This Week’s Trading Review & Market Forecast 4th August 2012

This Week’s Trading Review & Market Forecast 4th August 2012

It’s been a torrid Week for my trading with a series of events created by Draghi’s Thursday speech that really caught me out on so many levels.

Thursday’s violent Market sell off is the type that either follows through in subsequent days or ends in a consolidation period but this Week a violent sell off on Thursday was followed by an equally violent rally on Friday and I didn’t see that coming. In fact, even my day trading system which I’ve started to build trust in remained on a sell signal throughout much of Friday before being stopped out.

So, how did this affect my Swing trades?

The initial spike upwards on all risk markets managed to stop out my AUD:CAD swing short as new high’s were made incurring a loss of  -46 points. Not a huge loss thankfully, but somewhat disconcerting when minutes later AUD:CAD was trading 100 points lower.

Prior to the Drahgi speech the EUR:GBP swing long was showing almost +100 points profit so I felt the sensible thing to do here was raise the stoploss to breakeven, particularly as I was also running the AUD:CAD and GBP:USD positions and didn’t want to risk some great overall profits turning into large losses, which is generally unlikely, but equally possible.

EUR:GBP was eventually stopped out for break-even at the low of the day and you can see the pain in the following chart as Friday striked up a rally breaking to new highs:

The final swing trade of the Week was the one I considered the riskiest, a GBP:USD long. I liked this trade because I’ve seen price characteristics on Cable similar to those of this Week quite often in the past, and just as Cable looks like collapsing it magically recovers. Although not confident of a recovery, I felt the technical aspects of the chart allowed me to take this risk with well defined levels of where the trade would become wrong, so I entered long at 1.5550

In the hours prior to the Draghi speech Cable rallied hard. I didn’t want to mess with this fairly young trade so left stop losses as they were. In the huge volatility following the Draghi speech whilst seeing the AUD:CAD position being stopped out and the EUR:GBP trade rapidly losing it’s profits I felt the sensible option was to bank half the profits from the Cable long, thus exiting half the position at 1.5639 for +89 pips. Cable did continue to sell off hard and the remaining half of the trade was quickly showing a 60 pip loss so I felt taking that profit was the right thing to do. In the following 24 hours Cable made a huge recovery and now goes into the Weekend showing +90 pips profit on the remaining half of the trade.

The question is, how could I have managed my open positions better during that huge volatility?  Well, I don’t know the answer for sure. Had I have left stops where they were originally placed and not touched anything I’d have still been stopped out on the AUD:CAD position so no changes there. I would however still be holding the full GBP:USD trade and the full EUR:GBP trade and both would be showing very nice profits. Conclusion here is that I’d have been far better off by leaving everything well alone until the markets settled. But what if the market had continued it’s descent on Friday? Well if that had happened I’d have ended up stopped out of all of the swing trades.

In reality I don’t think moving the stop loss to breakeven on the EUR:GBP trade was a bad thing to do. At the end of the day trading is about Capital preservation and by raising that stop I removed the risk of losing any Capital regardless of what the market chose to do. Taking half profits so early into the Cable trade was also a fair thing to do, because in doing so I’ve removed the risk of taking an overall loss on the trade whilst also allowing the remaining portion of the trade to play out as the market pleases.

In conclusion we can look at this from 2 angles. Firstly, stops and targets are set at the initiation of the trade and of course we should stick to them throughout the life of the trade, but the 2nd angle being that I took action by manually managing those trades and that action removed the risk of an overall loss being taken regardless of market movements. Sometimes you can enter a trade with a certain market outlook, but that outlook can change during the price discovery process whilst the core analysis that led to the trade remains in place. Making mid-trade adjustments that reduce overall risk in the market during uncertain times can cost potential profits as it did with the EUR:GBP trade, but the most important thing of all is that in making those adjustments you are preserving the risk to your Capital and that’s what trading is all about especially as the learning curve never ends.

Stock Market Outlook

This outlook is specifically based around the DOW chart which I based the following analysis.

Cobra is showing evidence of non confirmation and weak internals behind Friday’s move.

Volume wasn’t particularly high so it’s not a major accumulation day either.

Quite difficult to confidently predict direction at the moment, but looking at the Daily (DOW) chart and it’s clear that tops never look like this, so I’m saying there will be higher numbers ahead.

The moves from 27th June to 7th July 2011 and 18th July to 22nd July 2011, and possibly from memory the 24th April to 1st May were all based on money leaving bonds and pouring into the stock market. All those moves ended in significant tops but today was the first day of that bond money moving over suggesting there are a few more up days ahead that will come regardless of bad data.

There are no major technical resistances ahead to prevent a test of 2012 highs.

If price goes higher than todays high, then there’s no negative MACD divergence left that is required to be in place at all meaningful highs so we’ll have to break 2012 highs to get that unless we chop around at current levels for ages.

As I’ve stated before on my ADVFN forum, I’d say first signs of weakness would be in the form of more than 2 consecutive red 4 hourly closes.

As far as MA’s are concerned, DOW shows Golden Crosses on every time frame, the only time frame that doesn’t have all MA’s in the right order for a rally is hourly which still has the 20MA below the 100MA but this will occur by 1am Monday just through momentum.

Technically, everything appears to be in place for a market that’s going higher, and the only thing that can stop it would be a bearish engulfing on Monday.

But, as I said at the beginning of the post, Cobra is showing evidence that today’s move was on weak internals.

Finally, history proves that July is a trend changing Month and the extreme July low or high usually sticks for considerable time. In the current case, that would be the 12th July low.

Whatever happens, those gaps at 11,134 and 11,212 remain to be filled one day in the future.

In the meantime, I hope you have a relaxing Weekend, one that I think is deserved following this Week’s Market mayhem! If you have any comments on how you have or would have managed swing positions during this Week’s volatility then I’d love to hear about it.

  • Rhubarb n custard
    Posted at 00:42h, 05 August

    Hi RS
    Have you got any imminent trendlines for gbp against the commodity currencies?
    GBP/NZD just seems to keep on going down. How many golds do we need for sterling to reverse?

  • RS2OOO
    Posted at 22:05h, 07 August

    Hi Rubarb,

    I wish I bought GBP:NZD immediately after you wrote your post…. It rebounded and rallied 200 points today!

    GBP:NZD is certainly oversold, the line in the sand still being that falling wedge line on the Weekly chart. As you know I’ve been looking for the right signal to buy it for some time now and I look back and wonder why I didn’t just go short!

    The Daily chart over the last 12 Months looks like a harmonic pattern…. I’m not up to scratch with harmonics so can’t be sure if it’s a bullish or bearish one.

    Although I’m watching GBP pairs, I’m not presently actively seeking new GBP trades whilst I continue to run the GBP:USD long.

    I do think GBP:CAD looks particularly bearish but it’s a pair where I’d rather enter at resistance rather than as a momentum play because snap back rallies seemingly appear from nowhere and can be powerful.

  • Olu
    Posted at 12:32h, 08 August

    Hi RS2000
    I read your thoughts about Dragi’s intervention with interest. Everything went haywire that day and almost all tightened stops would have been blown out. Setting targets and stops is an art which we will forever be getting better at. One style doesnt fit all trading situations. You will always find situations that will make you say ‘why did I do this or that’

    Wish you loads of pips

  • RS2OOO
    Posted at 19:30h, 08 August

    Thanks Olu, your comments appreciated as always.

    I’ve found the trading environment tough in general over the last few Months, the swing trade log on the left pre and post May kind of proves that, as does the reduced number of posts on here, though I’m sure there are traders who have excelled in these conditions.