Broker to Trading

As a further note to the trading analytics in my post, if you stake out a structure reference support and a spike resistance on a longer term chart and have enough in your margin, you can have a nice area for the instrument to move and you can have fun with support and resistance structures within this area, with some idea of directionality.

If you focus on short time frames the danger of getting cut up in volatile movements and becalmed in dead zones decreases. Getting cut up and becalmed is mostly psychological, if you commit to a longer term trade and trust in market dynamics then your trades can improve.

But the advantage of trading on short term charts is it gives you an intuitive feel for market structure. It is worth doing now and then to remind you what bases all this fractal structure (it is not fractal at its base at all, it just looks this way, this is one of the realities of trading).

But always keep an eye on fundamentals and the possibility of these or the computers triggering a breakout, but a knowledge of market structure will make it clearer when these are about to happen (the volatile ranging and deep valuation probes).

In 2007 I was very interested in China. I like Chinese culture, I think it is beautiful. The one major point every book I read on China made, was it has a problem with companies which were once communist enterprises and which the state consequently owns a stake in. Apart from this, the legacy of communism gives China the best gift of all, an educated confident population.

That is the root of its growth. Again without getting too political, the philosophy from which communism comes said quite starkly, there is an evolutionary process to the promised land - communism decided to short circuit this.

Perhaps one can see what is happening in China as part of this process re-establishing itself. Anyway I am not a communist, in case you are wondering. The fascination of China for me is it gives an apparent alternative to capitalism. But, I believe in individual freedom above all, this is why I throw in my lot with capitalism, problems and all.

Another point is, Chinese companies are innovative and effective and already world leading in very interesting ways. But nothing I have seen anywhere takes away from the status of US companies.

I was looking at my notes from 2007 and I saw my notes for G. I said positive things about it, but noted it was highly priced. My point of these notes was to provide a reference point for after the crash. As I have already noted, the crash changed the trend lines on companies and in this case pushed it down and pulled it up to where it was.

The point I am making, does the fact it would be more expensive now without the crash make it cheaper now - it depends on what happens when the recovery really starts, i.e. can we expect what has happened in the past a huge surge making up for lost time (the process which pushes the Dow to higher highs).

I am hoping this surge is based on company valuations and some other debt inflation. I hope the Dow does not go to where a real valuation would put it as I said in my posts and twitter (remember the possible probe of a while ago), but look for cheap quality companies.

© 2010 Guy Barry - All Rights Reserved.

Well my observations do seem to be coming true, re: EUR/USD. However it is just based on a belief in the power of fundamentals in a pair which is consequent on exactly this fundamentals. EUR/USD directly reflects the economic condition of the euro zone and the US. The interesting problem with this is the fact the euro zone and the US economy are entangled in an almighty mess.

The mess is the fact the euro zone (principally Ireland, the UK, Iceland, Spain etc, but the rest were involved as well, it's just they had their own industrial base) grew extremely wealthy on a great fiction - the US expansion based on their housing bubble. The US economic expansion and disintegration has been well documented. I will add it was obvious at the time what was happening, but nobody wanted to see it...

Do you know what this was all like on a geopolitical stage this time - the tech bubble - dubious revenue booked, on balance sheets and in the imagination of investors. It was obvious at the time this was well dodgy, but nobody wanted to see it.

What worries me is the fact there is another little inflationary exercise (all started in recent times by Paul Volcker, some say) going on - the $ carry trade predicated on cheap dollar loans. For many months nobody wanted to see this either, but it was happening. It is why the market mysteriously went up and has now slumped down. The market is at the mercy of the ebb and flow of...money, not investing principles.

*Honestly value the euro zone, what is your own answer - honestly value the US economic zone, what is your answer - which one of those zones has a mighty industrial base and amazing companies ? I do believe there is real growth happening in the US because of this, but it is being masked by the consequence of low interest rates.

As for the euro zone, apart from Germany it is hard to see where there is something for a fundamental valuation to truly hold on to. I will explore this interesting question, it remains open...

***Please note these are analytical comments, as I said I do not give trading advice. But as an analytical observation, when I trade based on analysis, I always look for the technical outlook, trading on fundamentals is a recipe for disaster in leveraged trading, you can be right, but get stopped out (or margin called a few pips from a major turn, the money makers in forex).

A good way of doing this is to look on a 1 day chart, look where the candles are and simply go left on the chart until you find regions of support and resistance in the chart.

These tend to provide support or resistance cascading down the time frames, now. And always look for those spikes, especially on higher time frames (1 day, 4h) they give you a good indication of where the market is in terms of valuation right now.

