Update on Currency positions:

** skip to the summary if you don't care about the evidence/support

As the week is nearing, it is clearly apparent that I entered positions with bad timing. However, this can be quite desirable as I am trend trading and I now know the current trend (the week has shown it to be quite bearish for the EUR,GBP, CAD and AUD). Through out the week all pairs I am trading (EUR/USD, GBP/USD, USD/CAD, AUD/USD) all counter trended my positions (B, B, S, B respectively). As you can see, some would probably call me super crazy as fundamentals would never warrant such bullishness. It is at times like this where one walks the fine lines of "loving" his trade and facing more losses.

Quick Reassessment:

GBP/USD:

This week the GBP/USD is moving counter to my expected overall trend and position, (unfortunately, I only am holding a one normal 200:1 leveraged position so sizing down is not an option, and simulating a hedging strategy would require more time than I can afford), however, BB's are coming to a squeeze and past price movements of 1.46128 in early November 2008 show a piercing of the 2nd deviation lower BB warrant price movements to the upper bands. Confirmation comes from RSI bottoming and MACD cross over of longer average crossing under the shorter average forming better support.

Weakening this technical analysis is the SMA's, cross analysis of 7, 14, and 21 SMA show that there is heavy downward momentum with the 21 over the 14 and the 14 over the 7 SMA. Though probably more experimentation with SMA's is necessary to gauge weather or not these average parameters are an accurate measure for the GBP/USD.

*summary*
I will maintain my bullish stance as apart of developing discipline and from belief that the longer run (within 1-2 months time) will yield a higher pound. I would possibly see that the pound can reach into the 1.50 levels again. The support comes from my Bullish analysis above, though is still not as strong due to fundamentals and SMA analysis.

EUR/USD:

Of all the pairs being traded right now the EUR/USD is the most worrying in the shorter term as BB analysis shows a 3 week downtrend. Also BB's are coming to a squeeze along with possible reconvergence of the two averages on the MACD (as i forgot to define the parameters used for the MACD: 12, 26, 9 first two for the averages and the last for the histogram: in the future I will have to tweak the parameters to suit each pair). RSI also confirms possibly prices may have room to be further undersold. Also, the intial drop in volume from the beginning of the 3 week slide has peaked off in accordance with trend continuation.

Despite the bearish analysis above, more compelling to the bullish argument is the SMA analysis. Using the same parameters as before, the 7 SMA has crossed over the 14 SMA. This is a good starting point for trend development by means of support. Unfortunately price movements have not reacted in a bullish manner to this indicator, which may show some evidence disproving SMA anaylsis being relevant to this pair, though some back testing would be required to confirm this. More importantly would be a cross of the 7 SMA over the 21 SMA. There appears to be convergence of the 7 and 21 SMA moving towards each other but further downward moementum could prevent this.

*Quick back testing of SMA convergence divergence shows that at moments of convergences into bullish patterns EUR/USD can take up to more than 3 months of sideways trading before the bullish trend unfolds. When the patter unfolds the initial movements are strong and then leads to the 7 SMA touch the 21 SMA or briefing crossing under for a period of a month before continuing on uptrend. Of moments of crossing of the 7 SMA to the 21 SMA you will see it take a about one week for bullish moves to follow.

*summary*
Within the next 2 months we will definitely see the squeeze in the BB and depending on the SMA orientation price movements can be determined. I would say in two months time pending on the squeeze of the BB if the 7 SMA crosses the 21 SMA the price movements will be indeed changed to uptrend. By the end of the first quarter we will see possible bullish trends into the second quarter 2009 for the EUR/USD.

Unfortunately I have run out of time to comment on my other positions as I must log in their P/L and get to class. I will comment on my other two open positions later.

Closing Notes:

Further analysis and back testing is required for the GBP/USD though I still maintain my bullish stance and I also maintain a bullish stance longer term for the EUR/USD. Though the current fundamentals worry me. I will have to discuss macroeconomic conditions of each of the regions I am trading pairs in later. If indeed my the bullish argument on the fundamentals can be convincing, my technical analysis would certainly complement this. In order for my technical analysis to be right, there would have be some underlying fundamental bullish signs to be happening. If a bullish movement does indeed occur within the next 3-4 months with continued poor fundamentals this may reflect a move of sentiment.

