Monday, November 30, 2009

Dubai Drama and Continuing Psychology

Dear Readers,
Last week there was a scary selloff in both equities and commodities when news broke out that Dubai World, a Dubai firm which has expossure in real estate companies investing in Dubai property market, asked for delay of debt repayment till May 2010. The total debts amounted to around USD 60 billiion!

According to mainstream media, this news created panic in 'investors' who rushed to sell whatever they had, equities, commodities etc. as this raised and renewd fears of 'bigger than what looks superficially' crisis. Well, my friend Abhijit told me one thing - "this should be real buying opportunity". He was right. It was definitely the kind of fall a bullish trader needs and those who bought the decline on Friday are in short term profits now and may get even more. However, this is not something new, in fact, this is what we know as 'Buy on Dips Psychology' and works very well during bull markets. Since Mar this year, traders who had this psychology have made very good profits.

So, what should we learn from this incident? A lot. As long as the underlying up trend is intact, traders will continue to benefit from this tendency to buy on selloffs but this is exactly what I think is important when markets change direction and the underlying uptrend breaks. This very tendency is alive even after a major reversal and traders buy initial 'dips' , then they buy bigger selloffs. Then, this tendency becomes the driving force behind reinforcing the 'reversal' as all those stuck traders sell their 'assets' on a bounce. This psychology does not disappear in early stages of that changed direction and traders gradually shift to 'sell on rallies' from 'buy on dips'.

Traders are not driven by news but its the embedded psychology that drives their decision. News is only a very small factor and does not have big effect on price but it is definitely something which savvy traders can use to look for opportunities. Those traders who take decision solely based on news suffer most.

Wednesday, November 25, 2009

A Clarification

Dear Readers,

In my last posts I've mentioned US Dollar and its correlation with equities and commodities and the ongoing price action. Today, I received a phone call from a friend who did not want to put this issue in the coments section and so chose to directly ask me. Here is the conversation we had:

He: Do you really think dollar plays actual role in dollar based asset prices?
I : I did not write it anywhere, did I?
He: Your posts suggest as if US Dollar is driving the prices of assets like equities and commodities?
I : Well, it does, but, this correlation is not suggested in my posts.
He : So you mean it 'does exist' but not 'shown' in your posts?
I : Yes it does exist. But, we can not calculate or even guess the future direction of assets prices based solely on looking at US Dollar index.
Well, we need to understnad the US Dollar index first. before that, we need to look at currencies and how they are traded. A currency of nation A does not have a price unless it is put against that of some other nation, say B. So US Dollar in itself can be evaluated on comparing it with the currency of some other nation like UK. This doesn't give us complete information about USD as it may be strong there but week against Japanese Yen. So, there is the US Dollar index, which is actually an index of USD against a BASKET of currencies. Its actually five currencies against which it is meassured. These are following:
  1. Euro (EUR)
  2. Yen (JPY
  3. Cable (GBP)
  4. Loonie (CAD)
  5. Kronas (SEK)
  6. Francs (CHF)
What it means is we have an index which is meassured against only five currencies of the world. So, the US Dollar index can not give us actual data for this reason:

We may have all these six currencies going down and USD index may show stability. It may happen in times like today when every central banker wants a lower valued currency so that their country can stay afloat in crisis.

Then, we have also to take into account one important feature - carry trade. In currency trading, its not only the outlook of economy that matters. In fact, traders often find out a currency that has low interest rate and 'carry trade' with it with a currency that has high interest rate. For example, Japanese Yen (JPY) had been used as currency of carry trade because of Japanese Central Bank keeping interest rates near zero. What happens when traders chose a particular currency for carry trade is that currency keeps low against other currencies (against which it is traded, e.g., GBP/JPY). One of the reasons why US Dollar is for a good time losing its value is that most probably it has been started as a currency of carry trade, perhaps mostly for EURUSD pair (Euro / US Dollar). What is more important here is that traders use a heavy leverage in trading currencies - near 1:100. Some brokers offer even 1:400 leverage! So, the thing to consider here is the importance of any change in tide - a trader is subject to high risk if his position goes beyond the interest differential paid by the currncy pair. This can lead to overnight turnover in the direction of currency pair price. This all means one thing - US Dollar index can turn any side swiftly if there is a good enough catalyst.