Once the programs get a sense of valuation they will tend to move in that direction. But note what I said about the different interpretations of spikes. It is best to be dynamic with the forex market in your analysis, because it is a dynamic market.

Let's say the market bounces off a fundamental move on a 1 day support, bounces up to a spike. Look on 30 min, because you have a probable trade, i.e. you have information - look for support structure on the left on 30 min and higher and then check Fibonacci levels. Enter at a level which makes sense for your leverage, but 30 min is recommended by many traders to trade on.

Keep an eye on fundamental changes which can turn the spike into a probe and remember different time frames are more receptive to different fundamental windows, but remember the pressure of higher time frames.

© 2010 Guy Barry - All Rights Reserved.

This is a further commentary on the ideas I was expressing a while ago about EUR/USD, USD/JPY and EUR/JPY. My interest in them and the stock market began before the crisis. I wanted to see what the links were. In the aftermath of the crisis an analytical method rose, the risk on/risk off methodology.

The idea of course is risk on money flows into less risky currencies and stocks, i.e. it explained the rise of Euro and the market, and the fall together as well. I was not entirely convinced. This is because I had seen in the crisis which should have been a crystal example of this:

*vast enforced liquidation of stocks by hedge funds
*huge money flows into $
*huge money flows into JPY
*huge money flows out of Euro

Yet it wasn't even remotely a linear relationship. It looked to me like an occasional push from one to another. But why ? Well because perhaps EUR/USD, USD/JPY and EUR/JPY are more than instruments, they are pipes, conduits themselves for money flows, affected (and effected) by what they flow through, in this case US equities. A currency pair sets up a pipe, from one to another, but the flow itself is important, i.e. stocks cascading somewhere in value.

What was clear to me was the effect on equities, making value a consequence of these pipes. Was anybody investing then  based on a belief on future income streams ? Actually I did in a small way. I bought some of the companies with the strongest balance sheets I had identified in 2007 as they went low. But is was easy to get cut up by this as well as the equity market became like forex, but it was illuminating.

© 2011 Guy Barry - All Rights Reserved.

"Euro rises despite weak equities" (CMS) because it is doing exactly what I said it would a week ago, consolidating on the 1 day chart, after a fall on the spikes at the top (4h), from fundamental pressures down on Euro.

It is caught between twin valuation targets, the decision of the Fed to continue to keep Fed controlled interest rates on $ out of the market as a fundamental and the forces pulling Euro downwards. Within this it can technically range. In a sense it has been freed from the Equity market for now.

In fact the Fed decision on interest rates possibly stopped a continued run downwards on Euro (the probe) for now (this was happening and this pressure caused volatile movements downwards even after the decision).

Interesting how the Federal Reserve Board of the United States is supporting the common currency of the European Union. And all in the name of the equity market of the United States. The cheapness of borrowing $ makes it still a source of huge money flows in a carry trade of epic proportions into equities.

Supporting the equity markets is not a bad reason to do this, but equities per se do not need this, nothing is wrong with US companies. The problem is from another long Fed inspired debt issue, the housing bubble (that is what the Fed is supporting, money flows into company shares damaged by mortgage sourced asset deflation).

I am actually a big fan of Bernanke, I am not with those who believe the Fed should be abolished, though I respect their opinion, he is doing his level intelligent best with the situation he was and is being given.

I believe the Fed should be removed from political interference and make monetary decisions. But is this even possible. The ECB is protected from political pressures but it is still making semi-political monetary decisions, since the crisis. The crisis has had one effect, the politicization of monetary policy in Fed and ECB.

However the Equity market must be normalized. It must be restored to a system which values companies on their balance sheets. This it is extraordinary power, and its power for the US and the world. Let the Fed raise interest rates or let the market do it.

One could say though perhaps the Fed are brilliant financial engineers and precisely wanted to free Euro from the US equity market by helping set competing valuation targets. It could be argued this has the effect of letting the market sink more softly and maybe just maybe resetting its internal valuations. Possibly.

6/27: In all events that little boost from EUR on Friday 30 min may have been a belief the G8/G20 will add more government debt (the other source of liquidity). To an extent EUR is enhanced on debt related liquidity measures and this has been a source of its rise since the early part of this new millennium (when US finances got out of control again).

But of course there was a huge price for the euro zone itself to pay for this mountain of debt liquidity as it was sitting on a housing bubble. This is now hurting EUR itself.  It seems Canada, which is biased towards conservative fiscal policies is pushing for debt reduction. It seems as well the US want stimulus to continue (according to CBC news !!!). A combination of Euro debt reduction and $ debt expansion, if it is believable and/or happens bodes well for Euro.

