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Don’t Miss the FOMC & FED This Week

By | Market Analysis

FOMC and the FED – Make or break scenario for financial markets

 

Market Update – 17th March 2021

Over the past couple of weeks we have highlighted on a number of occasions the rise in bond yields, and the threat they pose to financial markets. 

Everyone knew at some point this year that bond yields would rise, so what has all the fuss been about? 

The move higher has not necessarily been the issue, it is the speed at which the interest on the yields has risen. The sharp rise in interest rates on the 10 year has resulted in volatility spilling over into risk assets. Especially tech growth stocks. Stocks like Tesla, Apple and Amazon have been hit the hardest, as they were the corporations that benefited the most during the economic downturn. 

The rise in interest rates on bond yields signals a strengthening of the US economy. Markets are beginning to price in an interest rate rise or a bond tapering (central bank tightening) from the FED a lot sooner rather than later. Growth stocks surged throughout 2020 and early 2021 anticipating further stimulus and record low-interest rates for the foreseeable future. However, this could be coming to an end…

“The steepening yield curve reflects that returns on long-term bonds are growing faster than the return on short-term bonds, signalling economic optimism. This indicates the spread between short-term and long-term interest rates has widened. When a yield curve is steep, the market is pricing in central bank tightening. This means that the market believes the central bank will increase short-term rates, eventually creating a normal yield curve at higher short term rates.” 

 

Will rates continue rising?

 

Back in 2016, the FED announced they were reducing the pace of its purchases of treasury bonds (bond tapering), to reduce the amount of money it was feeding into the economy. The market did NOT like this, resulting in equties sinking lower. This is now known as the 2016 taper tantrum.  A similar scenario is potentially on the cards at some point in the near future. The question is will it occur during the next meeting. 

FOMC DOT PLOT & Interest Rate decision

The FED will release their new economic and interest rate forecast, which could show FED officials expectations to raise interest rates by 2023 which is sooner than the market expected, 2024. If so, expect a bearish move across risk assets and a bullish move on the USD.

Potential Outcomes

Scenario 1: Potential Dovish Outcome (weaker USD)

FED members signal yield curve control intervention. This is where the FED will purchase bonds on the longer end of the yield curve to drive interest rates lower. 

DOT Plot remains unchanged. This is where FED members signal their opinion on interest rates over the next two/three years. If this remains unchanged expect a weaker USD. Currently, the DOT plot median is a possible rate hike by 2024.

Scenario 2: Potential Hawkish Outcome (stronger USD)

If FED Chair Jerome Powell has no verbal intervention on the bond yields. 

If the DOT PLOT median interest rate change moves closer, from 2024 to 2023. 

No announcement of yield curve control.

USD INDEX – Daily Charts

There are two key levels to keep a close eye on. A close beneath the 91.36 support will indicate a continuation to the downside. This may occur if the FED cools inflation and interest rate fears. However, a breakout above the new resistance at 92.70 will indicate a continuation to the upside. This will occur if the FED signals an interest rate hike sooner than market consensus.

 

As always we will be looking to capitalise on the volatility in the trading floor later this evening! If you have any questions let us know in the trading floor live chat.

Bull Trap on the US Stock Market…

By | Market Analysis

Are we looking at a BULL TRAP on the US stock market?

Isn’t it bizarre how the US stock market is trading at record highs yet there are over 12 million US citizens unemployed? More major retailers have filed for bankruptcy in the first nine months of this year compared to the whole of 2019.

Furthermore, US mortgage delinquencies have jumped by nearly 4% which is the largest jump since the MBA’s (Mortgage Bankers Association) survey began. An estimated 4.2 million homeowners were on forbearance plans, as of June 28th.

You may have heard the saying, there is a disconnect between the economy and the stock market, and you would be correct in agreeing with the statement.

Markets are trading at record highs based on hopes of a second stimulus package. The mass stimulus from the FED and US government is resulting in a devaluation of the USD. The US printed more money in one month than in two centuries.

We are now questioning the strength of the recent recovery in the US stock market. 

Are we in a counter-rally/bull trap?

