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Prop Trading Futures

Commodities, Financials and FOREX Special Situations for the week of November 23 2015

Commodities, Financials and FOREX

Special Situations

for the week of November 23 2015

editor : Robert Main

MARKETS IN PLAY

Futures, currencies (and, occasionally, stocks) that have completed 10+ week chart formations (Head and Shoulders, Triangles Cup and Handle, Rectangle or Wedges) by means of decisive breakout.

Markets that are in Play are moving toward their measured move target and never had a serious pullback to the price range prior to the breakout.

Within these markets I’m looking the daily charts with the aim to:

  • build a position trade of expected holding period equal three or more weeks;
  • engage in swing trade of expected holding period equal to two or less weeks;
  • build a combination of the two above.

HOW TO APPROACH A MARKET IN PLAY

A market that breaks from a 10+ week long chart pattern gives to traders two edges:

  • A follow through from from the breakout trigger price in the direction indicated by the chart pattern.
  • A follow through of subsequent breakouts from smaller chart patterns in the same direction.

The probability that each single trade plays out in the favour of the trader is 50% and the result of each trade is unknown to the trader (no matter the amount of time and the quality of his or her analysis).

SCAN MARKETS AND PICK SHARES, CONTRACTS AND PAIRS

I do believe that successful discretionary trading has more to do with correctly scan markets and find the right picks than with trade management. Good traders usually come up with much smaller watchlists than novice ones. The latest tend to have too much tolerance for less than ideal setups. Chart analysis is a skill and as such it requires practice and time. A master trader sees things that a good trader cannot see (unless guided). While scanning through markets, is true the adage according to which the less (positions pass the filtering eye of the trader), the better.

CAPITAL ALLOCATION TO EACH SINGLE TRADE

It is at trader’s discretion to assign capital/risk (variable from “zero” to “max risk”) to each single setup. Over the long run this is a key ingredient of discretional trading success.

While systematic trading foresee some fixed money allocation rules, a discretionary trader relay on its intimate knowledge on a given market to determine how and when press “the pedal to the metal” and when be more risk averse.

CURRENCIES – USD-JPY

The validity of the breakout from the 2 months consolidation was never put into question, but yet the USD is struggling to gain against the JPY. Longs do not want USDJPY to close below Monday’s low.

CURRENCIES – CHINESE YUAN

The predominant pattern, and primary interpretation of the long term price action in the USDCNY exchange market, is a multi-year bottoming ascending pattern that – so far – is playing out nicely.

Shorter term, the cross rate two weeks ago has completed a pennant that is likely signaling the half-way to the measured move target.

CURRENCIES – EURCNY

Technically speaking, the EURCNY has completed a bearish flag, but since the completion of the formation the market has not move much. Levels to watch below are 6.7 and 6.5, the both can act as strong support.

CURRENCIES – EURO

After around 9 months of consolidation, the EURUSD has started a new downtrend.

Back in October, the rate had a decisive breakout with just a small (intraday) retest of the lower trendline of the Triangle. The pair is now sitting on an important support level> 1.05. Below it, look for parity. I’m short.

CURRENCIES – SWISS FRANC

Sitting just above 2015 lows. The trend is down, as confirmed by a completed Symmetrical Triangle.
Wishing I was short here.

COMMODITIES – SUGAR#11

In the past few months I pointed out a descending channel. This pattern was completed at the end of October (see the second chart below, showing SGG ETF).

Now, on Friday, Sugar futures (first chart below, showing March Sugar) completed a second bullish classical chart pattern, a monthly Symmetrical Triangle.

Obviously two bullish pattern in a market that has been in downtrends for years is something that should ring the “opportunity” bell to speculators. Holding 2 layers of longs here.

COMMODITIES – GOLD

Still in a downtrend with 1, and arguably 2, bearish setups in play.

DEVELOPING PATTERNS

These markets are not trending (in the sense that are NOT in “in play”, as per the definition in the previous paragraph). In this category are included all markets that I believe have the potential to start to trend and be “in play” in two weeks or less.

A regularly (in my case, once a weekly basis) review of developing patterns not only allow a trader to be prepared and do not miss eventual breakouts, but will also allow to build anticipatory positions and, finally, to train the eye to the price action.

ANTICIPATORY POSITIONS

Anticipatory positions are build in those markets where simply buy or sell the breakout would not be the best thing to do (either because of the structure of the market – i.e. in case of patterns with sloping trendlines – or because of the size of the position that one wants to build within the limitation allowed by his/her risk management rules).

Trade anticipatory positions means to place a bet in the “chaos” of a directionless market. In 90% of the case I’m against building anticipatory positions because they are based on the wrong assumptions that the trader “knows” in which direction the market will breakout and also when.

FINANCIALS – NQ

Here we do not have any chart pattern in play: I cover this market mostly due to several e-mails request I got this week. In my opinion, there is NOT a continuation bullish Inverse Head and Shoulder that is near to be completed in this market. Nevertheless, NQ is trading closely to 2015 highs and few hundreds points below all time highs: so it makes sense that in the next week bulls will try to push it close to 5000 (that is also the perfect round number for an headline…).

In conclusion, I remain overall bullish US equities, but during the next 2 weeks I will watch closely the 4756 level to see how the market moves around that level.

CURRENCIES – USDBRL

The long term interpretation of the USDBRL indicates a much weaker Real to the years to come.

Shorter term, a small 2-month pennant can fuel the next up leg in the USDBRL cross rate.

 CURRENCIES – GBPAUD

GBPAUD has been in an up trend for the past 2.5 years, so bulls have to be respected up here.

But, a 4.5 reversal pattern (a Head and Shoulder) can eventually be completed below 2.007, roughly. If such is the case, expect a move down to 1.9416.

CURRENCIES – AUDUSD

Long term chart is pointing down. Shorter term the Aussie is possibly forming a Rectangle.

FINANCIALS – ZF

Below I provide (with no further comments) the weekly chart of 5Yr T-Notes. Still early to look for a reversal, but this is something to look for in 2016, a year that can see an important new bearish trend in US Bonds.

COMMODITIES – CORN

Make or break situation for Corn that, so far, has not been able to decisively break the lower trendline of a year-long rectangle.

COMMODITIES – CRUDE OIL

Very bearish. Last week mistakenly interpreted the daily chart as a continuation bearish Head and Shoulder, but the lack of overlap between the right and the left should makes this interpretation weak. That said, Crude looks bearish to me.