Currencies

Get Ready for a Euro Rally. Or Don't ... and I'll Get Ready for You

The US dollar has had a torrid rally. But my charts suggest a correction is due.

Maybe that is what this latest bout of currency-market volatility is telling us.

Volatility is often a precursor to a change in trend (in all time frames). We know dollar sentiment is overwhelmingly bullish – it seems a one-way bet right now. But Mr. Market is watching because he loves one-way bets. 

I'm not betting big on a correction right at the moment.  But I have told my subscribers to get ready. Today’s price action plus sentiment data suggest a speculative extreme may be near. 

Sentiment extremes suggest a turning point is imminent. Be careful, all you euro bears!

I watch open interest levels in the currency futures market. It is a good longer-term measure of sentiment. Often times, open interest reaches an extreme just ahead of a trend change. Below is a currency futures chart for the euro. The open interest level is huge and sentiment for the euro is extremely bearish: 

The red circles denote peaks in open interest that corresponded with key lows in the price of the euro. Given the extreme levels, I think euro bears should be very careful.

I am monitoring the major pairs closely.  Because if a correction lower in the dollar does materialize at these levels, it would likely be at a least multi-day, and probably a multi-week, event -- in other words, something playable. 


Analysis like this is one way I  keep my subscribers prepared. Until recently, it's been up to them to follow along and follow through.

Now, however, they don't even need to! 

They can check out for a day ... a week ... or a month at a time and not have to worry about missing profit opportunities. That's because I'm launching a new auto-trading opportunity they can use to replicate the trades I recommend and execute in my personal account ... in their own accounts!

This is open to new subscribers as well. Read more about it at this link.

Thank you. And be careful out there.


-Jack

Comment

The $5 Trillion Answer No One Wants to Hear

Unbelievably, the average individual forex trader loses 3% per week.

I found that shocking statistic in The Wall Street Journal yesterday.

Combine that with what I told you last week:

We review...
all the fears and anxiety
...which are so
inherently symptomatic...
...of a losing team.
The mind is a strange thing, men.
We must begin by asking it...
...”What is losing?”

Losing is a disease...
...as contagious as polio.
Losing is a disease...
...as contagious as syphilis.
Losing is a disease...
...as contagious as bubonic plague...
... attacking one...
... but infecting all.
Ah, but curable.
— Two-bit carny hypnotist, The Natural

An observational study of 12 million actual forex trades made in the course of one year showed that traders’ losing trades are 80% larger than their winning trades.

The Wall Street Journal sums up the situation:

“The National Futures Association ... found that 72% of individual forex accounts were unprofitable and that the average life of an account was only four months.”

Four months?

In the words of the late Harry Carey, holy cow!

Despite the unfortunate proportion of losing traders, forex remains a $5 trillion market, all that money changing hands faster than we can imagine. So I have to ask:

Why?

The $5 trillion answer ...

No one wants to admit they lose.

“I lost $2,000 on a stupid euro trade last week because I was wrong about their inflation numbers.”

“I got killed on USD/CAD because I guessed wrong on the Canadian employment report.”

“The Bank of Japan added stimulus money to their economy and I got clobbered in JPY because I didn’t have a stop-loss in place.”

You probably don’t hear traders say things like that even though there is no shortage of losers out there.

People don’t want to talk about losing because losing carries a stigma. Losing suggests you’re wrong. And you don’t want to be wrong. In our own minds we equate being wrong with being inferior, inept or just plain dumb.

If you harbor thoughts like that, your trading account will surely be wiped out in four short weeks.

It’s why I told you yesterday to get your mind right. And last week I said you don’t have to know – or even think you know – what’s going to happen in the market in order to make money.

You must accept that losing is an integral part of trading. And managing losses is an integral part of success.

The Wall Street Journal article even acknowledged this.

I share this with you so you acknowledge it too. And so that you might do something about it.

Easier said than done. I get it.

It took me many years to develop a disciplined systematic approach that wins by keeping my personal rationalizations from sabotaging my success.

So I offer you my service, Black Swan Forex.

And I also want to offer you a way to further straighten your path to forex profits.

I’m rounding out a working relationship with a reputable firm. I’ll share the details with you later this week. But consider the arrangement a way for you to get all the success of Black Swan Forex without requiring your constant attention.

