Good morning traders. I am not going to attempt to ramble on this AM and fill this spot with summaries of overnight news stories or longer-term macro thoughts - largely speaking that type of commentary does not fit in entirely with our IPA Trading Methodology...
...or for the average duration of our trades, 1-2 days. No, rather I will simply offer a candid assessment of the market from a technical perspective in an attempt to explain why markets are so quiet and fickle at present.
I think the one overiding theme at present is the structure of the S&P 500 rally since the December 19th lows. As you will see in the chart below, the rise has been persistent but the ranges on a daily basis have become more and more narrow with only 1-day showing a greater that 1% decline. This suggests a complacency towards a bullish view and is supported by the VIX (Volatility Index) dropping in concert over the same period of time.
Meanwhile, we have seen in recent days/weeks a disconnect from this bullish equity view as 'risk on' FX pairs like AUD/USD and NZD/USD have been on a steady decline while at the same time seeing the U.S. dollar - Dollar Index (DXC) - push higher. These moves are at complete odds with what all traders have grown accustomed to over the last several years. Much of this price action is being explained by the following:
- Slow-down in Chinese economy will have a negative impact of China dependent exporters of raw materials like Australia and New Zealand
- Recent upgrade of the U.S. economy by The Fed makes the US dollar a more attractive destination for capital.
- Rising rates on 10-year Treasury bonds. Rates have moved from 1.70% to 2.33% since September 2011 - a 37% increase!
This, logically at least, makes sense and supports the price action we have seen. However, as traders, it is pretty hard to rapidly discount/abandon correlations that have held firm for a few years now. Granted, correlations are always in flux and traders need to adjust accordingly, but in a situation like this, most, if not all traders, are very hesitant to commit to a 'new paradigm' without further evidence. The result: a market that moves in short bursts and has no follow-through. Welcome to March 21, 2012!
This is where patience and discipline can pay-off. Todd has been firm in his stance that DXC is not on a new bull leg higher, rather just a correction to the upside, but rather than blindly jumping on short dollar positions both of us recognize that the timing is not quite right - the exception being USD/JPY which does its own thing anyways. We are also keeping a close eye on pairs like USD/NOK and USD/MXN, two pairs that have solid chart patterns and will be ideal to get short when the 'risk on' mode returns completely to the market. In the interim we will take the temperature throughout the day and continue to make assessments and then execute trades accordingly. Remember the old trading adage:
Success as a trader is not a function of the quantity of trades; but rather the quality of trades.
