This is a premium weekly analysis sent (23 June 2012) to all Capital3x trading and indicator subscribers which has now been opened for free access. This is part of the weekly analysis sent every Sunday to prepare subs for the week ahead.

Forex portfolio performance

There are two important lessons that I want to share with you as we begin the new week.

• Lesson 1: Trading is not the most difficult profession but it will rip you bankrupt if you carry your egos to the trading desk. You really dont stand a chance if you think you know everything. Even if you are veteran trading for over half a century, do not ever consider yourself to be the master out there cause you are not. On a long enough timelime, even a monkey can beat you down. There are circumstantial evidence for this.
• Lesson 2: You do not need to pick the top and bottom but you do need to stay out of uncertain trades. Bring a high level of reliability to your trading.

This being a weekly update, over 20 charts and setups. Fundamental analysis has been added given that this was FOMC week with possible trend changing minutes? The jury is out on that.

FOMC Minutes discussion

The FOMC unsurprisingly toned down their assessment of the economy. Statement sees economic growth to pick up only “very gradually”. In reaction to the gathering economic clouds the FOMC extended Operation Twist, which had been scheduled to expire now, until the end of the year. Specifically, the Fed will do the Twist at the current pace and altogether exchange $267bn of under 3-year Treasury paper into 6 to 30 year Treasury securities. This is basically the total amount of Treasuries in the Fed’s Securities Open Market Account to fall due until December 2015. Also, the FOMC confirmed the 0.00% to 0.25% target range for federal funds and continues to expect rates to be extremely low “at least through late 2014”. Jeffrey Lacker (Richmond Fed) again cast a dissenting vote. FOMC projections: The FOMC now sees GDP growth of 1.9%-2.4% in the fourth quarter of 2012, a downgrade of 0.5 percentage points when compared with the April take. For 2013, the central tendency is 2.2%-2.8% (down from 2.7%-3.1%). The unemployment projections consequently are higher by 0.2 percentage points for this year and next. Finally, headline inflation for the end of 2012 is now seen at only 1.2%-1.7% (obviously a consequence of the recent steep decline of oil prices). Finally, FOMC members take on the path of Fed funds did not change materially. Still three members see the appropriate timing of the first rate hikes as early as 2012, even if the most hawkish “demand” for 2012 has been reduced by 50 Bp to 0.75%. In Bernanke’s view, problems with the transmission process somewhat mitigate the effectiveness of monetary policy. While unconventional measures still have stimulating effects, the Fed also has to keep an eye on risks and costs of these measures.

The Fed downgraded its economic assessment, does not expect any  improvement of the unemployment rate for the coming quarters and is confronted with  increased global headwinds. Given that backdrop, the Fed, by opting for an extension of  Operation Twist, decided to do the barest minimum. In our view, there is still strong opposition within the FOMC against rolling out QE3. Only a further deterioration of the labor market or materially increased financial market tensions would probably force the Fed to further boost its balance sheet. This reluctance to up the ante might be due to some skepticism on the part of policymakers whether further QE would be effective. They obviously fear/assume a declining marginal utility of doing ever more.

US Housing improves

Against the backdrop of record-low mortgage rates, fewer vacancies and rising rents (chart),  the number of building permits rose to an annual rate of 780k in May from 723k in April, clearly exceeding expectations (see table). The increase came despite the fact that a number of potential borrowers do not meet banks’ lending criteria, thus dampening activity. Both single-family homes and multi-family units contributed to the gain. At the time, housing starts dropped to 708k from an upwardly revised 744k (previously reported as 717k). However, the decline was entirely accounted for by a 21% fall in starts of  multi-family houses – a very volatile series – while 3% more single-family houses were started than in April. Moreover, we regard the starts data as a less reliable indicator of the underlying trend than permits. Also, the increase in permits in May should translate into more future starts. In sum, the report underlines the view that the housing sector is on a moderate upward trend. Based on data for April and May, housing starts printed a monthly average of 726k in the second quarter, up from 715k in the first quarter and 678k in the fourth quarter of 2011.