It will be like having your own personal money manager at a tiny fraction of the cost.

Until then, trade smart, learn from your losses and stay tuned.

Comment

Euro Morphing Into the Old Yen—the Equation Says So

Quotable

“In finance you are playing against God’s creatures, whose feelings are ephemeral, at best unstable, and the news on which they are based keeps streaming in.”

                                 Taken from Why Markets Crash, Didier Sornette                                                                 

Commentary & Analysis

Euro Morphing Into the Old Yen—the Equation Says So

What if the euro is morphing into the old Japanese yen?  The Japanese yen which continued to rally for years against other major currencies despite Japan remaining tightly in the bear-hug of deflation for over a decade and nominal rates at zero (ZIRP) for many years?

There is growing concern the Eurozone is falling into a Japanese-style deflationary trap as the headline inflation rate across the zone continues to decline.  Many expect the European Central Bank will be forced to cut interest rates. 

I’m not sure declining headline inflation should be a big surprise given the unleashed domestic deflationary powers of austerity in an effort to save the single currency regime.  But one interesting aspect of this is the surprising strength of the euro even though the Eurozone is losing the yield and growth game to the United States.

I want to share with you an equation I took from George Soros’s book, The Alchemy of Finance, when I read it back in 1987; which is doing a pretty job of justifying the path of the euro. 

T + ↑ N + ↑ S →   ↑e

↑ T – Trade Surplus

↑ N – Non-speculative Capital

↑ S – Speculative Capital

↑ e – Exchange Rate

1.     The Eurozone is still sporting a nice trade surplus.

2.     Non-speculative capital flow seems to be increasing as banks in Europe delever outside of Europe in order to bolster domestic capital.

3.     Speculative capital flow into periphery bonds, turnaround assets, and buying bad debt (vulture funds) has been brisk, as international fund managers find opportunity across Europe. 

4.     Therefore, the exchange rate is rising despite what from the outside appears to a relatively bad economy.

Is it that easy?  No.    

Markets are full of rational and irrational beings; and those beings can quickly move through various stages of rationality when it comes to money decisions.  So, if we consider a situation whereby irrational beings are participating and impacting on the outcome they are also attempting to forecast (Soros’ Theory of Reflexivity), you can see the difficulty in using equations to determine outcomes.  It’s highly unlikely any Holy Grail-type equation will emerge until Chaos theory and computing power are much further advanced. (That’s a story for another day.)

Despite their limitation in predictive power, I do think equations play an important role as a framework for scenario analysis (I create my own homegrown equations to try to better understand money flow; all are flawed to one degree or another).  In the case of the equation I shared above, even if it breaks down as a rationale for the euro, i.e. the euro tanks, I do think it is helpful for thinking about how much flow impacts a currency and can run contradictory to the usual consensus regarding headline GDP or levels of interest rates. 

In retrospect, Soros’ equation was an excellent framework for understanding why the Japanese yen remained strong despite Japan’s dismal economic woes.  At the moment, it seems to be doing a pretty good job of defining rationales for euro strength.  But Mr. Draghi is back behind the microphone on Thursday; so stay tuned.

Interested in the Black Swan Forex Service ?  If you wish to sample the service, just send us as note.

Regards,

Jack Crooks

Black Swan Capital

www.blackswantrading.com

info@blackswantrading.com

Phone: 772-349-6883

 

Comment

AUD/USD: Up then Up ... or Up then Down?

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The Australian dollar is rocking and rolling. The move is very much in line with our expectations in the analysis we provided last week and the week before. And, as I see it, there are two possible scenarios once AUD/USD hits the $0.9330 level ...

To teach what we preach, the first Aussie chart shows the near-term 61.8% Fibonacci retracement target. That retracement is accompanied by a nearer-term 100% Fibonacci extension level. Basically, that confluence of Fibs is likely to pose at least some resistance:

After that level is achieved, I see two potential outcomes (based on Fibonacci levels.)

Outcome #1: UP

Lending credence to this view, the end of the Aussie's strong downside move this year represented a 61.8% extension. In other words: the Aussie may have higher to climb in order to sufficiently retrace this larger decline:

But there is potential for the Aussie's drop to continue (especially if you want to think about it in the context of our expectations for a rising US dollar too) ...

