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Finally – a journalist in the MSM has got it! An article in the FT on Thursday starts with this revelation:
“Market forces rather than China’s central bank are now the biggest force driving the renminbi lower, according to local traders, marking a decisive shift in trading of the currency which became a two-way bet last month.” (emphasis mine)
I have been banging on about how most people have market causality the wrong way around. They cling to the belief that central banks control interest rates and currency valuations. That’s why they waste valuable time forecasting what the central banks will do – and usually guess wrongly anyway.
THEY DO NOT AND NEVER HAVE OR EVER WILL.
Of course, there is a whole industry built up here – and it is a very profitable line for many pundits.
If you track changes in the Fed Funds rate against market 3-month T-Bill rates over the years, you will see that changes in the market rate always precede the Fed actions. The Fed follows the market. It has to because Mr Market is much bigger than the Fed..
That is why I spend less than 1% of my time on Fed matters and 99% of my time on the charts. Charts do not lie (although they can mislead!). The skill in trading is in reading the charts (and measuring trader sentiment). That comes from lots of practice, as does everything in life.
But one more subtlety from Yellen on Wednesday: The Fed is abandoning the Unemployment Rate as the trigger for interest rate changes and will use a vague combination of ‘other factors’. Isn’t that convenient? It reminds me of the decision to abandon tracking the US money supply data just when money supply rocketed up (QE).
I take that decision to mean the market will not hang on the Jobless Claims and other job data points for direction as they have hitherto. It is a handy cop-out for the Fed. If unemployment suddenly lurches up, the Fed will ignore it. That will leave it free to follow Mr Market! (Which it does anyway)
Markets now falling in unison
One of the tell-tale signs of a deflationary collapse is for asset markets of all stripes to fall in unison. Traders will cash out as they need dollars to pay margin calls, satisfy debts, and as a safe-haven. Yes, that’s right. Cash dollars will become a safe haven. You read that here first.
Forget zero interest rates, ballooning US public debt, and especially extreme bearish sentiment towards the dollar. The latter is the primary reason the dollar will become almighty again.
The only beneficiaries to flow uphill in this all-the-same-market scenario will be US dollar and US Treasuries.
I have also been banging on about this theme for some time and have been recommending liquidating most assets and getting liquid in US dollars. This advice will look very good in a year’s time.
One of the high-flying sectors in the Nasdaq – biotech – is tumbling to earth with the 50-day MA now broken yesterday. Biotech has been the new dotcom – and we all remember what happened to that sector after 2000.
China currency under heavy pressure
The FT article I referred to at the top suggests that many Chinese companies are seeking to buy dollars for yuan – this after China has relaxed the official trading band. If the yuan weakens much more, there will be an avalanche of selling and to keep the market from collapsing entirely, the Bank of China will need dollars to supply to the market. For this purpose, they could then sell Treasuries to raise the funds. This will serve to increase Treasury yields – and bring about that Fed Funds increase I expect.
This will put enormous pressure on equities, gold, art, stamps, Damien Hursts, and so on. And will be one more deflationary force adding to all the others. The potential for a massive collapse (which I have been expecting) is there.
I have a superb complete impulsive five waves down in Yuan/USD and now the reversal in trend is kicking in with a vengeance. Remember, the yuan is controlled largely by the authorities, so they must be allowing this weakening to occur – as they are alarmed at the economy flatlining. No matter, it is the market that is calling the shots.
The tide has turned, and I expect the yuan to weaken further – and the market will take note and mark down Chinese shares further. This will drag down shares globally. The potential is huge for a massive collapse world-wide in the next few weeks.
As for the rumbling Ukraine situation, I have no idea how much further the tit-for-tat sanctions can carry – or whether it will become more serious. Weekends are usually the time when surprises tend to occur, so the position on Monday may be a lot different.
Has made another A-B-C rally, but here is an interesting tramline pair
Yesterday, the market poked above the upper tramline in an overshoot (typical of buying exhaustion). The market then fell back later in the day to produce a daily key reversal.
This key reversal should infer a big down week next week.
For another perspective, here is the Nikkei. Many believe/hope the Japan stock market has finally turned up. I beg to differ.
Fabulous tramlines with the break and kiss. Pure textbook – lower prices ahead.
I took major profits on my longs last week right near the $1389 top – and I was thankful that I did as gold plunged by $60 in just four days. But as I predicted, gold has rallied in a mini – H&S pattern:
The Thursday low at the $1325 level was made on a large pos mom div and now appears headed for the 38% Fibonacci level at $1348. After that, a rally to the 50% or even 62% at $1362 doe snot appear out of the question, especially if stocks fall next week, as appears likely.
I remain long.
Have a great weekend!