EU recession worsens

The purchasing managers’ indices (PMIs) for June turned out disappointing once again. The index for manufacturing continued to fall by 0.3 points to 44.8. Its service sector counterpart stabilised at the low level of 46.8. Germany, too, is finding it increasingly difficult to decouple from the rest of the euro zone. The PMI for the German manufacturing sector
fell 0.5 points to 44.7, and the index for the German service sector even dropped 1.5 points to 50.3.

The stabilisation of the euro zone economy in the first quarter of 2012 was only a brief pause in the downturn. In the second quarter, real GDP presumably continued to fall versus the first quarter. Since April, the purchasing managers’ indices have been moving at levels seen in the past when the euro zone economy was contracting.  Besides fiscal consolidation in the periphery, it is mainly the uncertainty emanating from the sovereign debt crisis – which had increased noticeably in the run-up to the parliamentary election in Greece – that is weighing on the euro zone economy.
The fact that Germany, too, is now increasingly being gripped by the downward pull of the sovereign debt crisis is a concern. The fall of the purchasing managers’ indices and the recent decline of the Ifo business climate send a clear signal.

Misc Setups

JNK/TLT ratio had been diverging as noted here and here and here. Am sure you would have been well cautioned on the fact that equity markets will adjust to represent bond flows and hence had a high probability of a correction which came as expected.

Copper has 50 DMA at 3.526, 100 DMA at 3.680 and 200 DMA at 3.690. Copper continues to diverge from the financial markets and it does reflect on how detached the real economy is from the financial markets. This looks increasingly like a situation where financial markets are being pulled down to the earth under the gravitational force of recession underway though not entirely yet visible in data.

The put call ratio is at well balanced 0.61 making way for two possibilities: Markets could spend a few days without much movement or it could continue its down ward trajectory with enough room to run down.

The VIX VXO ratio is stable at 1.012 with no specific divergence to take note off yet.

The NYSE volume declining to advancing issues continue to support on its upward trajectory and the more recent example in 2011 suggests how this ratio can suggest building steam for a major correction in markets. In 2011, the 10 DMA of the ratio started to upward journey in January and continued steadily up the slope till July before a major burst higher. Markets corrected over 10% in July and August 2011. Surprisingly 2012 too has seen the ratio upward trend since Feb 2012 and still maintains to move steadily higher to 3.2299. In July 2011, as the ratio clipped 4.5, we saw the bulls throwing in the towel and led to one of the strongest correction in this 3 year old bull market. Keep your eyes open for the deteriorating internals.

The Australian dollar to the Japanese Yen weekly chart suggest that the latest sell off seen last week may be a mere correction in a move on SPX which should now extend higher. The aussie yen pair hardly had a bad week in June and does seem the forex market expect the carry trade to continue. Take note please.

Shanghai Index is still heavily weighed down by a slowing economy as growth drops to 8%. The index is well and truly under the 200 DMA and the 50 DMA both of which are now getting closer to a June first week gap at 2360. Will we see a late June rally to fill those up?

A few days back some one made a comparison in the trade room about how yen weakness is not exactly synonmous with risk trades and did support with some data which was only as old march. Now let me draw out a longer time frame to prove what I was trying to say. Now it is globally accepted across trading desks that yen is a carry currency. Since 2000, in fact yen has more months under its belt as a leading carry currency to help risk trends. Traders borrow yen (at 0%) and invest into higher yield currencies and hence result in global risk trends and waves. Post 2008, the dollar has taken the chief role of a carry currency courtesy Feds willingness to keep dollar weak via monetary means. But yen has had its fare share of carry even post 2008. This normally happens when bonds begin to correct helping the yen carry but till now has only been temporary. But in 2012, yen carry has really been found to be one of the strongest since 2008 Lehman crisis. The question that we need to ask is “Is the US FED slowly disengaging from monetary measures allowing its Japanese counter part to take over”.
This is not a difficult concept but I needed to put this down on paper as this concept was doubted in the trade room. Trading is not difficult but it will rip you bankrupt if you carry your egos to the trading desk. You really dont stand a chance if you think you know everything. In fact I will be increasingly watching for egos in my trading room as I have had whiff of it. No one should consider themselves above the markets. I dont care what you did 10/20/30 years back. We live in the present.

Forex Setups

The inside day on CADJPY has helped the prices as it caters away from the 200 DMA and now well on its
way to 78.9 and increasingly looking like 80.15.