All in all, I am beginning to have great respect for those who can accurately trade long term charts since it requires lots of analysis, patience, and discipline and a strong stomach to counter trends as they can occur for months.

until then...

Pound

Quick follow up on pound:

It would seem that last week played out the scenario that the pound traded temporarily to the upside but returned to prices were it began from the beginning of the week. Overall, though I am sticking to my long position as the weekly charts are still showing long term bullish trend formation, same goes to my position on the loonie and AUS.

Entry for 1/12/09

Currencies:

Just a quick note on the EUR/USD:

On the 9th of January I closed out of a short at 1.36911, due to bullish trend formations. However, it would seem that this is one time Dow theory failed me, or to be more exact where applied the wrong analysis. It would seem my unfamiliarity of the economic region of Europe and the general characteristics of the EUR/USD is quite apparent. Despite my poor trading decision, it has provided a great learning opportunity. At the time I was only trading based of 60 minute and weekly charts, in general I hadn't 'bothered to follow up with the fundamentals as in depth as I would if I were solely focusing on the dollar. It would have seemed if I were more experienced or if I followed the region more carefully a little fundamental analysis could have prevented this wrong decision. It would seem that sentiment from the 9th till now started pricing in Trichets decision of interest rate cuts. Today I see bullish trend patterns forming, however, the big question is whether or not the markets have priced in the rate cut enough, or if later on rates will prove to drop the Eur/USD. Concerning fundamentals, I have heard arguments of a 1.20 Eur, I believe that to be quite possible, and it is something that would definitely improve the export situation for the Euro region.

Currently, though on the weekly charts there seems to be strong bullish trends forming still. It would seem last week, that my closing out of the EUR/USD position was premature, and that this week may show price moves moving to the upper 2nd deviation BB. There may be a temporary whipsaw to the upside as the the 7 simple MVA has already crossed the 14 simple MVA and is about to cross the 21 simple MVA. It is also showing that the BB are coming to a squeeze. Furthermore, there is short term support from January 6th to January 11, along with long term support from June 2007 to January 11, 2009.

Again the bullish argument seems very attractive for the next two weeks or so, but the fundamentals pose a huge risk again, as sentiment may have not been fully priced in. However, its best at these times to stick with a discipline and learn from it if it is a mistake. I see there room for a temporary change in trend for this week and into next week, I will re-enter into a buy position and adjust accordingly by the end of this week. However, I think past a few weeks fundamentals will still reign and further downward movements will have to be considered...

"Layman's Financial Crisis Glossary"

I recently subscribed to a blog "The Big Picture," which I recommend all of you to subscribe to. Anyway, one of their authors posted this article from the BBC:

http://news.bbc.co.uk/2/hi/uk_news/magazine/7642138.stm

which I found pretty hilariously... then I realized, it actually might be somewhat useful for those just getting started with current events and for those whose native language isn't English. Either way for laughs or learnings... enjoy!

FX rate in Vietnam

If you have been following the Vietnamese market recently, you will see that the State Bank has raised interbank USD/VND rate (official midpoint ) dramatically to 3% but still keep the band of 3%. Typically, banks and financial institutions operating in Vietnam have to follow state bank’s regulation on FX. Accordingly, they must transact FX deals within the variance band of interbank rate that SBC announces daily.

Earlier in November, there were a number of rumors on the issue that State Bank would lift USD/VND variance band to 5% from 3%, which is due to the heating foreign exchange free market. The USD/VND rate transacted in the black market was higher at 5% than the interbank rate. Rumors of such change in the foreign exchange band is driving the market.

Basically, a flexible foreign exchange rate is necessary for the economy amid recent economic turmoil. However, the change in this time becomes sensitive. Perhaps, the Vietnamese Dong devaluation is based on inherent attributes of the economy such as weaker export industry, or economic stimulation from huge money amounts injected into the economy. However, a key factor led to this situation is rumors and speculation.

The State bank's expectation of better liquidity foreign exchange rate could be not realized by the adjustment in the USD/VND interbank rate. But, speculators think that this action from State Bank shows a sign that Vietnam Dong could be continued to devalue in the short time. So, speculators don't want to sell USD out in the short term. Again, this leads to the shortage of USD in the market. In return, foreign exchange rate could be higher. Therefore, I raise a call that there would be another devaluation of Dong in the next time.