SP500 – Daily Charts

The SP500 is showing a rising channel formation/bear flag, keep in mind these ALWAYS break at some point. The new high is also setting up a potential bearish divergence on the RSI. The bearish divergence is generally what we look for when trading reversal opportunities.

DOW JONES – Daily Charts

There is a similar story being painted on the Dow Jones. A possible bearish divergence setting up along with a bear flag structure. Retail traders are being brought into the market on hopes of more stimulus. Technical patterns are always broken at some point, what we tend to find initially is a move higher beyond what the market is expecting. Which results in capitulation and a breakdown. Classic bull trap scenario.

The question we have to ask is how high will this go before the opportunity presents itself.

Next week there is a blockbuster week!

VIX Options/ Futures expiration on the 21st October

US Government vote on the next stimulus bill.

Presidential debate on the 22nd October

 

Firstly, the VIX is a measure of volatility. Leading into the expiration date traders will be looking to sell their positions or face cash delivery. This can increase volatility on the day. The market, which is hanging on stimulus hopes, will find out on Thursday if they receive any stimulus prior to the US elections and to top it all off, President Trump and Joe Biden face off again for another comical viewing.

The stimulus will have a direct impact on the USD and US indices.

DXY Index

We have been tracking the USD reversal pattern for some time, as you all have seen previous analysis.

There has been an inverted head and shoulders formation at the bottom of a 5 wave structure. The DXY is now setting up a potential bull flag structure. There is a clear inverse correlation between the US stock market and the DXY.

If the stimulus talks breakdown, we could see an explosion on the VIX, consequently pushing traders into the USD and sell US indices.

The technicals are there for everyone to see.

We just need the catalyst to start the movement. Technicals are ALWAYS broken, it is just a question of when.

Our sole focus in the trading floor is to take advantage of these setups over the coming week!

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GOLD Bear Flag Pending

By | Uncategorized
Market Update – 14th October

The US equity market is holding the FED/ US Government hostage, craving more and more stimulus to support the US economy. Whether the money being printed is supporting the US economy in a positive matter is an interesting question. For US citizens and USD holders, their cash is becoming worthless. Gold is currently up roughly 25%-30% as investors piled in buying protection against the oncoming inflationary pressure.

There are a number of events taking place that will likely impact the next move on gold.

With the Democrats taking the lead in the US Presidential Election Polls the devaluation of the USD may continue. According to CNN, Joe Bidden is in a better position at this point in the campaigns compared to any challenger since 1936. Biden is reportedly ahead in the polls, 55% to 43% among likely voters. If the Democrats do take office, we should expect even more stimulus than what has already been provided by the US Government. With the polls at the current levels, the market is beginning to price in an even weaker USD, which may support higher gold prices. However, this all rests on the second stimulus check clearing, and soon.

Any sign of the US Government putting a stop to the stimulus and free money, they US stock market crumbles. Last week we all witnessed this first hand during Trump’s twitter antics. The US government is set to vote on the next stimulus bill on October the 19th. McConnel, the Senate majority leader, said the first order of business is to vote on a smaller stimulus bill worth roughly $500 billion. Therefore it puts the questions forward on whether a bill will be past prior to the US elections. It all hangs in the balance.

 

GOLD – Daily Charts

The past month trading gold has been difficult with the choppy movements. Taking a look at the longer term picture we can see a pennant breakdown and a move back into an inclining channel formation. Gold has been teasing a potential breakout to the upside of the channel formation.

GOLD 4 Hour Charts

The 4 hour charts are showing a rising channel formation or a bear flag. The question is what news event will result in weaker gold prices. A resurgence into the USD is the most likely scenario.

Yesterday news coming from Johnson and Johnson reported they had stoped clinical trials on their covid-19 vaccine. This resulted in a run higher on the USD, and gold consequently fell over night. Additionally, news broke about the stimulus package not coming into effect until 2021.

Goldman Sachs strategists have suggested to sell the USD on positive Biden news and vaccine hopes. On the other hand, buy USD and SELL gold on negative stimulus and vaccine news.

Traders will be watching for a break below the bear flag formation to confirm a move lower, or a rally above the negative pennant trend line to enter long positions.

As always we will keep you posted in the trading floor on any set ups we take.

 

Let’s see how this plays out.

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