This might be the reason why Gold is rising and making all time highs despite USD at 'only' 15 month lows. Otherwise, US Dollar index should also be at all time low if the correlation was that simple.

This should explain why the value of US Dollar index alone can't tell real picture and so, we must keep in mind that falling value of USD does mean bad for assets but we should not be limited to US Dollar Index. However, as we don't have better indicators, its better to use US Dollar index for our important decisions but only after we take into account many other things.

The other things we talked were not important to post here. I know many readers are well aware of the fundas behind US Dollar and currency trade in general, but I felt compelled to post these details for those dear readers who may be new to currency trading and might have been thinking like how this friend did.

Sunday, November 22, 2009

Gold, US Dollar and Equities

Dear Readers,

You must be aware of how gold price is going up almost every day. The reserver currency of world - US Dollar has been going down but not making new lows. Instead, it threatened to start a rally in last two weeks. The mainstream media suggests gold is going up because dollar is going down. I disagree. Gold is not 'reacting' to US Dollar in the sense media suggests. If you don't believe my words then look at these charts from

As we can clearly see for last week candles that US Dollar Index chart shows dollar is moving up and comparing to gold chart, both were up last week! Which, according to media and pundits, can not happen. Why at the same time we see gold going up and US Dollar NOT going down?

There can be only few possibilities:

1. Speculators are betting on hyperinflation in near future.
2. Supply of Gold is limited and the way China and India showed their intention of buying gold implies a rise in demand.
3. No reason, it might be just a coinincidence.

The third one can not be considered as if it were true, then you would not be reading this post. There is definitely a reason and out of the first two, my bet is on 2. Gold real demand might have outdone its current and future supply in a manner that everyone is looking to acquire as much of it as he can.

On 15 Aug I recommended buying gold and a lot of it. Those readers who followed my advice must be happy today, but, I don't reccomend buying gold at this point of time. Its certainly not the right time to accumulate gold as in my opinion it has gone up substantially and so, investors should look at some good correction to buy gold.

The Dollar Index (US Dollar) shows its willing to move up after a big fall in last few months. But, looking at the chart, it should first break that downtrend line and rise above 50 SMA (on daily chart). If it does manage to stage a rally then we can see it retesting 80-81 level.

Equity markets did not show any directions last week and looked like mostly following US Dollar which kept going up and down but not meaningfully. Indian NSE Nifty shows a Reversal Day (looking at Friday's candle) and there is good possibilities that Indian equities markets may rally next week.

Wednesday, November 4, 2009

Free Live Charts of Dow Jones, Currency Pairs

Dear Readers,

I have added Free Live Charts of Dow Jones index and Currency Pairs like EUR/USD on the top right side of this page. These charts are easily customizable and you can even detach them. I am thankful to DUKASCOPY for providing this useful resource to my dear readers.

For Nifty Futures traders, the Ascending Triangle pattern has failed when it broke 5030 (the trendline support). Those who were long on this pattern should have been in profit as this pattern gave breakout at 4750. Not a bad trade of 270 points of profit!

Now, the Dollar is getting stronger and looking at US Dollar Index, it is trying to break 50 DMA near 76.5. Yesterday it could not close above that but did pierce it in intraday movement. If Dollar continues and gets above this important resistance then we may see it looking at 200 DMA near 81, which means a horrible picture for commodities and equities. However, as long as the downtrendline and 50 DMA holds, one can have the best buying opportunity. Let us see how it behaves in near future. Following chart of US Dollar Index is from Here is the link to this chart.

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