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A CURRENCY TRADER'S VIEW OF A LONG-TERM BOTTOM

Tim LuCarelli, Danny Riley

Guest post by MrTopStep contributor Tim LuCarelli of FXAddicts.com

This week begins the downside of the year, with less than 6 months to Jan. 1, 2014. The first half of the year stocks did well, the dollar went up and bonds, well, bonds got spanked. Yields on the 10-year are now pushing above 2.6% after hitting a low for the year of 1.6% just nine weeks ago.

Commodities continue to be hot, with crude pushing highs that we have not seen in over a year. Grains, with the exception of wheat, are within striking distance of their highs, while metals continue a big correction.

In May, the Fed reminded markets that sometime soon they would take away the punch bowl. This past week Mr. Bernanke changed the tone, reminding the market that time when he taketh away that punch bowl is still a ways off. Stocks rose, bonds rose and the dollar took a bloodbath.

So, now what?
Chairman Bernanke gives testimony in front of two congressional subcommittees this week, Wednesday and Thursday. Will he say anything to move the markets?  Probably not. Most of the time when the Fed is not trying to “influence” markets they like status quo markets and overall low volatility. Expect him to say almost word for word what he said this past Thursday.

Monday morning China’s GDP was the major influence until 8:30 Eastern when the U.S. retail sales and Empire State manufacturing were released. Expectations were for a bigger increase in retail sales than last month, both the core rate and the whole number. As it turned out, the June 0.4% increase was less than the revised number for May of 0.5%. As we expected, the slightly negative numbers, faced with the expectation of positives, caused the markets to sell off initially, only to rally through the rest of the day, the perception being that the Fed would continue their easing program longer, pumping up stock valuations.

By a totally different logic, if the numbers had been greater than 1.0% then markets would also probably have sold off initially only to rally later, in this case the perception being that the Fed would likely taper sooner. Then the reality would set in that the economy is in good shape and it is OK that the Fed starts tapering. Yeah, kind of messed up logic, but when are the markets logical?

The Empire State Manufacturing Index had roughly the same impact, with a number of 9.46. The same likelihood of a similar reaction to a negative number was there. The market would have reacted to either extreme in basically the same way—and for totally different reasons. Only a number in the middle ground would have been a non-event.

The bigger picture
Being a currency trader, I believe that all the markets are a function of the differences in economic activity between countries. Money always flows to the highest return, whether real or perceived.

I have also been trading a very long time and know that I cannot allow any prejudices to interfere with my daily trading decisions. Therefore, I try NOT to form an opinion about the market’s reaction to political or social events. I view them as temporary setbacks in an otherwise trending market.

Last week’s comments by Chairman Bernanke had an effect very much like that of a political event. The dollar was in extreme need of a correction and Bernanke’s comments triggered the selloff. It was very fast and very extreme.

The dollar has been in a downtrend for a very long time, since the early 1970’s. Price action is now pushing that multi-year trend line. We bottomed out in 2008 and tested the lows in 2009 only to retest them in 2011. A monthly close above this multi-year trend line will signal a turnaround. A close above 90.00 will confirm the bottom.

While this is a very long-term view, it is nonetheless the beginning of a trend. If you want to pick a bottom, here it is forming right in front of us. Because of the bigger picture view, days like last Thursday and Friday where the dollar corrected too far, too fast become nothing more than great buying opportunities. The move turns out to be nothing more than a confirmation that the U.S. is the place to be for investing.

____________________________________________________________

ES-09-13-1-Min--7 15 2013

The S&P futures have closed higher 13 out of the last 14 days, up 128.4 handles.
The S&P futures have closed higher 8 out of the last 8 days, up 87.4 handles.
The S&P is up 149% since making its March 2009 low.

Tuesday, June 25 +15.2
Wednesday, June 26 +14.1
Thursday, June 27 +11.1
Friday, June 28 -7.3
Monday, July 1 +7.4
Tuesday, July 2 +.50
Wednesday, July 3 +1.9
Friday, July 5 +18.2
Monday, July 8 +8.2
Tuesday, July 9 +10.1
Wednesday, July 10 +3.0
Thursday, July 11 + 21.5
Friday, July 12 +.20
Monday, July 15 +7.2

Total =  +128.2 handles

Our view (Danny Riley): The Asian markets closed mostly higher and Europe is trading mixed, with the FTSE up and the DAX and CAC 40 down. You know my term “thin to win.” Well, yesterday we put that rule to the test with less than 1 million ESUs traded. Additionally 150,000 of that volume was generated in Globex before the 8:30 open and before the retail sales data came out. The robots can't eat when the volumes are that low.  

According to the Ned Davis S&P cash study, the Tuesday of the July options expiration has been up 13 / down 16 of the last 29 occasions. Wednesday is the exact opposite, up 16 / down 13 of the last 29 occasions. While we still think the trend is higher, common sense says that with so many up days, there has to be a down day.  The other part of this is the stats show Thursday as being up 19 / down 10 and Friday as the weak day, up 13 / down 16 of the last 29. The Trader’s Almanac has expiration Friday with the Dow up 7 of the last 12 occasions with a 4.6% decline in 2002 and a -2.5% decline in 2010. We’re not calling the exact day the S&P will sell off and digest its gains, but we do think we get at least one down day this week.  

Our view is again to sell the early rally and buy weakness, keeping in mind that we are looking for a down day. And lastly it is very important if you are trading to be very patient. We don’t mean patient as in hang on to a trade and ride out big drawdowns. We mean patient in choosing when you enter. Use a sniper rifle, not a shotgun. When it’s this thin people make mistakes -- be smart and cut back.  

And always have an exit strategy before you enter. As always, keep an eye on the 10-handle rule, and please use stops when trading futures; live to trade another day.

  • It’s 8 a.m. and the ESU is trading 1676.25, down 1.25 handles; crude is up 72 cents at 107.04; and the euro is up 47 pips at 1.3117.    
  • In Asia, 6 out of 11 markets closed higher (Shanghai Comp +0.31%, Hang Seng +0.04%, Nikkei +0.64%).
  • In Europe, 9 out of 12 markets are trading lower (DAX -0.34%, FTSE -0.01%).
  • Today’s headline: “Shares, euro steady ahead of data, Bernanke” (Reuters)
  • Total volume: (LOW) 910k ESU and 2.9k SPU
  • Economic calendar: CPI, Redbook, housing, industrial prod., Fed Gov. Esther George
  • Fair value: S&P 1676.95 (-0.45), NASDAQ 3073.2 (+1.55)
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-7-15-2013
  • Ned Davis Expiration Study for July - https://mr-topstep.com/index.php/equities/3687-expiration-study-for-july

 
Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

_____________________________________________________
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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.
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