The weekly charts are above its 100 WMA at 78.13 while on daily it is above its 200 DMA at 77.9. This is looking all set for a move to 79.27 on the weekly.

EURJPY inside day at 99.5 was clearly an extension of the uptrend and sitting pretty well at 101.04. The falcon daily on EURJPY was +1 since 100.57.

EURJPY weekly took support at the lower BB25,2 at 95.06 and since then has been on a mission to test 103.54. The weekly Net lines lie at 103.4 and above which we will see further buying pressures.

The weekly AUDJPY is painting similar pattern to CADJPY weekly with a few pips away from a test of the weekly mid BB 25,2 line. Further moves to 82.94 is a possibility if we close above the weekly mid lines at 82.86. But we must take note that pair is now headed into high resistane zone with many confluences and SMA lines converging. The free and easy move up off weekly lower BB line is now over.

FBTP (Italian 10 year) has finally stuck the target I spoke about in last weeky piece at 100.3 to 100.5 which is the weekly mid line for the BB 25,2. Now it may fluctuate around this level for some time as it test both side of this zone around 100.5 making trading the euro difficult.

The EU schatz (EU 2 year government bond) is now at the weekly support at 110.480 and hence suggesting a bounce on the weekly. Could this be the opportunity to makean entry into EURJPY?

A large inside day on the SCHATZ daily charts almost making its presence invalid on the daily schatz
suggest there could be a minor consolidation on the schatz daily charts.

The US 2 year is at the daily BB25,2 lower line but importantly has an inside week printed. This could be significant for USDJPY effectively capping its rise. The Inside week if it does resolve to the downside
will have major implications. The test at 110.05 should come soon which is the broken horizontal line post the FOMC decision

ES weekly lines up and closes a tad below the 25,2BB weekly lines at 1337. The weekly stochastics and vortex Oscillators are all in uncertain zones making trading hazardous and hallucinating where you start hypothesizing scenarios with hardly any degree of reliability.

An inside day on ES daily should be evidence that we could pause here if not immediatelyt snap back to 1355. This correction looks ove given the carry trade via yen as pointed out on CADJPY, AUDJPY and EURJPY. The fact that the future ends well above its daily mid line of BB25,2 should add significant confidence to the bulls.

Dollar Index daily charts are now at the mid line of BB with no clear direction preference. We need to wait and see how the dollar resolves here and then trade the direction. There is no need to jump early and expose to any risks.

The weekly dollar index charts are now retracding off its weekly upper bands
and may be on its way to test the mid line line under 81. The trend is overwhelemingly moving higher
as stochastics and Vortex are in bullish zones. The dollar index is now well clear of its congestion at 79.9 zone
and it is only a question of when rather than if dollar index will move to test 85.zone.

The Falcon EURJPY daily +1 at 100.52 and our subs have been adequately informed about the implications of this signal. This is one of the most important and clearest trend events that have happened in the last 10 days. It does increasingly look like that we are about to enter a period of yen carry than the dollar carry. Risk trades if at all will now be supported by an increasingly weaker yen that a weaker dollar. This will happen while some will be writing about broken correlation and scratching their heads not knowing that yen too is a carry currency just like the dollar as both enjoy zero rates and dovish CBs on the back of much lower inflation than the rest of the world. There are if and buts in the above para and hence needs your careful thoughts before finalising your views.

The Gladiator since 15 June 2012 provided more than 30 handles of winners on ES (SPX Futures) and 2 fakes. All in all Gladiator continue to strut around its status as high reliability signal than a some flip flopper who will bend to whims and fancies of traders who want it do certain things.

Verdict: It has been quite a week with ES futures running through both sides of the risk train with upside tops at 1360 while on the downside we pierced 1320. Given the evidence above esp from the forex markets represented by the yen charts, it does increasingly likely that if we hold 1305/08 we are headed once again 1357. Rest of the charts from forex and commodity charts are above. 

1. The June Live Trade Sheet
2. The June Live Trade Room
3. The Charts corner
4. C3X Performance FX portfolio
5. The Bond auction schedule can be found here: Bond schedule
6. The speaker schedule can be found here: Speaker schedule

The Indicator links are provided here:

1. Falconfx EUR/USD
2. Falconfx EUR/JPY
3. Falconfx USD/CAD
4. Gladiator ES