*edited by Alexander Lê

Entry for 1/06/09

Currencies:

Is the sterling finding support against the dollar?

Since New Years eve I had opened a short position on the GBP/USD, a pre-emptive attempt prior to the "supposed" rate cut that will bring the UK to its lowest level of interest rates with in the 315 years as the media portrays it. Interestingly enough it would seem on the 60 minute chart we are seeing short term bullish patterns forming. This is a possible indication of the markets have priced in such a dramatic change such as an interest rate cut. If this is surely the case, perhaps a opening such a short so early might have been a bad idea. Opening a short right before the Central Banks decision would have been most appropriate since there would only be the initial drop (weakening of the GBP) before resuming a bullish trend if market sentiment is more bullish. This past week in general, the first week of 2009, I have noticed increased levels of bullish sentiment in the US equity markets. Correlated to this is the rise in the dollar in many of the Major pairs. My point in general is that the new year has hailed in some bullish sentiment, though I doubt this is not sustainable. Fundamentally the economic situation has not changed much, so even if the GBP/USD is indeed in a upward bullish trend it is probably something that will only be seen on the weekly charts. I have not been trading on technicals since the New Years Eve, though however Bollinger Band analysis could confirm such a temporary change in trend. The obvious volume and momentum indicators could be useful as well if one worked with these indicators often in relation specifically to the GBP/USD pair. However, I have decided to ignore more in-depth technials in the mean time and just focus on fundamentals and macro trends and sentiment. However, if I were not paper trading I would of course include all forms of analysis.

basic technical analysis:

If volume is strong enough with a break in resistance of 1.476 the GBP/USD could rally much higher at the end of the week. However it is most likely we will see a battle between the bulls and bears which we will see much indecisiveness towards the end of the week, and more likely we will see where the trend will be in 3rd week of January. In addition, if price levels were far extended beyond 2 deviation BB (which I have not looked at) any bullish price movements would be supported by this (look to weekly chart to confirm this). Based alone on the basic technical analysis I would say the trend would most likely go up based off bullish pattern formation such as higher highers and higher lows the past week(this is not including volume analysis).

(For those more interested in depth analysis in pattern analysis one can consider possible head and shoulder bottom reversal on the monthly chart (roughly 11/20/2008 to 12/31/08). Current prices moves from new years onward can be seen as flag and pennant continuations or possible formation of ascending triangles support a bullish move to neckline resistance on the head and shoulder reversal pattern... for you super bulls you could even develop your price target at around 1.65 based off this pattern, which would be inline with 1.65 resistance)

Sentiment:

However, what can be worrying for a bullish model based of technical analysis is sentiment. Today I noticed that the US equity markets closed in the red. Considering this is the beginning of the week, this could possibly mean that past weeks bullish sentiment is ending, though it may possibly be that last week bull's are just taking some gains and bullish sentiment will carry through the week. One would would have to look to the equity future markets more carefully to see where sentiment will be for the week. If sentiment is truly bullish, people trading weekly charts could benefit from long positions. The next 2-3 weeks can be bullish weeks.

Fundamentals:

Macro considerations:

I would say any risks to a bullish model would be overall economic conditions. Those trading longer term charts would probably want to consider cutting back on some of their GBP/USD positions or hedging them considering strong arguments for short term bullish moves. Overall based on fundamentals, ignoring the extendedness of the GBP/USD on the monthly chart, the pound should still be in a downward trend.

Evidence as follows:

1. Credit markets are still stale as ever, less room for business to grow
2. Continued loosening job market, today i saw that Marks & Spencers decided to cut another 1,000 jobs, which leads me to my next point...
3. Consumption: despite a holiday boost, the fact that a company such as Marks & Spencers has to cut jobs truly shows a weakening of consumer willingness to support the economy. The reason I point out Marks & Spencers is that it is usually considered for middle class shoppers, and if middle class shoppers are getting hurt, this only leaves the upper class to support consumption and considering the percentage of rich to middle class and poor, it provides a bleak out look for consumption. Any models that say the middle class can continue to support economic growth should be abandoned as that may have possibly only been the case for 2007 and early half of 2008.
4. Rate cuts from Central Banks: The US interest rates are at an all time lows and the UK central Bank is planning on following suite.

