on cards as soon as bulls run out of steam. The question is WHEN?

For now I still see bulls in the market however I have taken 50% off on most positions and trailing stop below nearest support below 61.8% retracement. 200 EMA is still a magnet.

NQ:

Current position - Long

Watch for breakdown below 1322/1300 to signal start of retracement/pullback. NQ has been leader lately on this rally so a breakdown should pull other indices as well. 1240-1190 would be my testing zone and if they hold, could be worth going long again looking for 1680-1760 area as swing trade with stop at March low. The level to be refined nearer to the time.

ES:

Current Position - Flat

For short term, 882 - 875 is key level. If we start breaking from here, need to take some profit and watch for bounce from 799-768 level or infact consider some short position. The key is to hold March Lows to make highs at 1066 level.

ZB:

Current Position - Short

US long dated bonds have broken below key 120 level and are below 200 EMA. The trend is increasingly looking negative. Adding to existing short positions with stops above 123'16 could be a good trade. Target of 116 -113 does not look that far fetched however such weakness in bonds can pull the stock market down as well. Since this apepars to be last wave of downtrend, trailing stop losses would be key. Modified 2 bar high stop can be used to exit out. UBS says that only 18 times in last 20 years Bonds Stocks and USD has gone down together. Is it time for more such occurances. 

GC:

Current position - Long

In times of uncertaininty, having a long position in GC is always useful. Gold has bounced well from the lows and seems to be heading for tripped top, which if taken, can make for a killer move. So buying dips to 950-940 until USD returns to sensible level is the trade with stop below 920. With current level, ES/GC ratio has gone back below 1 but in current market Long GC long ES trade is better way to play for some time. I still count 869 as key low and support.

CL:

Current position - Long

Crude oil seems to be making new high and appears bullish with targets 68/72/80/91 in sight. Buying dips with 55 as stop level for medium term trades adding to existing long positions.

ZC:

Current Position - Long

ZC still appears to be in bullish mode though much of the moves have been in ZW and ZS. However if the grain trend continues, ZC has upside potential until 486 or even 608. Stop as of now around 400 level.

DX:

Current Position - Short

Trend is still down. Could add short at 82 82.5 level with stop above 84 and trailing. It looks to be a long way down so worth holding runner until a clear change in trend.

TRADE UPDATE : British Pound has something going on!

My Development as a Commodities Trader: British Pound has something going on!

Now that my first target of 1.5850 was hit, I have taken opportunity to reduce 50% of my position around 1.5850 - 1.5900 area. The hard stop on the rest of the position is now below 1.4940 area which is well above breakeven.

As of now I am marking next set of profit taking area as 1.6800 on my charts if we ever reach there.

In my heart, I do not see GBP as a very strong currency in the current environment and I have still not figured any fundamental reason for GBP strength other than general USD weakness, hence I am reluctant to back this long trade by too much risk. However I have learnt to trade what I see and now what I think. The chart is still bullish. If there is any reversal, I am watchign the 1.4996 -1.4940 point carefully. If we start to bounce from these areas or even earlier, I would consider adding more to this long as it might have some life left.

As of now, it is enjoy the free ride moment for whatever position I have left on.

Dollar in Doldrums?

DXM9 (US Dollar Index) on ICE/NYBOT

SELL up to 85.75 STOP 86.75 TGT 79.54 - 71.43 (extreme)

Recently I wrote about unusual movement in British Pound where I discussed that British Pound looks heading upwards against USD. Subsequent analysis of USD chart points that USD looks to be heading down against other major currencies (hence the weakness in USD Index). Now this creates interesting situation if USD does appear to be weakening. Back in Sep 2008 I wrote a piece about tendency of world market participants to run to dollar in case of extreme panic or euphoria (the so called dollar smile). Dollar is generally weak in other scenarios where investors look for better returns in riskier areas be it Russian real estate OR Australian copper mines. For most of the bear market of 2008-09 USD has been strong, even if US national debt has been clocking higher every second. And even though there have been some noises in the echelons of power about hegemony of US govt to be in position to control the value of world reserves given that USD is still recognised as world reserve currency. When China sells to Argentina, they do not exchange Peso to Yuan. It goes from Peso to Dollar which Chinese govt reluctantly uses to buy US treasuries to keep as its foreign exchange reserve. However in the new world era, it appears that longer term direction is set to remove USD as world reserve currency. It will not happen overnight, it will definitely not happen in a year but baby steps will be taken to make it happen in my lifetime unless I start playing roulette in Russian casinos. So a very long term direction for USD is down.

