A Year of Reckoning

11 Feb 2016 09:13 GMT · Time Estimate: 4 minutes ·
  • Markets dealing with healthy, overdue correction
  • Better it happens like this than with rising inflation
  • A new technique to analyze charts
  • USDJPY long in play from 111.05

REALLY!? - I have two insights to share today. One is fundamental and the other is technical. For any strategy related updates, go over and take a look at today's video. Ok..so first the fundamental insight. Back in December when the Fed finally made the decision to pull the trigger and go ahead with the initiation of policy normalization, was it not clear to the market and the Fed that there would be fallout? In many ways, it's almost comical to think the market is up in a panic now about all of this risk liquidation when it was abundantly clear, at least from this traders point of view, that there would be a period of reckoning.

UNSETTLING - You just can't have 7 years of artificial support by way of ultra accommodative policy, fueling record high stocks, without some form of a meaningful correction when that accommodation is removed. Surely the Fed must have been aware if this fact, and if so, surely this reduction in risk appetite isn't going to be enough to force the Fed to reconsider it stance. But the truth is it may. This is even more unsettling to me. On Wednesday, the Fed Chair hung in and did not fully appease doves, still leaving the door open for additional rate hikes. And yet, you could definitely feel the reservation in her voice.

LESSER OF THE TWO EVILS - But it continues to be my opinion the Fed should lean more towards a gradual rate hike path than moving in the opposite direction. The Fed Chair has made it clear that with things the way they are now, inflation should start to pick up. Nobody thinks inflation will ever pick up again and that is a mistake. It will. And it will happen fast. As bad as things may feel now, they will be a lot worse if we are dealing with a struggling global economy and rising inflation in the US. And so, better to keep making these small hikes and managing the NECESSARY correction in risk assets, than letting inflation steer that ship.

BLOCK OUT THE PRICES - The second insight is technical. This is more about what I have learned over the year when looking at charts. This point I discuss in today's video as well. Sometimes when looking at a chart, we still don't have the clarity we want or need. As an example, looking at the USDJPY chart right now shows a market that has been falling like a stone and could soon be poised for a correction. But that's just not enough to jump in and buy. So what should you do. I think it is critical to be able to look at multiple timeframes to gain a better feel and insight into the market you are analyzing.

Better small hikes and managing NECESSARY correction than letting inflation steer that ship. Via @joelkruger

JUST LOOK AT THE CHART - So if you are looking at a daily chart, always pull up the weekly and monthly for additional clarity. More importantly, when you are looking at a longer-term chart, don't focus on the actual prices, focus on where you think the chart can go with your eye. So if you are looking at the monthly USDJPY chart and allow yourself to not be distracted by the price, your finger might take you to a normal correction which ends up being all the way down in the 105s!. This is why this is an important exercise. It really gives you great perspective. I often say, think of a monthly as a 5 minute chart and then these big moves that you think aren't possible, all of a sudden seem a lot more possible.

SHORT-TERM TRADE? - Of course, I'm not saying USDJPY goes to 105.00. I'm just saying this is something that could happen and should not be ruled out. But having said all that, this hasn't kept me trying to take a shot on a short-term basis. This latest collapse has set up what could be a nice little bounce ahead and I have bought in at 111.05. Let's see what happens.

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