6/28: The reaction of Euro today suggests what was pushing it on Friday was a belief in debt, because what the G20 delivered was amazing, the debt reduction promise of Obama. This touches on something I have alluded to, which is this belief Obama may restore proper functionality to the market.

This isn't a political statement it is just based on what has happened so far, Obama delivers on promises, and he delivers precisely. If he can cut the US deficit, it will be an astonishing boost for the US economy and will finally give those amazing companies genuine capital support.

Obviously this bodes well for $ but what will the result of both Euro and $ taken off debt be...this is an interesting question: think about their functional role as pipes...

These are future comments, because as I have been discussing in twitter for many months and now on my blog it is all about that cheap dollar carry trade right now which produces the risk on/risk off affair - but as I said this isn't functionally about risk, it is about those pipes and how they flow...

© 2011 Guy Barry - All Rights Reserved.

Well the market imposed a valuation on EUR/USD today, quite correctly, since the Fed has once again taken interest rates on USD out of the market. Relatively speaking EUR/USD had undervalued itself, a refusal to add value to $ by raising interest rates had one consequence.

Such surges can signal a move upwards, as traders follow the lead and trust the new valuations (usually Asia follows the lead of NY on this), but they can fizzle out and the main trend with the fundamentals behind it can reassert itself, with accompanying volatility.

This is all about the issue everybody who enters forex finds in front of them, which can be expressed as the information content of forex. Investing is hard, but when you come to forex in comparison it seems easier. It is what blinds you in the face of candles which are not moving that quickly.

It is either a lack of information in this market, for which there is research evidence, the forex market may not have the long term information carrying structures equities have (or had) or it is a form of information the human brain cannot easily deal with.

In equity investing you can quite easily ignore technical analysis, but in forex there seems no alternative but to immerse yourself in it. This is because everybody is hanging on to these indicators, it is one of the few structures which make sense because you have them there in front of you. The problem is, these indicators make the market but they probably do not reflect it.

I feel there is a deeper computational structure there, but computational structures, as used by digital computers, are alien to the human brain. The most convincing explanations of the computational methods the mind uses I have seen, take them out of the realm of algorithmic computation.

What I mean by all this is that feeling you get of having nothing to hold onto despite loads of work is real. You are dealing with something which is not like your mind.

But news trading for those who want information, who want some basis to make a decision in forex is actually the best place. It is so clear what has happened, or at least at a level of clarity above anything else. This is why I like it.

© 2011 Guy Barry - All Rights Reserved.

The very short survey I did a week ago of some US companies revealed internal health and valuations which may be too low, in a normal market. Raising interest rates seems like impossible to do, but only because it will curtail the flood of dollars into the market.

But this method does not work, because the forex market values instantly any hint of interest rate raises, those leveraged trades have to feel a future where dollar lives with higher interest rates, than effectively zero.

By refusing to raise rates, the Fed has made forex like the equity market in the sense it has to value on a future expectation, in this case of rate rise, like the equity market is supposed to value on future stream of income (but as I suggest does not presently). Interest rates on a currency though are like income streams, because they give you an income stream in deposits in that currency.

But I have expressed such optimism about the US economy. Why ? Because those companies carry on regardless. Whose companies are strong in areas which matter, especially to the future. The US. Computer software is probably one of the most important industries for the future. Its potential is still barely realized, anybody who has worked in computer science research can see this.

However, the resurrection of US company strength (because this was not the case in the 70s) coincided with the decision to float equities on various forms of debt in various ways, from the early 80s. It results in huge revaluation shocks, as supposed assets are seen as non existent or as debt. This shows up in the market as the making of a new less steep trend line.

When the stock market rises high, shares rise and this makes it easier to borrow money. Those companies which are quality (as evidenced in their balance sheets) and used this money wisely get lean and hard in the crash. Then they power through the lift again, with this readjustment, like a retooling of their functionality.

What will happen if now the focus is away from debt but on investment, like the kind in the stimulus package ?

© 2010 Guy Barry - All Rights Reserved.

Some things to note about all this are the double spike indicting the top on EUR/USD and they way the market sinking accelerated the fall, the rise before softened it.

Again the actual causality is highly complex, if you view it as data it looks like a plunging or smoothing effect from one market into another: falling dollar ups commodity/energy stocks, falling market causes money flow to $ and yen, technically rising Euro causes dollar fall which ups commodity/energy stocks etc.

