Confluence

Preparations are key.

Preparations

Would you cast off the lines before checking for foul weather?  How about leaving port without a radio check?  Ever been at sea without a storm anchor?  Would you enter the harbor without checking the tide?   Only if you’re an Oscar.

To navigate the sea of emotion and fear in the markets, you must be able to asses the waves, weather and readiness of the ship.  All in conjunction with one another.

Some refer to this as “stacking confluence:”

  • Market Condition:  check charts, avoid indecision and choppy waters.
  • Market Phase: enter when the tide pulls back.
  • S/R: go long from support lines & short off resistance lines.
  • Indicators: If you use a compass,  understand its underlying principle.  
  • Price Patterns: Look for one of the primary price patterns.
  • Candlestick Patterns: keep an eye out for deceleration in price.

Any less than four given factors and I tie-off to starboard, sails down.

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U.S. Nonfarm Payroll (NFP)

All about the Nonfarm Payroll (NFP)

Always check the Economic Calendar

Later today, there will be released two separate surveys in one report. The first is a survey of 60,000 households (called the household survey). Workers are counted once, no matter how many jobs they have, or whether they are only working part-time. To be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.

The second survey is the Establishment Survey –a survey of over 557,000 worksites. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job.  Always keep in mind that this is just a single indicator.  One that appeals to the emotions of many traders, but is hardly representative of the overall economy.

Market reactions to this indicator are usually dramatic.  The employment data given is comprehensive on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers guide, not determine, the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it’s a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline – boosting up bond and stock prices in the process.
The employment situation is the primary monthly indicator of aggregate economic activity; it encompasses all major sectors of the economy. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. The Fed has emphasized that it is overall labor market conditions that matter – not just a specific number.

The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates.

The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. These figures aren’t adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.

90% of the time, I close out 90% of my positions the week of the NFP release.cropped-old-map-36.jpg

Sails Down

Always check the economic calendar.

All sails are down for the weekend.

Fed rhetoric is that rate hikes are not likely to happen in the relative future (relative to what exactly?).  This is the type of FedSpeak that throws an anchor around the dollar.  The dollar losing value buoyed up commodity prices resulting in higher demand for the commodity currencies (aud, cad, nok, nzd, etc…).  I will be keeping an eye out for the wave two pullback.

I always stay port-side with conservative lot sizing and wide stops when I see a pirate get-together listed on the economic calendar.

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Sails Up

Apply risk management to your alternative investments.

Short AUD/JPY

I expect the easterly winds to push down the AUD/JPY this week.  The Reserve Bank of Australia  (recent dovish rhetoric) did not hike rates recently.  Also the Chinese slowdown is putting overall downward pressure on commodity currencies.

However, I always rely on charts for navigable water, such as:

  • a weekly high-test with cci divergence
  • daily decelleration with cci divergence
  • top of a head & shoulders pattern on the daily chart

The Japenese Yen, a safe-haven (funding) currency, may rise above the AUD a bit this week to offset the expected decrease in the DXY.  I will be on the lookout for an updraft to the DXY to signal a flattening or decreasing of the Yen.

Use wide stops, in this case above JPY89.  Cap risk at a predetermined limit that does not change unless something outside of emotion justifies the change.  My target holding period is no more than 10 days, depending on the Winds.

trade closed:  stopped out at JPY89.2   risk capped at -1.9%

Short NZD/USD

High probabilility of the DXY  rebounding off 93, good probability of weekend gap in price action to fall, good CCI divergence on daily & weekly.  Conservative lot size and wide stop due to Fed meeting this week.  Stop loss set above USD00.75

trade closed:  stopped out at USD.755  risk capped at -1.1%

Read up on the Sintra Accord.

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fairweather & following seas