Outcome #2: DOWN

Rather than a third-wave extension of just 61.8%, the Aussie may embark on a third wave that extends at least 100% of the larger third wave down:

Granted, these are longer-term setups we're looking at here. Maybe you trade forex in these time frames; or maybe you don't.

One could use the CurrencyShares Australian dollar Trust (symbol FXA) to take these sort of positions. Or one might consider managing shorter-term trades based on the key Fibonacci levels within these larger setups.

In fact, I know that's how Jack prefers to play it.

He uses these Fibonacci levels and modified Elliott Wave in short-term time frames to make profitable decisions for his BSFX members. Wanna be one? Subscribe here ...

-JR

 

 

 

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If you are bearish on Japanese stocks, you should be bullish on the yen

“Don’t worry about hitting or missing.  When you know it’s the right thing to do, whatever the crowd is saying, just shoot.  That’s the winning formula.”

                                                            John Percival, The Way of the Dollar

If you are bearish on Japanese stocks, you should be bullish on the yen

Is the Japanese stock market telling us anything? Could it be that concerns are growing as to whether Prime Minister Abe’s three arrow strategy will be successful or not? 

I think so.

 

USD/JPY versus Nikkei 225 Stock Index Daily:  

 

 

There is evidence piling up to suggest failure is a real possibility. If that is the case, it would make a lot of sense to own the yen, with the caveat of course the yen maintains its tight correlation with Japanese stocks (as you can see in the chart above).  

No doubt, the tight correlation could break down at any time for any reason.  But I think the primary threat to this correlation is real crisis in the Japanese government bond market (JGB’s).  If JGB’s finally get hit as investors and analysts and traders and financial writers and the tooth fairy have been anticipating since around 1994, we’d likely see the triple-whammy—a run out of stocks, bonds, and the currency.  But for now, the repatriation game of weaker stocks and strong currency is very much still in play. 

So far, two of Prime Minister Abe’s arrows have hit the target. The first arrow was aimed at the Bank of Japan; the goal to trigger an unprecedented campaign of monetary easing.  The second arrow was also true to the mark, continued deficit spending on public works.  The third arrow is arguably the most important.  Its objective is to stimulate private sector-investment growth; and meant to be transformative and “normalize” the Japanese economy; it’s in the air but turbulence is growing.

In an interesting blog post by Andrew Smithers, appearing the Financial Times last week, he says the third arrow is aimed at the wrong target—Japan already invests “too much,” says Smithers.  And if Abe is successful in generating more private investment, it could be the mother of unintended consequences and roil the Japanese bond market in a big way.

 Source: Financial Times

Source: Financial Times

According to Smithers, “the return on capital in Japan is extremely bad” (by far the worst among the G-5 countries) and this is why investment has been falling and “needs to fall further.”  Thus, the third arrow strategy, which at its core is about the government convincing business to invest more, is “absurd and doomed to failure,” he says. 

There are many moving parts in play in Japan.  For now, I’m cautiously short $-yen and cognizant of what another round of massive easing by the BOJ, in an attempt to overwhelm the possible negative feedback from the upcoming tax hike in Japan is a real possibility, might have on the pair. 

Regards,

-Jack

Comment

Jack's reaction to the March FOMC announcement

Per our Skype exchange earlier ...

[2:27:05 PM] JR Crooks: When you're done sending your BSFX trade alerts, can you share with me your reaction on the Fed announcement?

[2:38:40 PM] Jack Crooks: The dollar rocketed higher on the release of the Federal Open Market Committee statement today, as the Fed continued along its path of tapering by a further $10 billion.  This seemed to surprise the market; they were setting up for something considerably “more dovish” from new Fed Chairman Janet Yellen.  

Does this change the game for the dollar? Possibly, as I still believe the long-term dollar trend is up and many currencies technically appeared overbought against the buck.  Over the intermediate-term it seems the game will be about growth and yield again.  And maybe the euro is in the crosshairs again as Fed Chairman Yellen looks stronger, and calls for the European Central to do more, and/or cut rates on the risk of deflation, grow louder.

The US dollar is rocking and rolling, now about an hour after the FOMC announcement.

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REMEMBER: This move is coming at a critical point in time -- a few of the major currencies have coiled up and are ripe for a big move, as I suggested a week ago.

As our Skype exchange noted, Jack's already making moves in his Black Swan Forex (BSFX) trading service. You can join now by selecting a subscription to the right.