A rising dollar should go with a rising market to an extent in a normal economy, but the fundamental thrust behind the trend up in the market recently has been a dollar predicated on low interest rates which should value it down. These complexities cause valuation shocks.

Anyway, The spikes on the 4h if you look at them on 30 min are an area of volatility, which one sees at a market turn. This is a very dangerous area to trade and it is one reason to try and avoid a top, which is so easy to get caught into.

The 1 week was indicating a time of volatility. But that is some serious structural support EUR/USD spiked under on 1 month yet the fundamentals are not entirely supportive of that rise, the market needed something to break through the structural congestion referenced on the 1 week chart, which it did not get today anyway, it got instead a euro shock.

Basically EUR/USD said yes and the markets said no, for today. But is that yes to a recovery or business as usual with $ at very low interest rates ?

© 2010 Guy Barry - All Rights Reserved.

EUR/USD consolidated and equities stayed in the range: 6/18. The ideas in 'Trading Chaos' are exciting but they have problems in forex, those divergent bars turn into something else a lot of the time.

The probe I mentioned during the week is a key form of this. It is a spike which bounces then finds the value the spike was probing, it is the death of divergent bars and stop-losses. It usually happens while the market is testing a key technical level.

A bullish divergent bar is driven by short covering, but if the short covering is technical, i.e. driven by buy orders at a key technical level, whatever was driving the price down can reassert itself. The forex market is technical but the problem is it is driven by external fundamentals a lot of the time as well. This makes for its difficulty and the way it becomes a zero sum game.

Key technical levels usually have large reverse orders to the trend, which bounce the valuation. But the market then finds the value. That is the problem with divergent bars, probes look like them, until it is too late (you get stopped out if you placed an exit at the bottom or top of the spike).

Filtering with Raghee Horner's 34 EMA does not help in this case, as these are movements which crash through the 34 EMA. However there are signs, usually they have an unusual volatility associated with them (hence the divergent bars becoming probes) and a greater than average bounce around the technical level (for example a '00').

They are also associated with fundamental surges behind them, like equities crashing. The question for Euro, is what fundamentals support a true reversal ? What is valuing Euro, not the fiscal health of Europe...is it $ being kept at near zero rates ? The world is afloat on this imposed valuation on $, which the market has valued as much as it can. This is I believe the true source of the valuation shocks of recent months.

If the market is being pushed for technical reasons in a given direction supported by an official policy of effectively removing interest rates as a valuation method, what happens when the fundamentals reassert themselves - well, it seems huge revaluations. It was standard analysis at the time, EUR/USD would breach 1.5 and continue ahead. But it didn't, look where it is now.

It didn't for a number of reasons, one of which were government comments and then the issues with euro debt, but the idea of interest rates rising seemed like the real cause. But they haven't been raised yet and there has been constant reassurance, except for that indication a few months ago, they won't be.

Technically EUR/USD can continue up (but that consolidation I saw in 1 day has produced a double spike top on the 4 hour, but rising equities provide elements of support, note how equities can dampen momentum, like a calm sea: 6/21), but is there another fundamental reassertion somewhere waiting ?

What happens when interest rates rise - it is the huge fundamental waiting. Perhaps it has already been valued in. But still, what happens when it is no longer possible to borrow large sums of $ at very low interest rates to invest in commodities and equities ?

The solution to all this is the recovery, because this will take over from the money flow sustaining the value of financial instruments, revenues increase, shares rise, all back to normal. That one assumes is the theory behind all this.

UPDATE COMMENTARY 03/05/11: The behavior of EUR since this post supported the above analysis.

© 2010 Guy Barry - All Rights Reserved.

"Stocks abound amid grim data" (MSN). Why ? Well, because Euro continued its rebound (the doji turned into the hammer, for now). As I suggested revaluation of Euro upwards = equity up. So more and more forex rules the equity market. What will change this ? Either a strong recovery or interest rates rising (needs a strong recovery).

But will Euro continue its bounce. If the are more euro shocks, Euro may be revalued downwards. There is strong support under it right now. The technical issue, which is so important in forex is getting under that support.

It is possible, as that spike under the hammer could be a probe. Valuation probes are common in forex, they pave the way for a revaluation to that point and beyond. It would take a lot though for Euro to fall under that support.

When one analyses forex markets one must consider all possibilities. The moment one makes a trade, one goes with that decision. One must be aware of what can happen to to Euro on its long term chart. This can help you manage the risk factor, even on shorter term charts.

Right now the risk factor is counter to the trend. It is the risk of that hammer being a probe downwards. The Euro may continue its journey upwards, this may be a big reversal, but it may not.

