percent move in currencies or bonds creates a ton of action given the
amount of leverage the futures markets provide. If I’m lucky enough to
catch a decent piece of one of these big swings I walk away happy. That
would be a single. You need a few of these to make runs and win. But a
man on base is, well, a man on base.
It happens to be that I cut all spec positions well before the end of
the year. So I am looking at an empty plate. I’m looking for the next 5%
play.
Individual stocks are of course going to give you the greatest
opportunity for a 5% pop. Thousands do that every day. That is a very
different game. I want to pick a broad market index and ride that for a
bit one direction or the other. Basically you're talking about an S%P bet, a
swing at the bond market or a shot at a currency position.
I don’t see an obvious bet in the short run on the S%P. It looks like
two-way risk. The trend is your friend so often in this market. So you
could argue that the path of least resistance is still higher. But how
long is this going to go before there is the inevitable correction? I
hate buying high on short-term plays. So no S%P bets for me till the fog
lifts a bit.
Bonds will surely make a 5% move in the not too distant future. Once
again the chart is pointing lower. It would be easy to jump on the slide
down. But there are a lot of headwinds on shorting bonds right now.
The most significant of which is that all of the smart money boys on
Wall Street have been pumping up the talk for the ten-year with a 5
handle. That always makes me nervous. My worst fear on the short bond
side is that the talk of a major conflict on the debt ceiling escalates
and becomes an issue. Guess what happens when there is no agreement? They stop issuing bonds for a bit. A surprise like that would make short side bond guys puke. I’m not playing bonds for the time being.
So I’m stuck looking at currencies. I don’t see a reliable 5% move in
either AUS or CAN. The Euro is an interesting place to look for a quick
5%. That could happen in any given week. Once again, “Which way to play?”
The problem is that I can make a pretty good case for the EURUSD to
make a hefty move one way or the other. If the outcome is a toss of the
coin then it better to just not toss the coin at all.
So that leaves the Yen. I’m more comfortable playing the long side of
USDYEN than all the other options. We are currently around 81.80 so the
target is 86.00.
A return to 86 is supported by this longer-term graph.
The market has had a bid to it so far in 11’. There was a solid seller
above 82.00. We’ll see if he’s there the next time around.
Why this trade now? Silly answer, it seems like an obvious choice. I’m
just hoping some other folks see it that way too. If you’re looking for a
different voice on this consider these words from Ambrose
Evans-Pritchard at The Telegraph.
Japan
will slip back into technical recession. It cannot keep raiding its
foreign reserve fund to pay bills. Public debt will spiral up to 235pc
of GDP. Interest payments will approach 30pc of tax revenues. Fresh debt
issuance will outstrip fresh private savings this year. Dagong, Fitch,
and S&P will have to act. Downgrades will come thick and fast. This
time they will hurt.
Bruce,
Looking good so far on your USD-JPY. If the USD can hold the 50 day moving average, you'll be even happier over the next month.
bet a 1/5 favorite at the racetrack. Research done over the years shows that lowpricedfavorites give almost nothing in return to the takeout which is 15% most places. The minimum payout is $2.10 to show on a $2 bet. (through the magic of the negative pool, don't tell Bernanke, he'll be all in!!)
Bruce, nice informative post, thank you. Orly, thanks for this fascinating insight, I think I'll spend some time today looking at FX thru Orly colored glasses....love the Zebras and the 'DMZ'. :-)
Wait 'til I get to birthday cakes and quilting stitches!
I had to teach myself, so my terminology may be a bit strange, but the signals are real enough.
Best of luck trading!
:D
Here are some coming 5% moves for you:
Buy USDJPY
Buy USDCHF
Sell AUDUSD
Sell CHFJPY
I can do some real homework and try to tell you when these things are going to happen but right now, it appears as though the moves are going to be rather nice and steady as opposed to 5% in a day.
Unfortunately, I won't know until we get adjacent to the event. In the meantime, just stay in the market. It's not the only way to catch big moves but waiting and watching the chart that closely can be time-consuming.
One trick I use to spot coming large moves is to use the Awesome Oscillator Indicator. The indicator will create what I call a zebra pattern of alternating green and black (higher and lower...) bar groups as it returns to the horizon line. Both of these events (the zebra and narrowing bar length...) show uncertainty in the markets.
