Chrysalis

Upon the final shedding of its skin and prior to the final stage of its transformation into a butterfly, the caterpillar enclosed itself in a hard shell called chrysalis. The presence of chrysalis indicates a paradigm shift in the life of a caterpillar into an adult butterfly.

In financial market, a fundamental change in trend often do not come with a warning label or clear indication. In fact, more often than not, we only saw small indications that add up over time into an explainable “story” on why a particular trend is nearing the end of its life.

That said, today, I want to talk about USD/JPY pair as shown on chart below:

This chart is showing a 10-years weekly USD/JPY pair dating back to 2005. The price this pair is currently trading is at around 8 years high and I am currently looking to short the pair around 123.50 to 124 region. No, I am not saying the pair must go down around this level but I do think this level makes sense for it to start reversing as there is a major resistance around 124 level. As with any of our counter-trend trades, we only enter small starter position at first while gradually building up the position if it went the wrong way.

This trade is actually just a microcosm of a bigger short USD trade that I am currently preparing across the board. If we look at the /DX Futures (US Dollar Index), it is extremely stretched and there’s a good resistance around 98. Not to mention that /ES Futures (S&P 500 E-Mini) is at all time high. Additionally, US Nonfarm payroll number has been revised downward for 3 months in a row (among other internals) which makes me a little uneasy about the dollar strength at this point in time. All these “small” indications make me incline to say that there might be a change in USD trend for 2015.

The potential risk here is BOJ. If they decided to continue with their weak Yen policy, then we will be looking at USD/JPY going to 130 or even higher.

Currently, I am planning the following:

• Short USD/JPY & USD/CAD
• Long GBP/USD, AUD/USD, EUR/USD (maybe)

Update on our account:

Current open position: Short AUD/JPY from 95.501

Additionally, I have a pending to open Short USD/JPY at 123.50 and Long GBP/USD at 1.510

Now, while I do not know when exactly we will enter these trades, I am under the assumption that we will start loading up starter positions in early June at multiple entry levels determined by our TNS System. I might make a blog post explaining my reasoning but more likely it will be on Twitter!

That’s it for today and happy trading everyone!

Spring Sprang Sprung

Greetings traders and happy spring time here in the northern hemisphere!

It has been a while since I posted my trades here and that is because I have not been daytrading a lot due to holiday, work commitment, and I just don’t feel like babysitting every trades I have.

As I hinted several time previously on this blog, I do trade in higher timeframe for my swing trades but until now, I never really felt that it is “exciting” enough to write on a blog. I mean… you click a few buttons to buy, close your software, and in a few days or weeks, you log back in to close them. Yeah, not the best for a trading journal.

I did, however, change my mind. I think these trades need to be blogged somehow because it is still important to track and maybe one day it’ll be useful.

Without further ado, I have now revamped the Methodology page to include this swing trading method called “TNS Support & Resistance”. Additionally, due to the nature of swing trading, I don’t pay attention to day to day news cycle as much since there is no use to do that. Below are some of the financial data that I do look closely because I believe they will impact the market more than just a few hours of movement:

• All Central Banks announcements. Fed, BOJ, SNB (liar liar pants on fire), ECB, RBNZ, RBA, BOC, etc.
• US Employment Data (Nonfarm Payroll).
• Global Dairy Trade (impacting NZD mostly).
• Chinese Manufacturing data and other commodity news.
• US CPI.
• Germany/EU CPI and PMI.
• Political “charade” (Grexit, US election, etc).

Having said that, here are some open positions:

• Short AUD/JPY (1/3 position entered) @ 95.501
• Short USD/CAD (runner position left) @ 1.27735

I have recently closed a bunch of positions thus there are not much open. Of course, I will update this blog when I open new position. Additionally, you can follow me on Twitter: @Nestledrink for a real time update.

I look forward to start posting more regularly again and hopefully we can learn something together.

Happy trading!!