In equity investing, one does not need to consider the risk factor like this ? But one should, and in the same way. The risk factor here is companies balance sheets being obscured in some way.

This has been the source of those huge revaluation shocks which have put the forex and equity market together (financial companies were booking revenue based at some level on debt, tech companies booking future revenue). Something has to value, and the forex market does it.

If company balance sheets are obscured by:

*revenue issues

or

*floods of cash determining share value

How do you determine value ? One cannot but the forex market can and will, producing the range. But the forex market is itself subject to valuation externally from the fiscal state of a country, interest rate policies and money flows (into JPY when there is equity market panic).

Remember these are being obscured as well. So it's a lack of clarity which is driving these extraordinary valuations. A strong recovery will restore clarity, one knows what revenue increases do, they grow equity, which grows share price over time, which supports currencies, but in complex ways.

But what does refusing to raise rates and flat revenue actually do ? It leaves valuation to the forex market.

© 2010 Guy Barry - All Rights Reserved.

The question for the forex market is this: has EUR/USD hit bottom. Is this a bounce upwards, will that 1 month candle become a hammer, otherwise a divergent bar reversal pattern. At the very least the pattern on 1 week suggests it will consolidate soon.

It depends on whether there are any more euro shocks in store. These may well have been already valued into the market. The forex market does not seem to value like the equity market should (i.e. future projections).

It more assigns value now, like I suggested the equity market is presently doing. It has to, assigning a future value is a consequence of long term investing, which is difficult to do in forex, especially in this volatile market (can we say margin calls ?).

Assignation of value now is like a default property of markets, and the forex market does not have the long term luxury of doing other than this. This may well be why there are apparently not long term memory processes within forex (but should be in equity markets).

On 1 day, EUR/USD is hitting structural resistance. By this I mean it is referencing consolidation in May. Is that tendency not a long term memory process ? EUR/USD if it is bouncing (rather than reversing) is hitting structure from 2006. It may well be this, rather than simply traders and trading programs wisely taking account of these patterns over time.

I do feel there is something more in the forex market, it may be it somehow references the properties of equity markets. This makes more sense to me than an inherent property of forex itself. But this is an open question. This though is why I trade on 1 min, to try and find something computationally solid.

Right now that 1 month pattern is looking like a doji, indicating indecision. A big valuation problem in the market is fundamental, valuing euro countries, valuing the US economy, and valuing the dollar. All three are distorted:

*The debt issue for euro contries (how do you value a country which is bankrupt and how do you value the non bankrupt countries which have to help it for powerful geo-political reasons).

*The US economy because of the huge issues for financial companies at the heart of the conomy yet the relative power and health (even inherent power and health) of US companies.

*The dollar because rescuing financial companies and the equity market comes at the cost of very low interest rates. Interest rates used to value the dollar, now it is the forex market itself. So what does the forex market do with Euro ? Technically it can travel upwards, the risk is the spike downwards having another interpretation.

© 2010 Guy Barry - All Rights Reserved.

Those projections of where the Dow would be in the past decade made in the 1990s made sense if you projected the trendline from where the market was on the huge run from the early 1980s. The only thing which ended this was the tech bust.

The housing bubble made a good effort at restoring this trendline. But the problem, is a market surge like this is technically unsustainable. Why though. Because it is always a result of what has been termed exuberance, but is it exubrance.

In forex where you see this kind of thing on a daily basis, it is cold hard and computational. It is usually computer programs triggering huge cascading bids, if the market is going up.

But really it is not exuberance, there is not much room for exuberance in highly leveraged trading, it is usually the result of a technical level being breached after a number of runs.

In the tech boom, it was based on revenue projections based exactly on projections of revenue. It was logical, but it ended because projections get called by an oncoming future.

In the housing bubble it was based on a belief risk could be taken away from debt, via a kind of referencing away from the source, finally to back rooms of banks, where it was caught in a web of insurance. The Lehman collapse ended this by calling some of this insurance, it was not meant to be called.

There is a new bubble, it is based on the consequences of the cost of borrowing large sums of money by the highly creditworthy money being kept artificially low. This was pumped into equity markets.

This bluff is now being called, in the forex market which refuses to accept these valuations. When these valuations are reimposed (the market says $ should be higher), when Euro rises basically, shares surge up again.

But, but, but...the companies of the US are strong and a company led recovery will escape from all these logical traps, assuming the inflationary exercises end at some stage.

© 2010 Guy Barry - All Rights Reserved.

