Trading Desk Notes - July 14Submitted by Polar Futures Group on July 13th, 2018
My trading this week: I started the week flat...waiting for good risk/reward setups to develop. On Wednesday I shorted CAD when it rallied on the Bank of Canada interest rate increase, shorted WTI when it failed to rally on a huge American inventory draw down and shorted EUR as it reversed from Tuesday’s rally. WTI fell an unexpected $4 top-to-bottom on the day and that helped pull CAD down over a cent. I took profits on all positions by Thursday morning thinking the bearish WTI move and bullish USD move had been too-much-too-fast. I also shorted the S+P Wednesday as it looked to have reversed on Tuesday but I covered that trade for a small loss. I’m flat at the end of the week.
The US Dollar Index touched a 3 year low in February, chopped sideways for 2 months and then rallied 7% in just 6 weeks. Since early June it has chopped back and forth in a narrow range. My bias is that the USD goes higher in the months ahead, primarily on the back of the “New Fed” policies diverging from the policies of other Central Banks. Over the past couple of months I’ve pointed out the “stealth strength” of the USD relative to many 2nd and 3rd tier currencies...sort of a canary in the coalmine story. I’m familiar with the “USD shortage” story as it applies to the massive amount of USD loans that are outstanding around the world and how those USD liabilities could turbo-charged a USD rally. Over 20 years ago, during Clinton’s 2nd term, I developed the idea that capital flows to the USA for “safety and opportunity”...and I can imagine circumstances in today’s world where those motives would once again become a significant force in the FX world. In short, “I’ve got my reasons” for being USD bullish!
But I may be wrong. I’m a strategist when it comes to developing ideas about where the market may go, and why, but when it comes to making money I have to be a trader...I have to be willing and able to see that my strategist ideas may be wrong. So from a trader’s perspective I’m willing to see that the USD could be taking a “breather” after its recent rally, and will soon take another leg higher or...the recent rally may have just been a correction in the USD decline that began in January 2017 and it’s now at risk of rolling over. I’ll stay flat until the market gives me some clues about which way it’s going.
The NY copper market jumped a huge 22 cents 6 weeks ago to register its highest weekly close in over 4 years...and then fell every week for the next 5 weeks...down over 60 cents to a 12 month low...creating a rare bearish Monthly Key Reversal. I saw lots of stories about how this 5 week decline was tied to “trade wars” but a July 9 FT story about a mystery Chinese investor unwinding a $1bn copper bet rang a bell for me. This story could be another commodity market classic like the Yasuo Hamanaka / Sumitomo copper story from the mid-1990’s or the Hunt brothers’ silver story from the late 1970’s/early 1980’s. I say “classic” because it looks like someone made a huge leveraged bet (is there any other kind?) and then added to their position when the market moved against them. As is often the case they are ultimately taken out by margin calls.
Front month WTI crude oil hit a 4 year high of $75 last week but tumbled as much as 8% this week. In my notes last week I pointed out that the deferred WTI futures contracts (October and back) and all of the Brent contracts did NOT trade above their pre-OPEC meeting highs and that perhaps the market got too high and was rolling over....so this week I was watching for a short selling setup. It came when the market failed to rally on bullish reports of huge inventory drawdowns. The speed of the break (August WTI fell $4 in 4 hours on Wednesday) suggests that market positioning was “too bullish” and vulnerable...a short seller’s dream!
The S+P 500 Index had its highest weekly close this week since late January when it closed at All Time Highs. Since February I’ve made (and lost) money shorting “bounce back” rallies that I thought had run out of steam. My bias has been that the stock market was more likely to break down than to rally. Since April that has not been the case and since April I’ve found better trading opportunities in the FX markets than in stocks.