Wednesday, October 29, 2008

Entry for 10/29/08

As usual, I do like to comment on the Fed Reserve. I must say again, I am disappointed in decision making policy coming from the US federal reserve. Another rash decision of cutting rates pushing rates to 1%, I find this quite rediculous. People argue the Fed is doing this for lidiquity I may give some leeway to that arguement, but I will not accept the fact that the Fed is doing this to "restore confidence" for investors. The Fed Reserve has strayed far from its jurisdiction to an extent, though, yes indeed this is systemic, but should they be taking the lead in trying to fix this mess we are ?

What needs to be changed is underlying fundmentals, real change in the structure of systems in place. All the systems need to be reassesed in order to find a better solution to the current "crisis" we are in. Dumping lots of money into markets with a bunch of skiddish investors will solve no problems. With a sound system in place that people can trust will take some what years to accomplish. I feel that many investors (middle class investors) have been scarred from event from the early 2000's, and feel they are reliving the past. Many pension funds and 401ks are taking hard hits, while some are holding cash now some are biting the bullet and waiting it out (though if there are a large number of people in cash positions, this may have large implications to come in the future, but I will have to discuss this later) After the 2000 crash, Sentiment probably wasn't restored about 2 and half years later after the crash as this is reflected in Fed Fund rate cuts shown against performance of the S&P500.

If one were to follow previous Fed policy in the past we will see that Janurary 3rd 2000, Fed Fund rate was cut from 6% to 5 and 1/2. Soon after that 1 about year later on Dec 11 Fed Funds rates were cut to 1 3/4. This was not even enough to restore confidence in investors as the S&P500 continued its slide all the way up until around march 2003. Prior to March before the S&P500 started its 4 and 1/2 - 5 year rally, the Fed Fund rate was cut to 1.00. Considering long trends, cutting rates so low was quite ineffective. Some will argue that Greenspan was at fault for our current situation from such policy decisions. Though, I do not suscribe to such a belief, there is some truth to it. From what I can tell 1.00 in the Fed Fund rate is way below the average (though I would have to calculate the averages from all the times the Feds Changed rates which the available data ranges from 1971 - 2008, which I have not done. Wheather or not this is an acurate average or a statistical blunder I am not sure, though Im sure we can pull some general truths from it). 1.00 is below the average and has been only seen at times when there have been crisis. If indeed, people want to believe that Greenspan is at fault for our current situation, I think everyone should be extremely worried now. Whereas in it took about 2 and half years to reach 1.00 Fed Fund rate from 6.00 from the 2000 crash. Bernake may manage to get rates from 5.25 June, 29 2006 (the begginings of the subprime problem)to 1.00 in 2.3 years. If one were to actually use the more dramatic effects of the credit crisis as a starting point, the rate at which bernake has cut rates has been much higher than greenspans cuts. Also, I would like to note that over the 2 and half years of cutting, the S&P500 has a more gradual down trend, while in 2006 to 2008 we have an uptrend, and then from the start of 2008 to october 2008 we have a sharp drop. The different trend patterns may suggest that one cannot compare the two crisis accurately in order to predict market performance. Though it is possible to gauge investor behavoir based of policy.

As we saw in the past crisis of 2000, investor confidence may not have been restored based off rate cuts and may have been something that needed to be fixed over time. This may suggest Bernake should not be cutting rates at this point, as it will be ineffective, in a matter of time fundamentals will improve themseleves. From a historical perspective Fed Fund rates at 1.00 maybe too much and something below the average (whatever that may calculated to be) and holding rates there might be more effective as it might stave off uncessary future crises since rates would not be extremely low at the point of causes future crises.

Though on considering the difference performances in the S&P500, such a fast drop in the index may mean a faster recovery. Though this will have to be examined at a different time...

** I will have to reorganize or summarize this later as my arguement may not be clear or organized well enough for comprehension.
Another quick morning update, it seems thats all i can be doing these days. Some interesting thing the index and energy markets. Since October 20 I've been short ICE brent and Gasoil. I've experienced about 3 whipsaws on the ICE brent though nothing major. I just want to mention that the recent whipsaw from the second OPEC meeting is superficial reasoning as to why this whipsaw occurred. It may seem like a fundamentalist excuse as to trying to explain the occurrence. I would attribute it to more of short sellers covering gains, or the recent jump in equity markets. I consider the equity argument to be more valid since that is what the majority of the world is watching now (whether it be central banks or opec). Financial market performance is leading many decisions on a policy basis. Though overall trend in my opinion is still down, though if the US Fed decision to cut rates actually does maintain any stability in the equity markets (which I highly dought), perhaps crude will trend side ways a bit before deciding a new direction.

