Sails Up

↓€/AUD

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↓€/AUD

Capital flows look good:

  • According to the COT report, swap dealers are short the AUD
  • Hedge funds are short the AUD

Technicals are lining up:

  • Head & shoulders forming on the weekly chart
  • expecting CCI divergence on the weekly & daily charts

Downside:  DXY is expected to fall which will strengthen the €uro.

Also, China’s PPI is up, strengthening the AUD.  So, with all that, I entered an order at 1.585 with a normal stop.  Risking a full bell.

If the weekly chart plays out as expected I intend to hold this trade longer than my usual 1 week holding period.  Keeping a weather-eye on the DXY.

Update:  closed 2/3 of the position before the weekend then bulletproofed the chart.  Stop hunted on Monday; gain on trade was +25.6% of margin.

What To Do …And Not Do… In A Confused Market

What Is A Confused Market?

A confused market has several symptoms.  A confused market is more than just observed volatility.  It also ranges, has no clear trend, or no clear price action.  In a confused market, price may also get stuck between our traditional exponential moving averages (EMAs).  Think of someone spilling rum on your best nautical chart while you are preparing to get underway  …you can squint at it all day long but still won’t be able to make out the channels from the currents.

Observed volatility leads to expected volatility.  This is the thing investors may not like, financial salesmen do not like, but what the calm, patient trader needs to pay the bills. A  confused market has none of that.

In a confused market, patience is key.  Be patient, Stay up-to-date on fundamentals, update your risk model, calculate your probabilities, reconcile your accounts, wait for price action to cross the proverbial line in the sand, but do not make any hasty trades and gamble client accounts.

Remember, capital is one of the three key factors to economic prosperity and capital preservation is number one rule.

That all leads up to my recent trades –which have all been purely technical with a short holding period (and less than 2.5% gains).  I am currently holding a PLN and CHF long which will probably play out before Sydney opens.

The greatest challenge I face in a confused market is holding a trade for too long.  I use many off-chart market indicators that guide me on when to close a trade.  Those indicators are just not very accurate in a confused market.  Again  …p a t i e n c e.

A little bit goes a long way in times like these.

If you want to make sense of a confusing market, go visit the fine folks who taught me how to read a chart:  Infinite Prosperity, a Corp. Authorised Representative of Alpha Equities & Futures Ltd ABN 76131376415

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US: Federal Reserve FOMC Meeting Minutes

Economic Calendar: FOMC

The Federal Reserve’s Meeting Minutes

The Federal Open Market Committee (FOMC) always delays the issue of its meeting minutes. The minutes of the previous meeting are reported three weeks after the meeting.

Why The FOMC Meeting Minutes Are Important

The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors and traders guessing about policy changes and Fed officials did not appear on the speaking circuit to set the tone of expectations as frequently as they currently do.

Since the Fed moved up the release of the minutes to three weeks after a meeting from six (in January, 2005), the minutes have become a market mover as analysts parse each word looking for clues to policy.

However, the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have dissented with the rest of The Committee.  These dissentions can be important in forming future expectations.

Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement.

Fed officials make numerous speeches, which freely give their views to the public at large.  When they do this, watch out for extreme short-term volatility in the market

Generally,  I shore up trades when I see the economic calendar filling up with pirate meetings and wait for the storm to settle.

↓€/PLN

Weekly eur/pln market structure looks good, so I put in a foundation trade at 4.23 with a wide stop. After the weekly candle finished, I checked for CCI divergence & positioning on the COT report.

Today, CCI divergence is confirmed on the weekly & daily.  The CFTC reports that dealers increased their euro shorts & non-commercials are taking profit on euro long positions this week.

Initial foundation trade (4.23) is a 1/3 bell, but looking at the DXY, not sure when I will add to it.  So keeping a weather-eye on the DXY for now.

Update:  added a bit of outside leverage to the trade, held for a couple weeks and eventually scaled out on the 4-hour chart; closed at a total of +18% of margin.  this is an extremely volatile pair and my risk management model was definitely put to the test.

Great Britain: Consumer Price Index

Economic Calendar

The British Consumer Price Index (CPI)

A consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for consumption by most households.  For the British Consumer Price Index, the entire UK is taken into account.  It is calculated using the same methodology (HICP) developed by the European Union’s statistical agency (Eurostat). The British CPI is the Bank of England’s target inflation measure.

Why Is The British CPI Important?

Out of all inflation indicators, The consumer price index (CPI) is the most widely followed. An investor or trader who understands how inflation influences the markets will have a tremendous advantage over other investors and traders.

In countries that make up the UK (England, Scotland, Wales, Northern Ireland), where monetary policy decisions rely upon the central bank’s inflation target, the rate of inflation directly affects all interest rates charged to businesses and consumers.

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Remember, inflation is an increase in the overall level of prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence markets.

Inflation (along with risk premiums) basically explain how interest rates are set on everything from mortgages, auto loans and Treasury Instruments (bills, notes and bonds). As the expectations on inflation change, the markets adjust interest rates. The effect ripples across all asset classes:

  • stocks (equities),
  • bonds (fixed income),
  • and commodities.

Everyone pays close attention to inflation trends.  By tracking the change in inflation investors can anticipate how different types of investments will perform.

Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits leading to more tax revenue for government expenditure.