Reflection and Prediction

Friday, December 26th 2014

Hello everybody, it has been a while since I last posted my trades on this blog. I have been busy the last few months and there’s really no “analysis” to do when my bot is the one executing trades. No worries, though, we will be back in January with our daily dose of trades and technical analysis!

Thank you so much for everyone who followed the blog and all the readers. It was a fun experience trying to set this blog up. I’m still learning everyday how to put up an interesting, thoughtful, and useful analysis & commentaries about the global market.

Having said that, I want to post a short post reflecting 2014 and what 2015 will bring. Enjoy!

Rearview Mirror

2014 was a year of dichotomy. Continuing US recovery vs Eurozone recession, All-time-high in equity vs Freefall in commodities, End of Fed’s monetary expansion vs BOJ doubling down on easing.

Here are some interesting highlights of 2014 in no particular order:

• Draghi was cutting with full force but until a real fiscal unity happens, their asset purchase program is toothless.
• Jobs number in the US looked great but the internals are worrying.
• Republicans took control both Congress.
• Scotland stayed in the UK.
• Eurozone (still) looked fragile.
• US Congress passed a last minute to roll back Dodd-Frank bill restricting prop trading with customers’ money. Jamie Dimon was whipping the votes. Back to pre-2008 we come.
• US Dollar is very… very strong.
• Gold crashed.
• Oil crashed. Brought Russia along with them. Thanks to Saudis!
• S&P 500 all time high! Wealth effect!!!
• Federal Reserve ended its QE program.
• BOJ doubled down on their QE to an unprecedented amount.

Looking Ahead

What will be the most interesting event in 2015? I believe the most obvious answer is oil. When (not if) will the oil price start to rise again? When will the Saudis finally feel the effect of depressed oil price? How will the US shale producers react? What will Putin do? These questions will be answered throughout 2015 and I am really curious to see how it unfolds.

What’s next for gold? Will it rebound? Will S&P500 finally correct? I am not even going to comment on these questions as I have been proven wrong time and time again about S&P 500. However, with the QE program finally ended, will the flow of money to equity finally stopped?

On the political theatre, Obama vs Republicans. Will there be a budget standoffs threatening the credit worthiness of United States in 2015? It is possible. Obama seemed very belligerent after Republicans sweeping victory in the midterms. He started to take initiatives on net neutrality and immigration and this might not bode well with the newly powerful Republicans in 2015.

US Dollar has been on a roll in 2014. Can it sustain the momentum? I am inclined to say it will not but we’ll have to wait and see.

Eurozone has been fairly quiet last year but will it stay that way? Is Greece going to have another crisis? If so, will Draghi able to calm the market?

2015 will be a very interesting year as traders. I hope we can profit and learn a great deal next year. Meanwhile, enjoy the festivities and your loved ones.

Happy Trading and Happy Holidays. See you bright and early in 2015!

Treat from the Far East

Sunday, November 2nd 2014

BOJ Shock and Awe

Happy Halloween! BOJ surprised the market on Friday with expanding their already massive QQE scheme. The board is split with Kuroda as the deciding vote in a 5-4 majority to increase the money printing program to 80 trillion Yen, up from 60-70 trillion per annum. In addition to that, Japanese Government Pension Investment Funds (GPIF) also shifted asset allocation to lower JGB from 60% to 35%, increase domestic stock holdings from 12% to 25% and they are now even buying up foreign stocks up to 25% of their allocation.

Nikkei soared about 1000 points after the announcement and closed around 5% higher to its highest level since around 2007. Stocks around the world also soared with S&P500 Futures reached an all time high. Japanese Yen tanked across the board with USD/JPY went up 3 handles from 109 to 112.

These two announcements were clearly choreographed to achieve maximum effect in combating several decades of deflation in the Japanese economy. BOJ cut its forecast for inflation and GDP growth for the year and they are now going to miss the 2% inflation target especially with oil price weighing on price around the world. This decision by Kuroda is certainly a surprise especially comes just days after the Federal Reserve actually completed their QE program in the US this month.