I still maintained my short, As I am still participating in the BP trading challenge, had I not been, I would have considered increasing my position a bit. Though, since i could not afford in depth analysis, the risks out-wayed the returned as if I leveraged more capital, any small movements in teh wrong way would have knocked me way down in the ladder. Throughout the week Ive fluctuated from rank 15 - 20 out of 200 people or so. Luckily I've been able to maintain such a high rank on two short contracts only. I am surprised I was able to maintain such a tax effective discipline, though since I took such a conservative role, I did sacrifice some possible huge gains as there were at last 3 whipsaws that took large portions of my gains.

Last night before going to bed I lost quite a bit on my equity position, I was at highs of gains of 20,000 pounds, though at the time I was somewhere around 10 - 15,000 of gains from my SP500 futures contract. Luckily I had a nice stop, though I wouldn't say it was exceedingly tight but certainly prevented losses. I still made a decent profit of 5,000 pounds from a short position from oct 22 or so. Though, last night I was not convinced the trend was over, and re opened a short position which is still positively gaining now. Though i will have to watch the trend through out the day as it maybe just attributed to bulls taking short term gains.

Overall though, this has been good practice in trading longer term charts for me, as my prior experience in forex only allowed me to trade in short-term charts in a undisciplined fashion.

Monday, October 27, 2008

Just a quick post today, Ive been doing really well on two short positions on ICE brent and gasoil, along with a short on s&p500 futures, based off a quick analysis last night there is no need to cover as yet, though as the day progresses I will check to see if i need to adjust my positions. According to 3 period simple moving average analysis there was still downward momentum, this confirmed a squeeze in the BB of 2 standard deviations. I also used the RSI as seeing if the market was over sold. Considering the RSI I showed markets still have room to fall, though I would not weigh this indicator as heavily as others. The MACD showed large enough volume to accompany the recent falls in the markets. This still confirms the extremes bearish sentiment and poor fundamentals in the economy.

On another note, currencies, I made some great shorts on a few pairs tied with the dollar few days ago (AUD/USD, USD/JPY, EUR/USD) As I don't have time to go into the details I will briefly explain. Only a few of the them were based of shorter term chart analysis using 60 min charts, while others were inline with overall down trends. However, I closed my position short since there seems to be strong conflict on the monthly charts vs short term charts on all these pairs. The last time I've seen such a divergence was during the summer on the USD/JPY, which eventually lead to a piercing of lower 2 deviation BB, and a long term rally that lasted through the summer with highs hitting around 110. I will sit out on the currency markets for now and hold cash since these markets require much more constant monitoring vs S&P500 futures, or a down trending oil market.

Though, this may be interesting since I do feel currency markets are good future indicators since they are most liquid and 24 going. Any big moves in the currency markets maybe indicative of whats to come in other markets.

Wednesday, October 22, 2008

entrry for 10/22/08 - BP trading morning update

It seems that my over night position considerably increased. My logic was right in my two shorts, or at least it was echoed on the morning wireds as i read some headlines, "Crude Oil Falls as Waning Demand Outweighs Prospect of OPEC Cut," the article written this morning says that an OPEC may have already been "priced" in. This is exactly part of my reasoning for shorting brent and oilgas. I almost for got to mention, I only shorted oil gas as the charts showed a pretty tight correlation on the recent charts. If I do not know much about brent and energy trading, I know far less in terms of oil/gas other than that it is related to oilgas, and that it maybe tied closer to seasonality patterns. However, such news would make me want to watch my position closer as more people on the fence are now hopping to the bear camp. I get the feeling whipsaw maybe due soon, and that it may take a significant portion of my profits as i cannot hedge against adverse movements and I have no options for stops or limits, and I must be at school all day today. Let us prey to the oil gods that nothing to drastic happens today... (then again... these are commodities I'm talking about).

Hopefully tonight I will be able to reiterate today's happenings in a more organized manor.

Tuesday, October 21, 2008

Entry for 10/21/08 - BP trading game

Day one concluded of the BP trading games.

Login Name: Chart Pride
Current Rank: 20/157

I believe it was yesterday night that I entered two short positions on ICE Brent and ICE gasoil -1 lot each. At the time I entered my trade prices on ICE Brent were around 71 - 73. Currently the bid is at 68.92 and the offer is at 69.72.

My rational behind the trade is as follows:

Considering I do not know in depth the driving fundamentals of the energy markets I used what I knew. I know the basics that oil is at most times supply driven, ( though recently the media loves to attribute the fall from 140+ to current levels on "slowed consumer demand"), has geopolitical risks, and susceptible to Marco conditions.