Once the AO reaches the horizon, everything gets very quiet with all the traders looking around to see who is going to drop a shoe. The bars on the AO at that time are microscopic. This is the area I call the DMZ.
When you see the DMZ/post-zebra set-up, post an OCO trade above and below the average adjacent candles. Boom...you're in the money. For an example, (though hardly perfect but you'll get the idea...), see the USDJPY H4 chart from 11.10.2010 to 12.08.2010 where there were three in a row.
Also, it appears that we have exited the zebra on the USDJPY H4 currently and are headed for a giant move as well, most likely to the upside. The USDJPY pair could very well end today (01.05.2011) at nearly 83.
Addo:
You know, something like that!
:D
Ultraleveraged FX is for chumps subconsciously looking to lose money quickly, but offhand I'd say your best chance for a 5% move is long CHF vs EUR. Research the calendars of the big Spanish government and bank bond auctions.
I would no way put a leveraged short on the Yen. It's true that Japan is approaching the limits of its extraordinary ability to fund its huge public debts with domestic private savings, but that doesn't put any near-term downward pressure on the Yen. On the contrary, the government is likely to increasingly lean on the banks to re-allocate away from foreign assets and towards JGBs.
Look at it like this: there is a big pool of Yen, a growing part of which goes towards consumption, a shrinking part of which goes towards investment/savings. Of that latter part, the government is taking a gradually increasing amount in absolute terms and thus rapidly growing share. You are correctly foreseeing a crisis, but incorrectly imagining the result - you are imagining that the resolution is for foreigners to step in and buy an increasing portion of JGBs. But to bring in foreigners on any scale, JGB yields have to go up so much, the whole country blows up in the process. When Japan can no longer fund domestically, it's game over. So Japan will just carry on funding domestically, twisting arms as much as the government has power to do that. When it collapses it will collapse suddenly and severely. Personally I don't see it happening this year, but I guess you'd better have a perch inside the Japanese banking system to have any hope of calling the timing on that one.
I don't know where Ambrose gets his information about Japan raiding its FX reserves to pay its bills. The logic is right: doing so would strengthen the Yen, stopping doing so would weaken the Yen. But if it's not happening, there's nothing to stop, it can't be a weakening factor on the Yen. So far as I'm aware Japan's FX reserves are going slowly up driven by the occasional attempts to weaken the Yen by buying FX reserves.
Being one of the few that is almost consistently bullish on JPY, I agree with your logic.
However, I think the 86 that Bruce is looking for is a goal that could be reached only from a technical standpoint. Especially when Japanese budgets are getting a little rough and we could see some stuff on the headlines.
After reading this article, I created some additional positions at 82 but I'll probably leave a little early before 85.
Better late than never.
Better early than late.
Disclosure;Long USD/JPY @ 81.40, 82
Happy day for us. Your target of "before 85" looks much better today. I hope you make a single (or a double).
bk
Thanks Bruce!
what about long vol if/when VIX <16?
Can't play currencies with the reaffirmed committment to liquidity swaps - there's a lot chances to lose out there. There's the MIB, they're out of favour with US. Commodities, Palladium should start moving lower, but when does the move start..?
tyler, Can you male all the scantily clad avatars slightly larger, and everyone elses avatars slightly smaller? thanks...
What is your time frame to make the 5%
I'd rather gnaw off a testicle than be long us/jy.
eur/jy came off 2.5% today in 3 bars.
Why not look there?
Bruce,
Your thoughts back in Sept brought my attention to the long Euro against CHF. It was good for 5%.
If we see 1.27 trade basis the cash this week I reckon it may be good for another 5%'er into Feb.
Bruce, if the USD sneaks back above the 50 day moving average, then copper is a great bet for a quick downside move.
Notice the important evening star formation over the last 3 days.
Copper is ready to break big to the downside. With 20% and 25% corrections in the last S&P corrections in Jan'10 (1 month) and Apr'10 (2 months), there is ample downside to come.
Why is this important? Because copper led the last two major downside stock market moves by 1-2 weeks.
http://finviz.com/futures_charts.ashx?t=HG&p=d1
I'd be willing to take the other side of the copper bet - it failed at 4.50 but i believe it will soon blow through it. It hasn't yet had the parabolic $1.50 move higher in 6 weeks as it had in 2006.