-JR

Comment

Boom: The Aussie delivers profits just as anticipated

Let me recall an urgent question I put forth last Thursday: JPY, GBP, AUD: Big moves coming ...???

Now, if I were going to say I told you so, this is when I would say it.

My chart analysis suggested a big move was possible for the Japanese yen, the British pound, and the Australian dollar. But my indicators had not trigger any trades at the moment. In fact, only today does it look like a trade idea will trigger on the yen.

Anyway, that's why I suggested the indicators I use serve better as an early alert system than a precise timing tool.

Also as I suggested, Jack uses indicators that do offer precise timing for trading ideas that can anticipate big movements in currencies.

In fact, his indicators worked perfectly on an Australian dollar trade he issued Thursday (shortly after I wrote to you). The position is still open and is showing gains of around 80 PIPs ($800) per lot of AUD/USD.

Once this trade is closed I'll share with you the chart setup he used to make this trade recommendation.

What's more, he also added a position in GBP/USD this morning. Remember: my indicators still haven't triggered a GBP/USD trade either, but it appears a trade might be triggered as early as tomorrow. Jack, however, is already positioned accordingly.

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Are you?

You can be -- here's another chance for you to get in now and join others members of Black Swan Forex (BSFX) who receive these trade recommendations in real-time.

Also, the FOMC announcement is tomorrow ... how are you going to trade it?

-JR

P.S. Subscribe using the payment options to the right. And remember our guarantee -- cancel anytime within the first 30 days of your subscription and we'll refund your money with no questions asked.

Comment

JPY, GBP, AUD: Big moves coming ...???

I (JR Crooks) mostly follow the daily charts of currencies. I want to alert you to something I'm seeing ...

Some of the indicators I apply to currency charts -- and all markets, for that matter -- suggest big moves are going to happen soon.

Take this chart of the British pound, for example:

Momentum, the yellow line across the bottom is neutral. At the same time, the Bollinger Bands and Keltner channels are narrowing and flat. 

The same can be seen on a chart of the Australian dollar:

And a chart of the Japanese yen too:

So what does this mean?

It could mean we see some very sharp moves, lasting a week or so and happening as soon as next week.

I'll continue to monitor these indicators. But the trouble is these indicators aren't as precise as I would like. In other words: often times they lag the price move by a day or two. In order for a signal to be triggered in one direction or another, several conditions need to be met to generate a high degree of confidence.

So, ideally, one will have other indicators to help anticipate the direction of the breakout.

Luckily, I know a guy who can help ...

Jack has a forex trading service (we call it "BSFX") that offers these indicators that help anticipate price action. And he's just added a new feature for his members.

This new feature keeps them updated with the same key support and resistance levels Jack calculates early each morning before making any trading decisions.

In fact, have a peak at what his new BSFX Members' Only Dashboard looks like:

The 'Recommendations & Updates' are emailed directly to members and posted automatically.

The 'Key Levels & Comments' are posted for each major US Dollar pair ... each day.

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If you're not already a member of BSFX, you can sign up real quick right now and be ready for the impending breakouts in some of the major currency pairs.

That's all I have for now. Happy trading.

-JR

P.S. Did I mention Jack's forex trading service -- BSFX -- had an ROI of 42% in 2013?? Yeah. Seriously. And the ROI is currently 11.1% year-to-date, assuming a $50,000 starting account size.

Here's the YTD profit curve:

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Get a load of this tidbit out of the IMF ...

REUTERS - IMF CALLS FOR ECB RATE CUT AND ANOTHER LTRO OR QUANTITATIVE EASING TO AVERT DEFLATION RISK

It seems like this can shake out one of two ways:

  1. A new effort to air the dirty laundry. As long as global policymakers are being seemingly transparent, then the consensus will believe things will remain relatively under control thanks to these devoted policymakers.
  2. A genuine attempt to pressure the euro lower. The common currency remains a key feature of the Eurozone growth struggles. The periphery certainly won’t welcome a further rise in the euro should it break above nearby levels. As long as the IMF volunteers further action from the ECB, the outlook for the yield dynamic appears to favor the US dollar over the euro.

The former might mean the euro continues to climb higher. The latter, should sentiment sufficiently turn, would mean the euro rolls over and begins a push lower.

-JR

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