If this is the early days of a recovery then tech stocks would be expected to do well. AAPL has not been affected at all by the financial crisis, it seems. Or has it. Look at its lifetime chart. If one cuts off the takeoff in May 2007, a classic chaos flow upwards, fractally modeling the equity market itself, its trendline puts its share value projection where is it now. This to me suggests computational change.

The equity market looks more like something which is not apparently a chaotic system - the forex market. As I have suggested there is an interrelationship between equity and forex presently. Because it seems the financial crisis made them computationally similar.

This is probably because the market is being pushed around by money flows (like forex), a reasonably linear event. But forex exacts a cost for this, huge volatility, which is the bane of any trader, not to mention central governments. However is this not what we are seeing in equities (the range) ?

Another company I like is G. Now G is interesting because its share value has been restored almost exactly. However it began its listing as the crisis began...markets are fascinating they really are, this is what I mean by having an interest in them other than to make cash. If it is a fractal component of the market then one can expect maybe it embodies fully the new computation of the markets. What this means only the future will tell, but it is worth watching...

By the way when I look at a company I look at a number of things. I am interested in perturbations, in data like cash. Divergences from the company itself over time, but as well with other companies. These tend to give hints of a change in share valuation.

Right now though the market is solidly valuing on the bottom line, G has restored its bottom line. However normally a company not growing its income would be hit, another interesting development. It is like what I said, its present state is being valued, not its future state...

© 2010 Guy Barry - All Rights Reserved.

The financial crisis had an effect on share values even in non-financial sectors (one reason for saying equity investing is highly risky). The engineering company JEC was worth $95 in December 2007. It has been rattling around $40 since the huge drop. Why cannot this company lift off ?

What went from such a company, was it something intrinsic to its balance sheet or something wider with the market. A premise in my blog is something changed with the computational nature of the market.

The company's sales are down and its income is down. Its bottom line has been hit, but not that hard. Share value is supposed to represent a future summation of expected income streams. By the way, Financial Analysis may look numerical but it is classically qualitative reasoning (this was one of my research areas), partly because it deals with future estimations which are inherently qualitative.

Anyway taken by itself JEC's share valuation is too low. It is like there is no belief in a recovery. JEC is valued at its valuation before the huge lift off in its shares in 2007.

Basically JEC has been sent back in time, to a state before the surge 2007-2008. What is happening is company values are being valued at the present state of the company more or less (mostly less), there is no belief in a future positive valuation. I have seen this across many companies (the same comments go almost in lockstep for another fave of mine and many others, EME).

A future belief in expected income streams represents a vast calculation across companies valuing companies over time. This calculation, inherent to the market has maybe changed. This calculation itself brings shares up to the inherent value of a company as it is not based on the future, it is based on a past and present qualitative analysis of the effectiveness of a company in increasing its stream of cash outputs, with numerical data.

The problem may be problems with the debt markets as this is a key way a company increases its equity. But debt tends to be discounted. The problem may be technical. The fractal nature of the market suggests patterns evident at very low levels are evident at high levels as well. A huge drop tends to be followed by a retracement correction upwards (which happened) and then a consolidation.

All these dampen down the market. But it can be said as well, the market in recent times has not been that big on future projections, and the surge in 2007-2008 may have simply been that irrational exuberance again. Thus the market may have fundamentally changed anyway. This may be a result of the tech boom and bust.

Irrational exuberance is really a big belief in big income streams in the future. A recovery surging back will surely re-ignite this, but a tech stock slump is possible as well.

The reason I think perhaps it is not a tech stock situation, is they were filled with hot air and JEC and EME never were, there bottom line was genuinely growing during their surge. Whether a recovery surge this happens or not will maybe indicate whether the market is or is not what it was !

© 2010 Guy Barry - All Rights Reserved.

Is this the recovery or the range ? Remember a week ago or so when the market rallied on higher crude boosting energy stocks and on optimism about Europe. Well that was the range. Why ? Because the market then fell (in a valuations based on a side effect of money flow). Note on 1 week, EUR/USD is for now ranging.

It is consolidating after the huge revaluation consequent originally on the hint of interest rate rises, a revaluation which causes incoherence with equities, as their valuation is consequent on very low rates (this may be the actual cause of the valuation shocks in the market in recent weeks, which puts Europe in perspective). That said there is a breakout in possible progress on 1 day. The Dow itself has been ranging about 10,000 (look at 6 month chart).

USD/JPY has stalled in a retracement. If the recovery really is happening, then it should start rising, even with low interest rates, but 1 month suggests room to move up, but more recent data suggests a fall (the resistance on 4 hour with spikes).