During the press conference, BOJ Governor Kuroda was clear in his message that the measure introduced this month should not be construed as “incremental” and he is willing to do everything to achieve the 2% inflation target.

What Now?

I think the biggest loser with this announcement is the European Union as ECB is still struggling to achieve their own inflation target. Unfortunately, the Euro has been battered because of the recent bad news coming out of the region. They are also set to enter a triple dip recession soon. Will Draghi be more dovish in their meeting this coming Thursday?

This week we are going to see a few more Central Banks decision and several high impact data so I expect further volatility.

• RBA Rate Decision (Monday evening)
• NZ Employment data (Tuesday afternoon)
• US Midterm Election (Tuesday all day)
• Australia Employment data (Wednesday evening)
• BOE Rate Decision (Thursday morning)
• ECB Rate Decision (Thursday morning)
• US NFP (Friday morning)

The Trades

I entered several “long JPY” trade this past week with a very small starter position. These pairs have all been stopped out for small losses. Managed to made it up with a daytrade shorting NZD/USD on Friday as shown above.

The Outlook

At this point, all bets are off, really. However, seeing that there is no Japanese data this coming week, we have to shift our focus to the other pairs. I am slightly bearish on AUD and NZD especially with their employment data this week. As far as GBP and EUR, I am not expecting any major surprises but Draghi might be a little bit more dovish as well. Since the rate in EU region is at record low, I don’t think they will lower it further to 0%.

US NFP can go either way but coupled with the midterm, this week might be unpredictable for the Dollar. I find it hard to believe that the NFP can beat 229k estimates but if they manage to pull a surprise and Draghi was more dovish then USD might be in for a move upwards.

It will be an exciting week again and I wish you the best of luck for your trades.

Pump and Dump

It has been a while since I wrote something on this blog. I have actually been extremely busy and did not daytrade whatsoever. Since the nature of this blog is to serve as daily journal for my trades, I had nothing to write about. In addition to that, last week economic data was fairly tame and there is no major moves in the market. I somewhat expected this, as we had a major market move two weeks ago.

Fortunately, the wait is now over! This week, we will see some major economic data & statements come out which should move the market again.

• FOMC Rate Decision/Statement
• RBNZ Rate Decision/Statement
• BOJ Rate Decision/Statement
• US & Canada Preliminary GDP
• Euro & German CPI

That’s three (3) central bank rate decisions, two (2) GDP results, and crucial CPI data coming out this week. Brace yourself it’ll be a doozy.

Potential Pump & Dump?

As of Tuesday, October 28th when this article was written, there were 8 up days out of 9 trading days since October 15th when market seemed to “bottom out”. Is this a dead cat bounce or a real rally? The answer is I don’t know. As I mentioned in this previous article, anyone who said they know something is either spewing out bullshit or they have that $9.99/mo central bank newsletter. Having said that, I believe this is just a dead cat bounce. There are a few reasons why I think this is the case.

Punchbowl No Longer

FOMC Balance Sheet (Source: FRED)

The Fed balance sheet has grown significantly since the start of recession in 2008. They have now accumulating over $4 trillion in assets which is over 20% of US GDP. The question here are twofold, can the Fed stop growing their assets? and how will the credit and equity market react when they are start letting these papers mature or even winding down the position?

The first question seems easy to answer, it looks like they will finally stop expanding in October 2014. This FOMC meeting should end the bond buying program as scheduled. I am not expecting any surprises here.

However, the end of bond buying program this month will bring the second question into the headline. How will the market react when the punchbowl is taken away from the system? It was borderline comical seeing the market’s kneejerk reaction when Jim Bullard of St. Louis Fed said “Fed should consider delay in ending QE”. Market soared since that statement for the entire week. Is this really the mark of a healthy market? Think about it, a five (5) days plunge in the market can only be stopped by a Fed governor basically spoke to extend the punchbowl before market will rally again. I’m not one for crazy theory but it sure seems the market participants are addicted to this QE program and will do anything to keep the drugs running.

