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!!

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.

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.

Commonwealth of Dingoes

Thursday, October 9th 2014

Today was an eventful day. We have a couple open trades outstanding from yesterday’s Dollar bloodbath and I intent to close them today. In addition to that, we also opened GBP/AUD trade with a picture perfect setup and I even try to “add” position during retracement period.

Trade #1 – Long GBP/AUD at 1.82450

First chart shows how perfect this Sonic R. classic set up was. Price bounced from a whole number of 1.82000, blew through the dragon and trend, pulled back to the dragon and started a move upward. I entered at 1.82450 when price is moving up inside the dragon but not without reservation. Everything checked out with a standard classic entry but the dragon is not above the trend so I was being extremely careful with this because I’m afraid it might stabilize and did not resume the move upwards. Price quickly moved up, however and we reached the next whole number of 1.83000. Since I am a little wary of the dragon not being above the trend, I closed the trade around this level at 1.82980 for approximately +43 pips profit. That said, I am keeping my eye on this because I feel the price will slightly retrace and then move further upwards to RDH.

Trade #2 – Long GBP/AUD at 1.83150

Second chart shows another “classic” set up this time after a slight retracement that I have been waiting since I closed the first trade. In addition to that, dragon finally crossed over the trend and I entered the trade without hesitation. Price quickly moved to DR1 and RDH when I finally closed the trade for another +43 pips profit. Note that the price has since move further upwards but I rarely trade in US afternoon session as volume is low and price is easily moved.

What about the Swiss Cheese?

The outstanding (and awesome) open trade from yesterday has finally been closed. I’ve been wary about closing this trade given how the dollar dropped precipitously yesterday in light of Fed minutes. USD/CHF formed a double bottom in early US session and I decided it’s enough and we have to close the trade. We took about +145 pips profit on this. At the time of this writing, the Dollar has strengthen considerably and have now broken through the dragon and trend during the US session. Glad we closed it.

That said, the reason why I post a second 1 Hour chart for USD/CHF is to show that this classic set up can be applied at any time frame. If you look at my first short entry of 0.96000, it was actually a picture perfect classic short entry on 1 Hour timeframe too!!

In addition to this, I also closed a short USD/CAD from yesterday as well as took profit on another daytrade of short AUD/USD and EUR/USD during US session. Not nearly as exciting as these other trades, though, so I decided not to go through them.

That’s all for today’s trade journal but I have a write-up regarding Dollar and the global economy tomorrow. Be on the lookout for that commentary post in the morning!

Fly Away Like a Dove

Wednesday, October 8th 2014

Today’s post is going to be a little different. I do not have a closed trade as of yet. I’ve been building short dollar position since Tuesday.

Open Trades

I currently have 2 lots of USD/CHF short open. One lot was from 0.96000 and the other two are from 0.95750. In addition to this, I also have a half lot short USD/CAD position from 1.1150.

Why a dovish Fed makes sense

Today was a huge day for Dollar short traders. The Fed minute came out and it was much more dovish than expected.

Some powerful quotes from the minutes released today:

“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,”

“Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk.

This minute shows for the first time that the Fed is giving a second thought about quickly raising rates due to the disinflationary impact of a strong currency and further concern about global growth will hold inflation rate to below their 2% target.

In addition to that, there was also a push for further clarity that rate increase will be data dependent which shows investors that the Fed is more flexible than initially thought.

In my opinion, this makes a lot of sense given the nonfarm payroll figure, while looking great on the latest headline, is still hobbling when we dive deeper into it. Some examples of the weak “internals” of the supposedly strong job data last week:

• 102 million adult are not in labor force or unemployed. This is approximately 41% of adult population.
• Youth unemployment is at 20%.
• Labor participation rate is at its lowest in over 36 years (62.7%). This matches 1978 lows and contributes to the 5.9% unemployment rate.
• Employment to population ratio is 59% vs 62% (6 years ago) and 64.2% in the year 2000.
• Out of the 248k jobs added in the latest report, 230k is actually from 55-69 age group.
• The prime working age population of 25-54 demographics actually lost 10k jobs in the latest report
  • Their employment ratio is at 1982 levels.
• Since December 2007, the 55-69 age group has gained 5.5 million jobs vs loss of 2.04 million jobs for the core 25-54 demographics.
• The type of jobs added in the latest report are restaurants and supermarket jobs which are lower wage and more often than not, not a full time position.
• U-6 measure of labor underutilization is at 11.8%. This measures the total unemployed plus all “marginally attached workers” plus total employed part time for economic reasons (underemployed)
  • While this number is lower than what it was during the depth of recession, it is still at an elevated rate and have not recovered to its pre-recession rate.

We discussed why the appreciation of dollar and concern of global growth will hold inflation rate to below their 2% target but there is another factor in determining inflation. The last puzzle piece which drives inflation is wage growth. Unfortunately we have not seen wage growth manifested as of yet despite the recovery in stock market. According to Mohamed El-Erian, this is partially due to the lack of “holistic policy response because of polarization of congress” in not taking up measures to increase the minimum wage.

I believe that in addition to the paralysis in Washington, this is part of the “new normal” where the jobs being added (as shown in the latest jobs report) are low paying jobs in retail sector which might not even be a full time position. This phenomenon suppresses wage growth as people are force to take up positions with little to no future increase in salary.

Lastly, we are also seeing an increase in productivity which prevent companies from hiring as they can now squeeze more out of their existing workforce. This means less opening for higher salary jobs and the unemployed are stuck doing retail jobs at lower wage which will also diminish their skillsets over time.

Overall, there are still reasons for the Fed to be concerned about the US economy which makes their dovish minute today a lot more sense.

Happy trading!

Spring Cleaning in Australia

Friday, October 3rd 2014

Happy Friday (and US jobs day!). Prior to outlining the trade, I hope you will visit this Methodology page for an updated outline of my trading methods. Reason being is that today’s trade will be the first that I posted to utilize Sonic R method (despite having traded using this for several months now).

Trade #1 – Short AUD/JPY 95.502

Sonic R method satisfied for short.

• Wave is H-L-LH
• Dragon (blue shaded areas) are angling down
• Price is below the long term EMA trend as well as the “dragon”

Entered this trade at the confluence of those three conditions as well as the .50 half number level. Price broke through day pivot and went to RDL (which is the range daily low level) and I closed as soon as the price stabilized around that area for some +40 pips profit.

Commentary Regarding Market Manipulation

I mentioned on the news section yesterday that

USD has been weakening the last few days. Is this a real catalyst for USD (and equities) move downward? or is this just banks trying to drive price down so they can reload long USD trades?

Today’s NFP release really put a whole new meaning of V-shaped recovery. The dollar has been hammered the last 1.5 sessions and it bounced back up to the same level as 2 days ago in a short period of time. This looks like the case of banks whacking price down to go long at lower price points.

With a relatively strong jobs report, the Fed will not hesitate to shut down the stimulus this month. We have to be careful, however, because equities market look weak and the flight from risky asset might mean a stronger Yen or decline in USD/JPY.

Lastly, I am planning to write a deep dive into the US Nonfarm Payroll number tomorrow. Be on the lookout and happy trading!