Remember the equity range is characterized by vast temporary surges into JPY, causing retracement ranges in USD/JPY. Why ? Because it is all about money flow, not equity valuations. Thus the evidence today is the market is still floating on cheap $, but with subtle technical support for recovery.

The recovery is in the market it has been for some time, but the markets are distorted and saturated by cheap $. Interest rates rising would clear this, but at a cost. This anticipation is another distortion in the market, inhibiting its computational capacity to value. Look at the way EME is in sync with the market, this is not a market which is valuing stocks.

So what would an undistorted market look like ? Well, the forex market. It precisely values everything including a distorted equity market. But an undistorted equity market is a beautiful thing.

It is the foundation of the wealth of America, a magnificent machine for bringing shares up to the fundamental value of a company, its capacity to increase its own equity over time, a computation so advanced it is hidden in the black box of chaos. Hopefully this can be restored...(of course it can be).

The nature of the market right now is a consequence of the decision to reflate assets by cheap dollars. It is an imposition on the market, not the nature of the market. One assumes its inherent computability will reassert itself, especially once interest rates start rising. Thus my call for many months to raise interest rates is about repairing the market itself.

© 2011 Guy Barry - All Rights Reserved.

A ranging rally will tend to fall. Why, because it is not a rally it is a range. Anyway let's talk leading indicators. One does not say they predict. One says they give you better odds. But do they ? If they do not predict and they are premised on a future event, how do they improve the probability of the outcome you desire happening. Well they do not.

The Stochastic used as an overbought indicator will either say everybody buying is wrong (unless they are doing it for strategic reasons) or they are right. The point is you make a decision, like a coin flip and cut your losses or ride if you are correct. That is the core method of forex.

But it is possible to exploit market structure and improve your information and thus improve your profits (knowledge = $$$). The RSI for example gives you an insight into market structure.

Divergences tend to work (I use RSI and Ehler Fisher as it is more precise). They are not predictive they are revelatory as they tell you what you are seeing in price structure is not quite what is seems. A good indicator will reveal, not predict. I use USD/JPY, EUR/USD and EUR/JPY like this, they reveal structure in both the forex and equity market. I prefer RSI to Stochastics in forex because RSI reveals market structure better.

© 2010 Guy Barry - All Rights Reserved.

I believe the recovery will be strong when it happens, and it is already beginning. The problem is one the central banks created, removing all the distortions caused by cheap dollars.

Really, interest rates should already be rising, and the market seems to think so as well. These falls in equities and forex are not based around fundamentals, but a market saturated with liquidity based on cheap dollars. Long term the $ is rising even against JPY.

Anyway they are not so much falls right now as ranges followed by falls. This is not 2008 yet. A lot of 2008 was de-leveraging from years of distortions caused by the housing bubble. These were burned away, in the huge fall. Yes new distortions were introduced, but these are not so serious, yet.

As I said here is some more '00' behavior (market structure analysis). By '00' I mean USD/JPY 91.00 for example. This is a typical behavior at '00' I have seen many times, assuming downward momentum and on the 1 min chart. 3 attempts to breach '00', with a bounce up till 15, then back down.

Third attempt or fourth attempt breach, then move down with return at .85. Or surge down with a spike at .75. Then you get clear reversals back up, why because you are getting a bullish divergent bar which programs love to short cover on. Even in news trading you will get this behavior.

It is happening because there are buy orders clustered around '00', speculative buys, and program pattern recognition.

© 2010 Guy Barry - All Rights Reserved.

The flow of cash in a central bank engineered carry trade ruled on Non Farm Payrolls. And in terms of chart patterns, the resistance I talked about on USD/JPY 1 day on Thursday's post ruled producing a very bearish pattern on USD/JPY yesterday (more or less bearish engulfing). There is a key Fibonacci level providing resistance which needed something to get above, which from a money flow perspective it did not get.

There was a variation on a value indecision trade in USD/JPY yesterday morning. It pipped up just before release then crash/gapped down. This is why one needed to ride this market. The problem is those jobs figures are pretty good, from a fundamentalist view !

But the market is so much a money flow phenomenon, the hint of negativity was enough to send the flood of cash into JPY (as I suggested would happen), meaning they were bad figures for money flow, which is much more sensitive than valuations based on company growth. On the USD/JPY 4h there was a little bounce in the making, stopped yesterday. But on the USD/JPY 30 min what happened makes more sense from a chart pattern perspective.