Mind you, stopping the QE is just the first step in going back to normal Fed operations. They still need to raise interest rate and unwind their position. God knows what will happen to the bond yield when everyone is rushing out the door at the whiff of Fed’s unwinding its holdings.

Global Picture is (still) Ugly

Global Unemployment Rate (Source: Eurostat)

Eurozone has been plagued by malaise for years now. Even when US Economy improved after recession, Eurozone countries were mired in their sovereign debt crisis which further deteriorate their already weak demand. As I mentioned previously, they are set to enter a triple dip recession in Europe this quarter. European confidence index slipped to its lowest figure in a year and their unemployment rate is still extremely elevated at over 11%. Without confidence and jobs, demand is weak which in turn drives inflation in Eurozone to be (way) below ECB 2% target.

Germany, the driver of Eurozone, is looking weak, in addition to the decline in export data from several weeks ago (which will drag them into recession in Q3), their IFO Business Confidence index is at its lowest point since 2012 as well.

Japan is another basket case (and has been for decades now). The issue is exarcebated in Japan as their working age population is now declining as they get older. They need to quickly find the magic to spur export as well as domestic consumption. Abenomics is not working and the VAT increase has only dragged the aggregate demand even lower. Bank of Japan is expected to announce an extension to Quantitative and Qualitative Easing (QQE) scheme in December meeting. This QQE extension should theoretically should spur Nikkei upwards but I remain cautious on this as this is a massive undertakings, even surpassing the effort from FOMC during The Great Recession.

How to trade this?

I have been building a “long JPY’ position across the board the past week. These positions are extremely small and they are basically shorting EUR, CHF, and GBP against JPY. Reason being is that I am skeptical about how the extension of QQE scheme will work in Japan and weakness in Nikkei will translate into a strong Yen.

Rout and Volatility

Wednesday, October 15th 2014

US Retail Sales Excluding Auto

What a day. S&P 500 was bracing for a meltdown at the open which continued until lunchtime with the market tanked to its worst decline in 3 years at its low. Greece market declined 10% at one point today before ‘settling’ at 6% decline at close to send the global jitter across the Atlantic. This, coupled with a very weak US data before open makes an extremely volatile day. US Producer Price Index went down -0.1% m/m, Retail Sales is down -0.3%, and Retail Sales ex. Auto is down -0.2%, their first decline in 8 months. Dollar was clobbered across the board with Aussie breaking 0.88, Euro breaking 1.28, and USD/JPY fell some 2% to 105 handle within hours. Brent and WTI Crude Oil continued its decline.

Netflix came out with its earnings afterhours and the stock is now down some 25% after disappointing subscriber growth number as well as HBO announcement that they will have a standalone HBO Go subscription in 2015 without needing cable.

Trade #1 – Long NZD/USD at 0.78371, 0.78497, and 0.78749

We are not in the business of picking top or bottom. I’ll leave that to the pros who have more capital than I am. However, we are in the business of making money. Today is an interesting case study on how to add position when trade is going your way.

First off, the initial entry at 0.78371 fulfills most of our ‘checklist’ except one, the dragon (blue area of EMA formation) is not over the longer term trend (black line). Since I am expecting this pair to go up, I entered a starter position of 1/3 of planned position. Once this is entered, I am looking to add as the price moves upward in my direction. I entered another 1/3 at somewhat a round number of 0.78497 (near 0.78500). After the US data came out, I added another position after the initial move upwards during the mini pullback at 0.78749. I then exited at some total of +62 pips profit. Again, I am leaving money on the table here but we are not in the business of picking top and bottom and profit is a profit.

That said, before this trade, I made a bonehead decision and did a trade with -20 pips loss. We are not talking about that trade as it was not being traded with this method or my automated EA but I still want to disclose the trade for the sake of transparency.

What’s Next?

Light on European data tomorrow but there’s some Final CPI number which might further show the disinflation that has been happening in Europe. However, there is US Industrial Production as well as Philly Fed Manufacturing number which is usually the bellwether for our economy. We shall see what kind of crazy volatility will happen tomorrow and meanwhile, happy trading!

