SPY Weekly Update
In my my Nov 7 posting, I mentioned that we will be in this trading range for another 3 weeks, and 3 weeks later today on Nov 28, SPX is still trading sideways for almost 13 days in a row (this is the record so far in this rally) and not much has happened. As I'm following the three drives pattern, I'm still expecting the market to come down to complete this pattern toward Dec 2~4 time frame.
SPX Monthly Chart
I have expressed my long-term bullishness in one of my previous postings Three Peaks and Domed House and this becomes even more obvious if you take a look at a monthly chart. No matter how you look at it, this rally only has a "single leg up" since March; meaning every monthly candle made a higher high. This indicates that, there will be AT LEAST one more leg up after a retracement. This is one of the reasons that I don't think we are anywhere near the top.
Trading the equity market has been pretty tough for the past many months. The biggest challenge that I see is the "routine" gap ups and downs, in addition to a week-long sideway topping pattern. This creates a very difficult situation for many day traders; namely
a. By the time the market opens, most of the significant price movements have already been made. We are typically left with the sideway moves for the rest of the day.
b. When it gaps up/down against the current positions, it could take out the stops at a worst possible time, and moreover, you may not be able to get out at the pre-calculated exit price.
In addition, the moment the market takes out the previous high, it often turns around and drops back down. Whenever we thought that the market was going to drop, it then turned around and went higher. We have been whipsawed so many times and we all learned that holding the position overnight may not be a good idea.
However, the only way to make money in this market is to hold on to the position overnight and/or over the weekend. In fact, almost every single Monday for the past 3 months is a gap up open, which forces the short sellers to cover their positions every Monday, which in turn fueled the market to the upside. However, it's very hard to go long at this level as the market was going too high too fast. But if you go short, you could get stopped out at a worst possible time. What can we do???
There are many things we can do, and the most obvious answer is DO NOTHING. Maybe this market is not worth trading. We should preserve our capital and mental sanity and wait for the right moment. We don't need to be in the market all the time.
The next thing we can do is to trade the futures. In fact, I have been trading the futures much more than the options these days because of the gap away market. Position trading is becoming very difficult unless you could time the exact market turns.
Last but not least, and this is the topic of this week, is to trade the currencies.
Ever since the fallout of the notorious H&S pattern back in July, I have been trading forex much more heavily. My favorite pairs are GBP/USD and USD/JPY pairs and they treated me so nicely in the past. TA still works quite nicely, and we don't need to worry about the gap away market, and believe or not, "buy and hold" (or should I say – sell and hold) still works as long as you follow the trend.
Here are some examples of my currency trades. You would be amazed how straight-forward these trades are compared with trading the major indices.
I don't trade EUR/USD pair – it's too choppy to trade (just like SPX), but I keep track of this pair very closely because of the correlation to the US equity market.
This was my price projection back in July 31 upon the breakout of the bull flag.
This is what it looks like right now. Mission almost accomplished?
Now, if you look at the weekly chart, you can see how close this pair is coming to the previous high of 1.6038. Once it closes above 78.6% fib level, there is a very high probability that this pair would come to retest the previous high.
This was my price projection back in July 31.
This was Sep 13 chart:
This is what it looks like right now. As USD/JPY closed below Dec low, this pair will be very likely coming to retest 1995's low of 79.75 in the near future.
This is what I posted as of Nov 17. GBP/JPY was forming a very tight triangle on a daily chart.
Here is what it looks like now after the breakout of the triangle. If you set up a stop right at the high of the daily candle and enter upon the break of the low of the daily candle, the risk/reward is totally phenomenal. While SPX was going through a sideway movement, this pair has made a whopping 1,000 pips move in a matter of 7 days!! In the mean time, EUR/USD has made only 20 pips price movement during the same time frame.
Here is a long-term view.
How to get started on Forex?
If you like to get started on Forex, here are something you can do.
1. Open up a currency account with the existing brokerage firm, if they have one. If not, check out the forex brokers like FXCM, Forex.com, etc.
2. Open up a micro account so that you can start trading in 1 lot. 1 pip in 1 lot is $1 move in USD/JPY pair.
3. The biggest trap in trading forex is the leverage. If you have never traded any high leveraged financial instruments, please trade small. You can open up an account with $1,000, and once you double your account balance (i.e.,$2,000), you can gradually increase your lot size.
4. I would start risking 1~2% of the entire account. If you are starting out your account balance with $1,000, please make sure that you won't risk more than $10 at a time. This way, it would take at least 100 consecutive bad trades to wipe you out entirely.
5. Find your favorite pairs and trade it again and again. This way, your trading success would be so much better than trading various pairs.