This is a further detail of this kind of analysis, look for space for the programs to move but as well look for chart patterns they can move to. However the valuation down is far too overdone, note the gap upwards in USD/JPY 15 min yesterday afternoon. But it it not overdone on a money flow calculation.

The battle between recovery and carry trade continues...expect a reversal upwards when the sensitivity to money flow abates. This is a program induced sensitivity, and we have seen it wreak havok in the markets in recent weeks. Time a lack of news shocks and recovery signs abate it.

Another way to see whether this sensitivity is abating, is whether market make order flow is reversing it. This means sustained bounces at '00' levels for example. This is a powerful counter force and usually only news events or huge equity triggered money flows stop this.

What do I mean by a sustained bounce ? Typically a bounce will go from +15 to -15 around '00'. If it gets back above +25 for example it is looking sustained. If it is a true reversal it will go much further of course, but will tend to run into resistance around .50, no matter what. Check as well at higher time frames to see if the pattern makes sense as a continuation, reversal, or indecision candle pattern.

© 2010 Guy Barry - All Rights Reserved.

Non Farm Payrolls has been the driving force in Forex for the past while. Why, well because FOMC has not been doing anything for a long while. But this is as things are: money pumped into capital markets from cheap $ in the hope a recovery will materialize.

The US economy can regenerate itself, it has done this many times before. But really the crash was not about the state of the economy pe se. At the time of the crash, US company balance sheets were in fine condition. There were big distortions in some sectors by debt, and the crash deflated these. Thus the way the real economy is recovering is not surprising, it was not really damaged.

Did the near collapse of capital markets damage companies though, something did happen in the crash. US companies adapt and survive, especially when they have to. What tends to damage US companies is lack of a need to adapt and survive. Remember the effect of Japanese competition and the reaction to this ?

Thus perhaps they will be even stronger without so much of a loan market available. This factor itself could produce the next wave up. However the medium term effects of debt market functionality issues may be the cause of perturbations on fundamental recovery data, reflected again in EUR/USD falling today.

Good jobs reports have been good for USD/JPY, so far. This is a good way of trading news, it is cleaner, less volatile. Long term (1 month) there is space for USD to move and maybe even go back up towards that breakout. 1 week is even more positive. The problem is what happened a few weeks ago, the huge run of cash to JPY assets. To what extent will this effect any reaction (1 day is hitting resistance).

It could dampen a reaction. And always remember the tendency to price in a move before the news is released (4h upwards). But there is room for breakout from the resistance at 1 day, assuming good news and EUR/JPY is near a breakout level as well. Bad news could produce a run towards JPY again, the market is nervous.

What does all this mean for trading tomorrow. For me it means waiting to see what the report is. Indecision in valuing tends to be reflected in a move opposite to what you might expect then a move back towards the expected direction, after a classic divergent bar. It is best sometimes with news just to ride the market.

The problem with news is the complex reactions which can smash through stop losses. But this is why many traders stay out of news. But it can be a lot of fun as well.

© 2010 Guy Barry - All Rights Reserved.

Well yes, yesterday's fall was only news related. The real direction was up till the news, up. The question is though is the market really on a new up or is it range trading. There is a third possibility, at the beginning of a new trend there is great volatility.

What has been happening recently, volatility, but is it sufficient for this to indicate a new direction, or simply ranging within the freedom given by a ranging EUR/USD ? I look at EUR/JPY as well, it gives a smoothing function of momentum direction, it is a little bit like the ADX, it gives the structure of momentum. There is indecision in its long term pattern.

Note the up in USD/JPY today, it hit one of the twin pillars of today's Dow surge: the recovery ! This will drive the next big move upwards, there does not seem to be many more ways to inflate, one assumes. I would keep an eye on EUR/USD 1 week, that could be a continuation pattern...

© 2010 Guy Barry - All Rights Reserved.

Not a surprising day in the markets if you read my earlier posts. Forex and Equities cross reference each other in complex ways. But sometimes it is straightforward, structures in either cross reference structures in the other. This means sometimes on the end of the week you can see hints about the coming week's open.

In all events, EUR/USD is indeed consolidating and this provides a kind of safety net for equities. Equities fell near the close on news. USD/JPY looks to be near the end of an Elliott Wave of some kind, I would expect it to rise given a real recovery. But it can still fall before this happens.

There are signs in both Equity and Forex markets of a recovery. What I am saying is USD/JPY is one of my benchmarks for a true economic revival, companies improving the balance sheets because of earnings not debt. EUR/USD is a benchmark of mine for computational structure in the Equity market cross referenced to Forex.

© 2010 Guy Barry - All Rights Reserved.