Double Trouble from the Old Continent

Tuesday, October 14th 2014

As indicated several days ago, I am pretty worried about the Eurozone because I believe the weakness will continue. This also play into my hypothesis that while Dollar weakness is what the Fed wants, they might be powerless to jawbone the Dollar while Eurozone is possibly going into recession. German ZEW economic sentiment indicator drops by 10.5 points in October and now at minus 3.6 points which is the 10th straight decline for the measure and the first time it went into negative territory since November 2012.

In addition to that, overnight economic data suggested further weakness in Europe and UK as British CPI fell to the low of 1.2%. It seems like the UK has “imported” some of the low inflation problem from the Eurozone. The longer this phenomenon goes on, the worse it will get as Europe might be stuck in deflationary cycle similar to Japan.

Trade #1 – Short GBP/USD at 1.60601

After yesterday’s debacle with my Swissy position, I decided to take things slow and not overtrade before the London session.

As usual, classic setup to the downside when London session opened. I knew there will be UK CPI data coming out at 4:15am but it’s a good set up and I am willing to take the trade. Data came out and was lower than expected. Cable then declined precipitously before I closed the trade around NY open for some cool +117.5 pips.

There will be more high impact UK news tomorrow which I will keep an eye on in addition to US retail sales data.

We’ll keep trading using our system and see where it takes us! Happy trading!

Courage in Your Conviction

Monday, October 13th 2014

Bank holiday in the United States today. Was expecting trade to be choppy. Downside bias in equity to continue after last week’s sell-off. I was leaning weak USD trade to start the day but didn’t really look at the chart until 6am ET in the morning.

Trade #1 – Short USD/CHF at 0.95250

https://twitter.com/nestledrink/status/521666541998579712

I shorted USD/CHF about 1.5x full lot early morning after a classic setup that bounced around the trend line. Was expecting the trade to be choppy while USD follows how equity (/ES futures) is doing. However, early afternoon, I had to step away from my computer and I just did not have enough conviction to stay with the trade and took a total of -4 pips loss. Of course, towards the end of the day, US market got clobbered and dragged USD along with it. USD/JPY broke 107 to the downside, EUR/USD broke 1.27 to the upside, and our closed USD/CHF trade went down to 0.94750 which means we would’ve gotten some cool 50 pips profit had I stay on the trade.

Frustrated, Angry, Salty, Rage?

When I first started this blog, I am doing it for the sake of learning and I would post all my trades. The profitable ones, the loss, and today we have a new type… the “could’ve been” trade. This kind of trade is sometimes more frustrating than your losses as the profit was within your grasp but you made a wrong judgment call that caused it to slip away.

If I just had the courage of my conviction to stay with that trade, I would’ve reaped a massive profit today but alas the market is unpredictable and I’m just glad that I am not losing a lot of money. Name of the game is capital preservation. Having said that, I think this situation lent itself for a few learning points.

1. Always trust your system.
2. Sonic R. system is not a countertrend trade. We follow the trend. Therefore, unless the trend changed against you, it is probably best to trust the system.
3. Don’t get frustrated over stuff like this.
4. No revenge/double down trade. The week is early and there will always be new opportunities popping up before Friday. Just need to seize the moment.

That’s all for now. Here’s to a good week! Happy trading.

Cheap European Vacation

Friday, October 10th 2014

Unfortunately I am not on a real European vacation but at this rate, the Euro might be staring at that 1.20 level before too long and the vacation will get cheaper. On the heels of yesterday’s dollar strength, I am expecting further upwards move on the dollar. Going into the day, I was planning to short the Euro, Aussie, as well as the Swiss Franc against the US Dollar.

Trade #1 – Short EUR/USD at 1.26600

Classic setup on this before New York open. Entered the short at 1.26261, rode the wave until  early afternoon and when price went to RDL and bounce back up slightly. Closed this for some +34 pips profit. After the London session closed, there was news about France outlook being downgraded to negative by S&P and it puts more pressure on the Euro but we are not picking top and bottom with this method plus it is the Friday before long weekend here in the US and I am not going to trade when nobody else is trading.

