Weekly Wrap

Announcement

My book Tramline Trading is being published by Harriman House and they tell me publication date is to be in July.  You can purchase in advance at a discount from their website

www.harriman-house.com/comingsoon

There is a paper book and an e-book combination. It is packed with practical ideas for trading using my tramline method.

Your voucher Code is HHTT2014

With small caps hammered and large caps the main beneficiary, and Treasuries well bid, there has been a massive flight to safety in the past week or so.  And the gravity-defying euro bond market finally succumbed to reason and fell hard on euro fears.  Interestingly, US junk bonds (HYG) rallied with Treasuries in its own flight to risk.  

So there are many cross-currents swishing around at present.  That puts the nascent stock market decline in some immediate doubt (see later).

Last week, I forecast that the ECB would need to do the unthinkable – start a QE programme of its own.  And now, this idea is taking shape with a think tank making such a prediction in AEP’s latest piece on the eurozone.  Growth is non-existent (save for Germany, as usual) and several nations are heading backwards.

The ferocity of the euro sell-off is a clue that the market is in accord with this view.

Whether they do or not is immaterial to me.  It is the markets that are starting to believe it and that is what counts.  There could be some very interesting trading opportunties between now and next month’s ECB meeting.  If the euro weakens considerable over the next few weeks, I will look upon that as an opportunity to take at least partial profits on my shorts.  It should be a case of sell the rumour, buy the news.

And over in China, things are not so rosy.  The real estate bubble is bursting and manufacturing is not just slowing, but also heading backwards.  Read this piece by Cam Hui (always a very worthwhile read) which sums up the precarious position China is in.  Pretty scary stuff. 

In the US, last week’s economic data was pretty dreadful.  This is getting to be a habit. 

And to illustrate why I believed the move in the Dow above my line in the sand 16,600 level last week was very likely a buying exhaustion, confirmation has come in yesterday’s COT data.  This shows that as of Tuesday (when the market made its high of 16,735) the specs loaded up on longs.  This is the e-mini data:

Hedgies topped up longs by 5%, while the small specs loaded up by a whopping 16%! They must have read a book on technical analysis which tells them to buy a new high!

What I like to do is to see how the market reacts to a new all-time high.  Is there more new buying coming in?  If not, the locals will fade the rally aggressively and force the new small specs out at their stops in a cascade of selling.  And that is what occurred Wed and Thurs.

 Nice work.

FTSE

I have a wonderful tramline pair working on the hourly:

Here is a classic set-up.  I have a lower tramline break on a neg mom div and market is rallying towards the line again. But so far, the decline is a clear A-B-C.

This places the upcoming kiss attempt a very critical event.  We shall know next week the outcome.

T-BONDS

Have had a stunning run to my long-term target in the 137-138 area, but it may have come to an end yesterday:

Nice neg mom div and tramline break with market closing yesterday at the lows.

This could be setting up a nice H&S pattern if market bounces off lower tramline in a RS and then breaks neckline.

I took all profits on long positions yesterday on the tramline break.  I will be looking to position short in due course.

EURO

Should be setting up for a bounce.  Here is the daily:

On support and could see a rally to kiss tramline.  But if support gives way soon, next target is the Fibonacci 50% level at the 1.34 area.

EUR/CAD

I am going off piste here to cover an exotic currency cross that is new to me.  The reason is simple – the chart is very compelling!

The Canadian is primarily a commodity currency and the yen is definitely not (Japan has few commodities of its own).  I expect the yen to strengthen medium-to-long term and I have no view n the Can.

Great tramlines on the daily with a top as an overshoot (buying exhaustion).  But look at recent trading:

Here is a genuine H&S pattern with neckline break.  There should be support at the lower tramline, but the multi-year trend has changed to down.

I will be looking to short on rallies.  This could be a very long-term position trade.

GOLD

I was surprised that on Thursday when the Dow was collapsing, gold did not rally – it was flat.  That was a big yellow warning light to expect the downside:

Last week, the market hit my trendline and backed off.  My expectation was that it would punch up through it and take out the mass of buy stops on the back of stock weakness.  That didn’t happen.  So, what cannot go up must come down.

Because of this failure, I took a small profit on my long and reversed position and went short.

Have a great weekend!