The past several months I have been increasingly trading the currency markets more than anything else. I haven’t had much to say on the stock market. Once again we have had another pullback the past few weeks but once again it is looking like another dip to be bought, rather than the beginning of a decline. I think we’ll see ES test the 1846.5 high once more this year.
It’s possible ES trades up to 1900 this year but ES drops much, much quicker than it climbs- this means I can’t use much leverage on ES if I want to trade with the prevailing trend. My strategy has been to sell volatility. I simply wait for the big drops then sell puts on the first up day following a big (50+ point) decline, usually 100-150 points below the recent low. I have mentioned before that anytime the markets drop, option prices explode. In non-volatile times you can usually sell options 30 points away from the current market price expiring in 5-7 days for about 2 points. But whenever we have a 50+ point decline, option prices 100-150 points away from the current market price begin trading for around 2 points (expiring in 5-7 days). The key is to sell only as many puts as you can comfortably afford being long contracts of ES ie if you have a $10,000 trading account you should only sell 1 put. With each put selling for 2 points, you make about $100 per $10,000 each week, or 1% per week and 4% per month which is good, but for a trader this is not the most efficient use of capital, and big declines don’t happen every month.
The currency markets rise and fall more evenly and you have many more options to control leverage, so you can take full advantage of your account size and trade every trend in every currency market. The prevailing trends have been:
AUD – down
CAD – down
CHF – up
EUR – up
GBP – up
JPY – down
Gold – down
(referred to USD)
I’m writing this post now because we are at a time of opportunity in the JPY and Gold markets. Specifically these markets are in downtrends but are rallying.
I believe JPY will continue to drop for another few years at least. Currently the Yen is around 9.8. I think it will drop all the way to 8.1 (2007 low) and possibly further. I think upside will be capped at 10.4.
I believe Gold will drop below 1000 and upside will be capped at 1350.
AUD is in a downtrend, if it takes out 0.8049 (2010 low), I think it will drop all the way back to 0.5975. Since AUD is currently in a bear market rally I am shorting it. However if you look back over the past 6 years the uptrend is still intact and because it is still holding a higher low compared to the 2010 low, it’s possible that it rallies strongly from this point on. So I am not using as much leverage here as I am in the Yen and Gold markets.
CAD is in a downtrend and much weaker than AUD. Upside here should be capped at 0.94-0.95.
GBP is stronger than CHF and EUR. So I focus on going long this market more than the others. I believe GBP is headed to 1.7043 (2009 high). Downside should be capped at 1.585. Something would be wrong if it dropped that far.
EUR is still in an uptrend but over the past few weeks the price action has hinted that the trend may be changing. But I remain bullish on this market, I think we will see 1.3834 again this year and that will be a buy signal and that the Euro will head back to 1.49-1.51 over the next few years, maybe quicker. Currently EUR is at about 1.36 and I think there still may be some downside to go, so it may drop to the 1.34 area. Something would be wrong if EUR dropped to 1.27 and it shouldn’t drop anywhere near that far.
CHF is similar to EUR and is headed to 1.168 at the very least. This currency has recently been stronger than EUR, so that is the only reason I mention it at all.
Overall it’s all about the interest rates in the currency markets and JPY has the lowest interest rate and needs to be this low (CHF is lower but because this market is rallying it is probably unnecessarily low). AUD and CAD interest rates are too high hence we’re seeing drops in these markets. GBP has a higher interest rate than the EUR, so it is stronger.
Europe in general has been reluctant to cut interest rates so their currencies stay stronger than the USD. Yellen is the new Fed Chief and so far she sounds like she is going to keep devaluing USD as much as Bernanke and maybe even more. So I am not seeing any fundamental reasons for a big USD rally and therefore any pullbacks in the Stock Market are purely technical and should be viewed as dip buying opportunities.
At some point we will have a big correction in the stock market. It will carry us down to the 2007 top around 1580. But even if this happens, we will still be in an uptrend. Usually tops are very complex and consist of several tests of the highs. We aren’t seeing anything like this right now so I’m betting ES at least trades up near 1846.5 again.