Trade #2 – Long USD/CHF at 0.95650

Got into this trade slightly late but managed to enter long at 0.9565 during early New York session. Closed this trade for some +15 pips profit. This trade is an auxiliary add-on to the short EUR/USD trade so I closed this at the same time as the first trade.

The French Outlook Downgrade

 “We believe that a recovery of the French economy could prove elusive and that France’s public finances might deteriorate beyond 2014”

S&P downgraded French credit outlook to negative this afternoon due to the weakness in economic recovery while reaffirmed the AA rating. S&P also mentioned that between 2014-2017 their budget deficit will increase to an average of 4.1% from current 3.2% projection. According to S&P, this negative outlook indicates that there is a 1 in 3 chance some events would occur which would actually push the rating to be downgraded within the next two years.

I have indicated there are a few events that might tip the global economy. Germany and Japan are at a risk of going into their n-th recession since 2008. This deterioration in Eurozone economic condition is reinforced by this S&P release today as their second largest economy is struggling to recover.

Again, consistent with yesterday’s post, my bias is bearish towards the Euro and will position my trades accordingly.

This has been an eventful week and let’s hope the volatility continues! Otherwise, have a great weekend and happy trading.

Currency Wars Episode V: The Dollarempire Strikes Back?

Pardon my lame attempt at joke but yesterday we saw the dollar strengthen across the board following huge decline the day before. What does this mean for the dollar? Honestly, I don’t know. Nobody does, really. Anyone who tells you otherwise is full of shit (or they work in a central bank and secretly knows what’s the next policy move is going to be… Hey, I want in on that $9.99/mo secret central bank newsletter too!).

That said, I still believe, all things being equal, we should see the dollar weakens because the move upwards in Dollar had been relentless until several days ago, Fed is clearly telegraphing that we are not getting strong Dollar just yet, and the US equity market is not looking bright entering the earnings season this month. However, there are a couple strong caveats (a.k.a ‘Black Swan Event’) that might derail my hypothesis.

Deutschland in Trouble

German factory order

This week German export number came out and it looked grim with a decline of 5.7% month over month. This is the biggest monthly fall in more than 5.5 years and impacted by the continued Russian sanction by the EU as well as weak Eurozone demand in general. This week also featured Germany industrial production declined 4% vs a decline of 1.5% estimated by economists. Again, biggest fall since 2009. Lastly, Eurozone investor confidence has declined for nine straight months.

Prior to this week, Germany’s GDP also shrunk 0.2% in Q2 thus barring a “miracle”, Germany will technically go into (triple-dip) recession next quarter. Yikes.

What does this mean for the Dollar? Well, Germany is Europe’s biggest economy and the Euro is weighted approximately 56% in the dollar index thus any weakness in Germany (and by extension, the Euro) will send the Dollar straight up.

Abenomics is a Dud

Japan leading indicator

Our next “Black Swan” event might come from the far east as Japan leading indicators came out this week and the figure fell to 108.5 according to the Cabinet Office. This is the first fall since June 2014 and prompted a change in language in regards to their economic assessment from “weakening” to “signaling a possible turning point”. This downgrade in language indicates Japan has, for all intents and purposes, provisionally admitted that their economy fell into recession.

Many blamed Abenomics and the increase in VAT earlier this year to be the culprit.

How do we trade this?

Recent economics data have looked bleak for everybody. US equity is on shifting sands going into earnings season, Eurozone & Japan might be heading into yet another recession, Aussie employment number was atrocious, and so on. What matters now is who will be the “cleanest shirt in a dirty laundry basket”. If history can tell us, the US has always been the “least bad” among the bunch.

On that note, perhaps, rather than focusing on the Dollar (which move might be opaque due to reasons above), we should focus on shorting the Euro as they inevitably tumble into triple-dip recession in Q3.