Vantage FX | Trading the Bernanke bounce | 12 July 2013

July 12, 2013

Today’s Morning Call is going to be dedicated to traders and trading – I’ll touch on the overnight action but what I want to do is talk about market structure and market sentiment and the difference between trading and rhetoric.

But first.

Recap

Stocks in the US continued the rally that started pretty much as Bernanke started talking about 24 hours ago and the message that was received was that Helicopter Ben was Dovish (now I don’t agree with that – more below) so the S&P 500 set a new closing high  of 1675 up 22 points or 1.35%, the Dow rose 1.11% and the Nasdaq was up 1.63%. US 10 years rallied closing at 2.57% down 6 basis points.

In the US jobless claims unexpectedly rose by 20,000 to 360,000 but this fit with the market narrative that Bernanke put in play yesterday morning that rest on the employment and its outlook so as such it did not hurt or dent the stock markets move.

European Bourses with the exception of Milan, which was flat, were also higher but less so than  their US counterparts.

On Commodity markets the weaker US dollar saw Gold rally to  $1284 oz up $32, Silver rose 4.14% to $20.06 and Copper was 2.66% higher at $3.18 lb. Crude is doing its own thing at present and withdrew from resistance falling 1.8% to $104.60.

Bernanke as Sisyphus (Hat tip Greg Robb of MarketWatch)

Before I get into the trading and rhetoric stuff I want to talk about this morning I want to talk about the message that the Fed, Ben Bernanke and his colleagues from the various Fed Districts and FOMC Governors have been sending markets over the past two months because it is central to the very issue at hand.

From the outset Bernanke et al have been saying we’ll taper but rates are staying low for a very very long time. Perhaps the previous target of an unemployment level of 6.5% has been unhelpful in separating these points but from where I sit this has been the consistent message.

What was clear though yesterday and in hindsight previously is that the market, pundits, CNBC sound biters and so on want to characterise Bernanke and his Fed as either hawkish or dovish with no nuance about the fact he might be hawkish on bond purchases but dovish on interest rates.

Bernanke in my estimation and the words of Greg Robb,

…is trying mightily to separate any decision on tapering from expectations about the path of the federal funds rate.

But markets continue not to make this distinction.

Indeed the market wants to characterise him as either dovish or hawkish.

But I reckon that the more he tries to make this distinction, the more he and his colleagues seek to clarify their message the more they are implicitly telling us that they ARE going to Taper – else why spend so much time trying to make the distinction.

Save rhetoric for another day

I’ll leave you to decide for yourself on whether or not you think the Fed is going to taper – I do. But that is not going to get in the way of my trading in the interim.

Aristotle defined rhetoric as, “the faculty of observing in any given case the available means of persuasion”, but the key point here is we can’t persuade the market – leave that for the Fed Chairman and his colleagues. We can only trade the market in front of us and if the path of least resistance happens to be up then that is where our trades should be headed, if down then shorts should be in our pocket.

Clearly my Rhetorical Keynesian beauty parade radar has been off on Stocks lately as they make new highs and to a certain extent, off a little on the US dollar as a whole but I have just continued to trade the market in front of me and in doing so have collected about 250 pips in the Aussie alone in the past two days.

So lets look at some charts for levels I’ll focus on the Aussie for today given time constraints and potential for the biggest break of recent trends.

I have been bearish for some time on the Aussie and I have had a target of 0.8916 as an extension from the previous break. This remains in place for the moment but as you can see in the chart above which is the AUD daily the Aussie looks at worst like it is consolidating in this lower range and at best it could actually have a sustainable base from which to launch a big move higher above 96 cents at a minimum.

Clearly this doesn’t fit with my rhetoric, it doesn’t fit with the employment data we saw yesterday for Australia, it doesn’t fit with the NAB Business survey or the continued diminution with the mining boom nor with the slowing in China. But it remains possible because not all of the Aussie sell off has been Australia specific – a large part has been about the US dollar (1 of my 5 primary drivers) and if that is going to change then the chances of this being a base have increased.

How will we know?

I tweeted this chart (or the version of it) yesterday afternoon when the Aussie was just above 0.9300 and said that the Aussie was either 30 pips from a big and unequivocal break higher or at the top of the range. In the end I went short at 0.9294 and rode it down for 50+ pips (jumped off too soon to cook the family dinner).

So when you put the two charts above together you can see on the dailies the chances of a move higher have risen and when we use the 4 hours charts we see a clear Darvasian box. A break of 0.9330 is the signal that a move higher has begun. In the interim I’ll just trade the lower box.

It is a similar story for the Pound, Yen and Sterling to name just a few which speaks of a potential bigger USD retracement within what I strongly believe is a big and enduring trend toward more USD rallies in the months ahead. The key levels to confirm or deny the chances of a move higher in all of these currencies against the USD are the highs of yesterday or overnight.

Similarly Gold has a resistance zone in the $1300-20 region but a break would also be decisive.

All the best and good trading

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