Kruger Insights Thursday – January 16, 2014 by FirstMacro

BinaryOptionsNow | Published on January 16, 2014 at 2:05 am

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By: Joel Kruger

Must We Part Ways? – I have been trading in and out of the S&P over the past few weeks, and for the most part with good success. On the whole, I caught a nice move from 1847 to 1818, and then sold again late Tuesday at 1839. My expectation was the market would put in a lower top ahead of a fresh downside extension back under the Monday low. But the market had other plans, and broke to yet another record high on Wednesday. At the time of this report, the S&P is consolidating just below the high and should it break higher again, I will part ways with the trade and revisit another time. At least I will be able to say that I was able to make money in 2014 with my bearish equity view. The funny thing about stocks is that there is no real value in playing the short side. Stocks are built to go higher. Currencies on the other hand are a different animal. Shorting one currency means you are buying another. So the dynamics are different. I had written about this idea several months back, and I have found it to be all too true as I have experienced this difference first hand. If you are selling equities it is because you don’t like them. If you are selling a currency, it might be because you like something else and not purely because you don’t like the currency you are selling. Moreover, with currencies, no matter how beaten down a specific currency gets, there is always demand for the currency on non speculative merits. So I guess my point here is that while the argument for a pullback in equities is highly compelling and completely justified, because stocks are not inherently designed to be sold, it becomes a lot harder to see the materialization of such a bearish reversal. The lack of a direct relative value play as you have with FX markets is a bit of a game changer. But I swear, I am a currency guy through and through and apologize if I have spent too much time focused on US equities. It’s just that in this market environment, where everything is so closely tied together, it has become impossible to ignore the price action in this other asset class.

kruger insights january 16, 2014

The Superfecta – Ok so back to currencies. I have gone ahead and re-established a long position in AUD/NZD today (see below). The latest slide in the cross rate has resulted in a drop to fresh multi-year lows, with the market now trading close to monumental support in the 1.0400-1.0500 area. The much softer than expected Aussie employment report has been the driver behind this latest slide, and as the market settles into this longer-term support zone, I am trying to start to look beyond the what was to focus on the what will be. The market has priced in a ton of Aussie bearishness over the past several months, and I was there at the very start of this when everyone thought I was crazy to sell AUD/USD above 1.0500. And while I still think Aussie is exposed against the buck, it seems like the divergence between Aussie and Kiwi has gotten a little out of hand. Perhaps we have now reached a point where the balance is so far out of whack that too much bearishness is being priced into Australia and not enough in New Zealand. Admittedly, at the moment, the picture looks rather bleak for Australia and much more encouraging for New Zealand. But these things always have a funny way of turning around. The technical picture is already warning of such an event and is screaming for a correction. It isn’t too often that you see an FX superfecta, and today, AUD/NZD is showing highly oversold across all of the major time frames. The hourly, daily, weekly and monthly charts are all well overextended, and if you are a believer in the concept of mean reversion, we should soon see a reversal. Now what does soon mean? It means the market may still drop into the 1.0400’s, but I suspect that at some point over the coming sessions, we will get that sharp reversal bounce. The fundamental catalyst could come from many different fronts. Perhaps it is a Kiwi specific event, or perhaps it is a sell-off in risk that weighs on higher yielding currencies. But the key takeaway is that something this oversold is highly compelling at a very minimum. I may be wrong and my timing might be off with this one, but happy to take another shot and find out. I would like to hold the trade for a while, but will need to see how the market responds over the coming sessions. At this point, only a break below 1.0400 would give reason for rethink. As far as the upside potential is concerned, I believe we could get a recovery back into the 1.1200-1.1600 area in the months ahead.

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