Update on Euro......Rebound still on the way

Update on Euro......Rebound still on the way

                   I wrote a post (here and here) to explain why Euro is time to rebound but it had been keeping falling after that. It suggests that risk management is critical anytime in your trading life. Catching a falling knife is not my trading style and I am patient to wait a reversal to take a position. In this trade, I cut loss several times with discipline and control the loss. Even though my marketing timing is not perfect, I still have enough capital to make a mistake and follow the trend lastly. Euro formed a double bottom on April and breakthrough short term resistance at 1.10. At this moment, I expect Euro still have room to keep the rebound alive.

          Figure 1: Euro price chart with my call (Red line).

Source: Barchart.com

                 Figure 2: Euro sentiment still is at extremely pessimistic. There still is a room for investor get more optimistic.

Source: SentimentTrader

                 Figure 3: Commercial hedger still accumulate a significant long position on Euro. It means the rebound on Euro still is likely to be on the way.

Source: SentimentTrader

                 Figure 4-6: The latest credit data shows that the fundamental condition in Europe is improving.

Source: Danske Bank

                 Figure 7-8: DAX Index and 10 Year Bund start a correction. More stock and bond investors will close their position on hedge against Euro and it triggers a rebound on Euro. I expect a correlation of DAX and Bund between Euro tend to be negative.

Source: Bloomberg

          All in all, Euro rebound is further to go when sentiment is still at pessimistic and Fundamental factor is improving. In addition, over stretched DAX and Bund start to pullback. It also can fuel the rebound. So stay on the boat.

Financial Crisis and US dollar Pullback

Financial Crisis and US dollar Pullback

 

         I write the post (here and here) to explain the reason why US dollar is time to pullback. Now make some update on this topic. According to history, when financial crisis take place, US dollar tend to get weaker either in bull or bear market. It is because when Fed has a tendency to inject liquidity into market or ease monetary policy for containing the crisis; it leads to weaker US dollar as the largest reserve currency all over the world. You can find this pattern in Figure 1. Given current background, recently parabolic rally of USD may trigger the outflow of capital from emerging market and worsen the current account of some resources focused countries such as Russia and Canada. In addition, some indicators I will go though as follow reveal the risk is building up although SPX still is close to new high. Moreover, US dollar now is overbought, over optimistic and over stretched. Pullback may be immediate due to financial crisis.    

            Figure 1: We can observe in the history that USD gets weaker at the start of financial crisis.

Source: Nordea Markets

            Figure 2: BofA Merrill Lynch Irisk Indicator plunge dramatically recently to make a divergence.

Source: PFS Group

            Figure 3: Bloomberg Financial Condition Index also keep falling since mid 2014.

Source: PFS Group

            Figure 4: Canada and Australia LIBOR-OIS worsen in sudden. (Two countries also is facing the housing and debt bubble)

Source: PFS Group

            Figure 5: Russia CDS hit a new high and International Reserve Asset hit a new low.

Source: PFS Group

             Figure 6: Gold keep to rally regardless of the parabolic rise of USD and no longer follow the plunge of the commodity. Smart money may flow into risk aversion haven and expect Fed may ease monetary policy or at least postpone the rate hike to prevent crisis to spread.

Source: StockCharts.com

              My takeaway is that there are some signals that crisis may be coming soon. Fed is likely to ease to contain the crisis. This action will make USD weaker. However, USD will resume the bull market because the capital flow form other market into US economy after the crisis is contained.

Opportunity to Long gold

Opportunity to Long gold

           In 2014, US dollar returns as a King among currencies. It become a the most crowded trade. However, it is two sides of the same coin. Commodity face a relentless bear market and crude oil accelerate to plunge in recent month. Over stretched rise of US dollar lead to oversold in commodity. I expect US dollar will take breather in its secular bull market(my view is that US dollar will rally in future 3 years at least and write a article to explain my point.). It is time to prepare to catch the opportunity to rebound of commodity. I choose gold as my proxy of this view.

Figure 1: US dollar rally is getting stretched when looking at the 6 month ROC in its history. US dollar performance is disappointed in the following 1 year.

Source: J.Lyons Fund Management, Inc

Figure 2: The US dollar hedgers accumulate a considerate amount of short position that is time to trigger a price reversal.

Source: SentimentTrader

Figure 3: The latest ECRI weekly Leading Index which plunge to be negative predict strong expansion of US economy at 2H 14 is time to decelerate.

Source: Advisory Perspective

Figure 4: According to SentimentTrader, the opinion towards US dollar had reached extremely optimistic level. At the same time, US dollar rise to a 11 year resistence.

Source: KimbleChartingSolution

Figure 5: Gold had declined by over 35% in Nov 14 which is higher than the slump in the all bear market in average historically.

Figure 6: The option towards Gold had reached an extremely pessimistic level.

Source: SentimentTrader

Figure 7: The Gold vs Gold miner Ratio had reached the level that had not seen since 2000 when is the start of secular bull market for gold.

Source: Short side of long

Figure 8: Two Gold Miner ETFs had breakthrough the triangle to rally. It is a bullish sign for gold.

Source: KimbleChartingSolutions.com

Figure 9: Gold react to be relative strong to other commodities even though US dollar makes a parabolic rally recently. (The latest NFP released today and beat above expectation but US dollar response weakly and gold perform well).

Source: Short side of Long

Figure 10: Gold had breakthrough the declining triangle.

Source: Short Side of Long

               All in all, it is time to build up a long position on gold. Especially, its price pattern is favorable to rally. I will accumulate position if the price keeps to rally in the next few days. At the same time, stop loss is used to control the risk. This is typical trading style of trend follower.