Primarily for last nights trade my model included macro considerations, geopolitical in the sense of what I read from the media, and lastly basic technical analysis.

1. macro considerations

Overall fundamentals of the world economies in general or obviously not sound at all. Every industry is craving for capital and business earnings are expected not to outperform previous quarters (though Im not to sure on the equity side totally). But in general, macro fundamentals due to effects of financial systems, in general will tend to slow business down. Production will be less and transportation costs will would also decline. Now much in part production can be slowing down as a fucntion of "slowed down" consumption. Which I will admit to some extent is affecting overall consumption. Though I will have to say from the US perspective, the Middle middle, and the upper middle class are still relatively well off. If consumption however is driven from the lower end consumers then peaked off demand could quite reasonably be a reason for oil prices dropping off (though however i don't see people eating of of garbage's and walking around in rags yet). The point being that on the fundamental side macro conditions if correlated to oil prices to some extent, would indicate that oil prices should be in a down trend. And that is the point to the macro analysis. Overall trend Should be down, and that any whipsaws to the upside are just temporary as overall conditions have not fully stabilized.

This brings me to my second point. Whipsaws... As I was reading the news last night, a whipsaw should have been ready to happened before I entered my trade. The media kept hounding how OPEC was going to "cut production," to maintain prices around 70. Now anyone sensible seeing that oil is highly supply related would have used this rational to enter on the long side. However, I felt that to be too simplistic in nature for that assumption. Though I am not too sure when OPEC makes their official announcements I felt it was something that they still needed to discuss as there are many market risks still were present ( though recent expected earnings from oil equities make pacify these market risk worries causing a cut in production to occur sooner). I felt that considering this is a bear market, you will get strong reactions to media reports, the type of heard mentality. Thinking this I felt it was a good idea to consider the contrarian perspective (a little nice view i learned to apply from the old Fund I worked with). I felt that all this news and media quite could possible already priced in the markets. And that instead that this would produce opposite affects of the normal news of production cuts (as the news wasn't that "new"). The point being is, though geopolitical risks said for me to go long, a contrarian perspective said otherwise. Adding more solid reasoning for me to go short.

3. My last consideration, considering this is short term trading I tend to give more weight to charts in the short term. Though the BP platform does not provide me with as many lovely charts as my FX platform. However, i scrounged google and found some basic futures charts on brent and gasoil. Though the functions were basic in nature, it was more than to suffice for the time being (in fact simple often works quite well for me). I confirmed the downward trend with a simple BB on a standard deviation of 2 and average of 20. The general charts (oct, nov, dec 08) showed continued movement along the lower BB. I also used the RSI and MACD indicators, though I do not think the RSI would really fit into this system as I am not sure how responsive it is in the oil markets. Though, I gave weight to the MACD as indication of movments of momentum and volume. Overall, there seemd to be indications of continued downward movement as volume was still relatively high. It is unfortunate, but I am not exactly sure what contract I entered as it does not say in the BP trading screen, and I am still very new to this all. Hopefully I will get some support from BP later.

I would like to comment on my current position on the ladder. The first and second trader have 136 trades and 205 trades with $31,780 and $28,085 mark to market respectively. Considering the number of trades, these guys must have lots of time on their hands as this only started yesterday. Secondly, there strategy I would think is really ineffective as the number of trades is so high for one day. Though, I am not familiar with the total amount of taxes for short term gains, Im sure a considerable amount of their money will be going to taxes. Where these top to traders are students, I would like to high light two BP traders. Ranked 15 and 16 are to BP employees playing the game. They have 10 trades total each with $8,240 and $8,185 respectively. In the top traders these are the two traders with the least amount of trade and highest amount of money, excluding myself. I am the 20th person with only 20 trades. Though I would like to point out that Cambridge Hedge has 2 trades as well and is ranked 22. I believe these trades to be more profitable, or if not at least shows better discipline. Sticking to a sound reasoning and following through. Though of course part of this discipline will need to also follow through when any position turns sour.

At any rate, I hope I will learn more about the fundamentals of the oils as my technical abilities are quite stunted with the current platform. It is too bad that the platform also does not have any limits or stops which would help me trade with more. Anyway, I will have to follow up again to see if I need to readjust any positions.
This Blog has been developed by Analyze Capital LLC, and as an independent organization we provide “AS IS” information without warranty. The ideas and opinions expressed by the contributers of this blog are personal and do not represent the actions or policies of Analyze Capital LLC. The contents of this blog do not intend to assert recommendations or to offer advice of any kind. We are not responsible the consequences, be they gains or losses, that may result from using any of the information from this blog.