ZP, I am not suggesting you short it because it is the final top in copper or commodities. There can easily be one final leg; however, keep in mind that commodities do not all top at the same time.
There is ample space for a 20-25% selloff in copper, followed by a potential final vertical leg upward.
More importantly, if copper keeps going downward over the next week, then it is signaling an important top in the stock market is imminent.
Interesting perspectives indeed, thank you. Im hoping the selloff does not occur simultaneously in AU and AG.
Another important point about copper is the gap between "large traders" and "commercial hedgers" on the chart. It is as wide as any time in the last year. Each time it has coincided with a selloff event.
http://finviz.com/futures_charts.ashx?t=HG&p=d1
I expect that they will, but like corrections in the past, silver and gold may not drop as much as other commodities.
Silver and gold didn't sell in the Apr'10 correction, but they sold in Jan'10 correction.
Silver is sitting on the bottom of a critical 4 month uptrend line right now.
http://finviz.com/futures_charts.ashx?t=SI
Couple that with the critical action in the USD at the 50 day moving average and you've got a brew for much higher or lower prices depending on how the USD breaks.
I thought that the JP Morgue has bought up "not more than 90%" of the future contracts on copper, so unless they dump alot of copper, wouldnt the price just keep rising? or did I miss something?
Matt, cornering the market has been attempted many times in the past.
http://en.wikipedia.org/wiki/Cornering_the_market
It doesn't always work. There are lots of good examples in this wikipedia article.
In JP Morgan's case, they are likely trying to hoard copper to offset their short silver exposure (my opinion). It is dangerous since it is now widely known that they have massive silver and copper exposure. JP Morgan is sitting on a potential time bomb.
Again, I am not suggesting shorting copper, just use it as the stock market correction indicator that it was in Jan'10 and Apr'10.
Maybe a long straddle on the S and P? You said yourself you don't know which way it will move, but you are convinced it will move one way or the other.
The top is in! Sell all your silver now before you lose everything!
YAAAAAWNNNN. Wake me up when DXY hits 90.
Nice piece and well reasoned. Why not short the Nikkei, and double your chance of being right? There are no Japanese growth stocks that would scare me out of that trade.
5%- go long the CRB today would be a good buy day or if you think a greater pullback is under way short it you may get the quick 5% in the next few days but the overall trend is up . In the long run this is a long where the gains will be well ahead of 5% at years end but corrections are going to be fast and swift to get you those 5% all year
Thanks Bruce, but since US and Japan both want their currencies cheaper I prefer long SGD/JPY. Also, short EUR/NOK has been good. I like these other countries where they respect the value of their currency more.
brings back memories from when, for a few months, I read Tim Knight - I haven't visited slope for at least a year - a weird blog slope is/was
I'm not trying to be critical - we all have to find our own paths...but, you wrote an article about trying to protest the "system" by paying $.01 extra on bills, and now you want to make a 5% move somewhere in the same system?
But of course. Enlightened self interest is what they call it. I gotta eat?
I'm really glad you are so nervous about the bond market. This is broke city crash season round 4. It's going to be strange, unpredictable and ugly.
Gum up the Evil System. Send me $0.01. I gotta eat, baby.
There's nothing wrong with trying to gamble the system and crash it too, why not profit on the demise of it
As my brother says, "In chaos is profit."
Or as the Chinese proverb says, Crisis = Opportunity.
According to the Plan, "Ordo ab Chao."
+1 TJ..
BK, you should Sell 5% of your equities and pay off your Credit Cards. Then close those accounts.
While Big Ben is depressing interest rates? Hell no, I'm paying off those cards with dollars after BB has made the dollars worthless.
For 5% buy precious metals here.
Silver at $29.50
Gold at $1380.
Platinum at $1735.
I'd be wary of the USD action around the 50 day moving average here.
I am waiting for that resolution before jumping on anything.
I missed that I wanted to sell 2 days ago, and ended up askin .05 more than the market was giving now I am .5 lower, oh well I just wait 2 weeks
are we day trading PM's now??? if you don't believe we are headed another 50% in 1-2 years than you might want to just hold and stop buying
if you do, just buy when you can.. forget the price
I concur...i picked up silver and sugar today.