Beware the slides in March

It’s been a ‘funny’ month, said a close trading pal a couple of days ago. Of course one immediately knows by the choice of that magic adjective that he was not on the right side of the market.

It is always a good pointer when odd words give away the game – almost intimating blame on the great beast itself: the market!

Funny? Personally I think not. The Ukraine has been thrown into turmoil. International relations are on edge (nothing new, I know) and in the last few days the tragedies of the missing Malaysian Airlines plane and another explosion in New York immediately made the market jump to assumptions.

As a trader of more than a few years I have seen this all before and it never fails to surprise how the markets get their communal knickers in a knot of doom and despair; the end of the world  will always be nigh and the flight to safety foreseeable. And, more importantly, it will all reverse when the smoke dies down.

There are lessons for traders of all levels when we get a mismatch of what perhaps ‘should be’ and the reality of what it becomes when driven by conflicting themes. If indeed there is any ‘should be’ – the market is the market after all and will take no prisoners, however amusing (unexpected?) the moves and current levels may be.

After all, at the moment the market is watching the geo-political scene and the possible effects of further defaults in China rather than the economic data: whatever the data the reactions are short-lived and frequently reversed.

The Ides of March are almost upon us and as I type the EURUSD has been trying to knock on the door of 1.40; much to the undoubted chagrin of the Draghster and his colleagues at the ECB, this is not the door to heaven whence the euro should be knocking methinks.

Today’s ECB March monthly report led the way with the inevitable arguments that might encourage a cautious bear stance in the single currency:
•    Employment to remain weak and projected to rise slightly in 2014
•    Inflation to remain low into 2016
•    Disparaging comments were made on the performance of Italy, France and Spain

This was followed by the Bundesbank’s Weidmann:
•    Expansionary monetary policy is appropriate
•    Low interest rates can not last forever
•    ECB policy exit shouldn’t be delayed just because of stability fears

•    They have no fx price target for the currency
•    However a strong currency can influence the inflation outlook
•    Forward guidance doesn’t depend upon one variable

And then the ECB’s Klaus Knot:
•    Says negative deposit facility shouldn’t be excluded
•    Rate cut remains an option if CPI falls

The point here is that the euro has fought off all attempts to sell in the last few weeks and here we have general concern and caution from the powers that be. BUT the market is very short and at the wrong levels.

The most important thing in trading, in my opinion, is to be aware of market positioning; the retail market, amongst others, has been wrong and it looks dangerously like a test of 1.4000 is imminent and be assured the shorts will run for the door.

Perhaps when this happens we will see one of the opportunities for one of the above-mentioned slides!

A final squeeze above 1.4000? the MACD looks tight to me, the Stoch is ready to roll and the RSI has bearish divergence…..I might even go and put my sell order in! Failing that there is an exciting channel play building a short from 1.4200 to the channel top with the stop above.

The chart shows the weekly EURUSD, with MACD, Slow Stoch and RSI (from top to bottom).

Let us take a look at the equity markets (specifically the leading SP500) – the other great slider coming?
The market has been strong all through the QE story and has soldiered on regardless of bearish divergences. Makes one quite breathless – must be less oxygen at these recent dizzy heights approaching 1900.
The SP500 weekly chart story shows similar signs to the EURUSD (as we might expect?).
The MACD, STOCH and RSI all showing similar characteristics and a clear channel.

The market has been very long of the equity markets and when we get the turn we can expect significant action; I have spoken recently to several large real money players and read reports from some large funds expecting this turn to be imminent.

Of course we have had many top pickers trying for some while now but my view is that the timing is looking much better.

The weekly SP500.

It’s never fun when it’s not going your way, however you cannot blame the market.

Author: David Horton is a partner in Market Tutors Ltd in the city (markettutors.com). He has had a significant career in financial markets; he is a trader and trainer with a passion for coaching and mentoring.
davidhorton@markettutors.com