For monetary policy, the Bank of England (BoE) generally follows the annual change in the consumer price index which is calculated using the European Union’s Eurostat methodology so that inflation numbers are comparable across the EU.

UK Office For National Statistics

The Federal Open Market Committee

FOMC Interest Rate Announcements

What Is The Federal Open Market Committee (FOMC)

The FOMC is the policy-making arm of the U.S. Federal Reserve. The FOMC determines short-term interest rates in the U.S. by manipulating the overnight interest rate that banks pay each other for borrowing reserves.  Banks borrow reserves when a bank has a shortfall in required reserves. This overnight rate is the fed funds rate.

The Federal Open Market Committee also determines whether the Fed should manipulate liquidity in credit markets by other means. The Fed announces its policy decision (whether to change the fed funds target rate or not) at the end of each FOMC meeting. This is the FOMC announcement.  It also includes brief comments on the FOMC’s views on the economy and how many FOMC members voted for and against the policy decision.

Since the last recession, the statement also includes information on Fed purchases of assets, aka “quantitative easing”, which affects long-term interest rates.

Why Is The FOMC announcement important?

The Fed determines interest rate policy at FOMC meetings.  A FOMC meeting happens approximately every six weeks.  The FOMC meetings are the single most influential event in the markets.  For weeks in advance, market participants speculate about the outcome of each meeting. If the outcome is different from expectations, the impact on the markets can be significant.

FOMC The Fed Funds Rate
Effects Of FOMC Announcements Reach Far And Wide.

Why Is The Federal Funds Rate Important?

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates….All. Other. Rates.

A change in the fed funds rate (the lending rate banks charge each other for the use of overnight funds) affects all other interest rates from Treasury bonds to mortgage loans. It also changes the flow of  investment dollars. When bonds yield 5 percent, they will take more investment away from equities than when they only yield 3 percent.

Interest rates impact the economy in various ways. Higher interest rates tend to slow economic activity; lower interest rates tend to stimulate economic activity while at the same time erode pension fund returns and consumer savings. Either way, interest rates influence consumer sales. In the consumer sector, fewer homes or cars will be purchased when interest rates rise.

Furthermore, interest expense is a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits.  When interest expenses increase, net profit decreases which lowers corporate profit. The bottom line is that higher interest rates are bearish for equities.  While a low interest rate environment is bullish for equities AND juices up government tax revenue.  Get the picture?

 

ISM Manufacturing Composite Index

Always Check The Economic Calendar

What Is The Institute For Supply Management (ISM) Manufacturing Composite Index?

The manufacturing composite index from the Institute For Supply Management is a diffusion index.  It is calculated from five sub-components of a monthly survey; there are eleven sub-components in total.  The survey respondents are purchasing managers from roughly 300 manufacturing firms nationwide.

The entire survey asks purchasing managers about:

  • general direction of production
  • new orders
  • order backlogs
  • their own firm’s inventories
  • customer inventories
  • employment
  • supplier deliveries
  • exports & imports
  • prices

The five components of the composite index are:

  • new orders
  • production
  • employment
  • supplier deliveries
  • their own firm’s inventories

Note that the five components are equally weighted. The questions are qualitative (not quantitative, so no specific numbers).  Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

WHY IS THE ISM MANUFACTURING COMPOSITE INDEX IMPORTANT?

The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is solidified by the fact that it is available very early in the month and is not subject to revision  –this lowers the probability of reporting shenanigans.

Investors need to keep their fingers on changes in the economy because it dictates how their investments will perform. Tracking economic data such as ISM manufacturing lets investors know what the economic backdrop is for various markets.

Remember, the stock market likes to see healthy economic growth because that translates to higher corporate profits.  And, the bond market prefers slow growth and is very sensitive to whether the economy is growing too quickly which gives rise to inflationary pressure.

ISM manufacturing data give a detailed look at how busy the manufacturing sector is and where things are headed. Since the manufacturing sector is a major, major source of cyclical variability in the economy, this report has a big influence on the markets.  And remember, it cannot be revised once the number is released.

A few ISM sub-indices provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on these sub-indices to help determine the direction of their interest rate decisions (in case inflation signals are flashing). Since inflation leads the bond market, the bond market is highly sensitive to the data listed in these sub-indexes.

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ISM Manufacturing Correlations

The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market (existing bonds are valued higher when interest rates are expected to fall).

Also, a healthy manufacturing sector, indicated by rising ISM index levels,  increases the expectation of higher corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall.

ISM Manufacturing, What Do The Numbers Mean?

Readings below 50 indicate a shrinking manufacturing sector but overall GDP growth is expected to remain positive until the ISM index falls below 42.5 (based on statistical data through January 2011). Readings between 42.5 and 50 suggest that manufacturing is in decline while GDP is still growing (very slowly).

As mentioned above, the various sub-components contain useful information about manufacturing activity. The production component is related to:

  • industrial production
  • new orders to durable goods orders
  • employment to factory payrolls
  • prices to producer prices
  • export orders to merchandise trade exports
  • import orders to merchandise imports.

Vendor (supplier) deliveries are another important component of report. The more slowly orders are filled and delivered (inventory turnover), the stronger the economic growth and expectation of higher inflation. When orders are filled quickly, it means that producers don’t have as many orders to fill (or there is a supply glut).

The ISM manufacturing composite index and its sub-components may show monthly volatility, so check the three-month average of the monthly levels to spot the trend and calculate the probability of an interest rate change.