All these fundamentals are the factors that are going to be driving a continued downward trend.

Conclusion:

In conclusion, I would have to say that the next 2-3 weeks will be bullish for the GBP/USD considering sentiment can remain positive. However, if the next 2-3 has some bad economic reports or we have some more surprise job cuts, or if more financial companies show further signs of distress, then I would say price of the GBP/USD should remain around the same levels of the past week (around 1.45). Though, I believe that that sentiment will not be totally killed as much of the bad news will be priced in and I do believe we will see bullish moves within the next 2 weeks, we will definitely see prices hitting around 1.49 vs the current 1.46.

However, for the first quarter 2009, I would still say that the GBP/USD will remain weak and in downward trend.


****
For those of you who are trading charts longer than monthly charts, one can ignore what was discussed above and call long term support seen from 2001, and say that the charts are way over extended due to the financial crisis and maintain long position from here. This definitely would be popular for currency managers who agree with the media in that there may be economic recovery in the second half of 2009 leading to recovery in further years... though I would not personally subscribe to this long term trading idea as there are too many economic uncertainties that may take a few years to play out, such as restructuring of the financial sector and political impacts yet to be seen.
****


Brief on other currencies:

Of my other open positions, my best calls were shorts on EUR/USD from new years eve, and going long on the AUD/USD from new years eve. Though I had one really bad call long on the USD/JPY from new years eve, which I closed yesterday.

Another day to talk about a different currency...

End of the year 2008

Unfortunately I've missed quite a bit of time blogging.

However, it is always interesting when you take a break from intensely following the markets. All the changes in the markets seem much more exaggerated and certainly can bring new insight that one might miss by getting caught up in daily events.

Oil

One of the events that sticks out to me the most was the rapid drop in oil prices. Considering I was trading oil securities back in October (which i have yet to post my final trading results) the speed at which crude oil feel is quite shocking. If one were to consider that long term oil charts were in an overall down trend, and that macroeconomic fundamentals were weak; this move may not be surprising at all. Even if an analyst were to consider oil prices from an equities perspective, if industries heavily on oil were expecting poor earnings or even if one were to follow the general job market could have all found support for shorts on oil. Considering these events separate or connected all still shows evidence of continued falling oil prices, but this may all seem quite useless since everything is clearer in retrospect. Though, one can take this experience and apply it to future analysis.


Currencies

There is much to blog about currencies, I will briefly summarize some major pairs. Prior to 2008 the EUR/USD from around 2005 to July of 2008 was when the trend changed. July 2008 seems to be a break in trend for most pairs. The pair trended downward for the whole year until about December when it almost returned prices levels of the beginning of the year. This would not be a surprise if one were closely following weekly charts. Another chart that experienced a similar pattern is the AUD/USD ( upward trend prior to 08/2008 then a reverse trend in 12/08) except price levels did not return to similar levels of the beginning of the year. what worries me is that many other major pairs are just as extended as the EUR/USD and the AUD/USD however have yet to change downward trend. However, into 2009 i certainly expect most major trends to reverse from downward pattern. Weather it be a whipsaw or a true change in trend will depend on economic situations.

I feel that from a brief look at the economy, if there is any reverse trends in major pairs it would have to be temporary considering the job markets, which will probably also strongly affect the equity markets and in turn also major equity indexes. Unfortunately I do not have much more time to explain all of this as I must catch up on other works for school...

S&P500

Lastly I will briefly mention the S&P500, the past 3 months have not been to surprising, though if one were trading the actually index it would be quite a ride as I myself did not do too well trading S&P500 futures. Price movements in the shorter term charts (1 year charts) seems to show bullish patterns of possible support and serious of higher highs and higher lows.


Quick Close for 2008

I would like again to emphasize, such movements of upward bullish moves in currency markets (reverse trends in EUR/USD and AUD/USD) along with short term bullish formations in the S&P500 shows that economy does not equate to financial markets. Though as I have mentioned before in bear markets the correlation between economic activity and financial market is stronger. If one can find more divergence between financial markets and economic data might suggest changes in trend and/or sentiment. This might lead to enough evidence to use a contrarian approach to trade in the first quarter 2009.