 

The confusing scenario or fly in the ointment for USD weakness is the question about recovery in world markets/economies. Even though most markets have rallied strongly since March lows, the economy still appears to be in danger of slowdown. Credit markets and corporate bonds are still pricing in dooms day scenario and even though some bond markets have improved to price in a recession instead of depression, the threat of depression has not gone away and my analysis of bond markets does indicated a lot of pent up energy which can provide a wild swing up in long term bond prices (i.e. a Japan kind of recovery instead of V or U shape everyone tends to talk about).

 

As always, the fundamental reasons will start appearing soon once the charts have started showing direction. This move appears to be in making so if it panes out as planned, this can be a long term ride. One to watch!

British Pound has something going on!

BP/6BM9 Globex or GBPUSD

Buy up to 1.4450 Stop 1.4100 Target 1.5850 - 1.7320

British Pound was turning out to be the worst currency (and worst economy) in the developed world. The deficits are comparable to Hungary which had to go out cap in hand to IMF and there were intense speculations as if the same fate would be met by British economy as well in not so distant future. So I was bit surprised to see that BP chart has started showing quite a lot of strentgh lately. OK, some part of that run up is due to general Dollar weakness but BP has performed strongly against EUR and YEN as well and also other currencies. Could it be return of carry trade? Dont think so. GBP barely offers any decent interest rates compared to YEN and unlike AUD/ZAR - we do not produce much commodities so it could not be inflation and run up in basic metals story. So what is GBP charts saying which is not yet out in news? Short covering - may be and in which case the rally will die after some chop around without significant breakout from current levels. 

One reason could be that may be just may be Bank of England will start putting breaks on the quantitative easing and interst rate cuts (not much to cut anyway). Inflation in UK has remained stubbornly high and any sign that BOE is getting concerned about the inflation may squeeze GBP shorts for some time. Also signs of recovery in world economy would depress dollar and unlike EUR, GBP does not have to bother about Eastern Europe problems. So whatever are the reasons, it would come out soon. As of now the chart looks bullish and worth a punt on GBP long for sometime.

Remember 1989

GOLD (GC) S&P500 (ES)

Still making up my mind about what to do!

Do you still remember 1989 - I was in school around this time in 1989, in class XII. Studying hard (?) for the CBSE exams and various engineering and medical entrance exams which all aspiring students in India ritually take. It was long time before I first got aware of the financial markets and not so long time before I got a taste of my first beer. Life was simple and carefree. There was no mortgage to pay (not even for my parents) and TV's have just stared to appear in my home town. Michael Jackson was still coming out with great numbers  around then. So what is common with 1989 and 2009. Well 1 ounce of gold buys same amount of S&P (a measure of US stocks) as it did in 1989. We certainly have not made much progress financially as the crow flies (without considering dividend of couse which make a significant proportion of the returns from stock market). In the attached chart left scale shows GOLD and S&P500 levels in USD and right hand scale plots the ratio of S&P to GOLD (i.e. how much S&P you could buy for 1 ounce of GOLD). The chart is in log scale to emphasise the relative change. At the time of writing, the ratio is hitting close to where it was in 1989 (0.78 region). 

Now it can mean the following three conclusions:

a) Stocks are very cheap relative to GOLD (i.e. at the level they were nearly 20 years ago) and time to buy stocks.

b) Stock have dropped like stone and there is no faith left in these psuedo measure of wealth and time to pile into "real" assests like GOLD.

c) At least one of S&P or GOLD is overvalued relative to the other and therefore an inflexion point can be in offing.

If you subscribe to option a) time to buy S&P futures and selling equivalent GOLD futures.

If you believe in option b) time to do the opposite i.e. sell S&P futures and buy equivalent GOLD futures (or even physical GOLD if you have lost faith the in whole fianncial world).

If you believe in option c) a market neutral trade can be put on by buying (or selling) equal amount of S&P and GOLD futures. Question would be which direction the ratio is heading.  If the ratio is turning and heading up, S&P would rise faster (or fall slower) than GOLD.  However if ratio is still heading down to regions before 1989, S&P will rise slower (or fall faster) than GOLD.

Certainly times are interesting and that is an understatement. I am tempted for Long S&P and Long Gold position to start with, turning into Short GOLD (if GOLD appears to be topping) or Short S&P (if S&P appears to be tanking further). Let us see what that brings.

For information, 1 S&P emini future is equivalent to 0.3773 GOLD futures so roughly 5 S&P for 2 GOLD.