Tag Archives: analysis

copy 1 of foundation

Fundamentals Drive My Trading

I began trading with the idea of using pure technical analysis. The basic tenets of TA, that all things are known by the market or will be known, and all that knowledge is represented in the charts, was a big draw for me. TA broke trading down to simple price action, technical indicators, candle charts and I was enthralled.

However, over time, I have also come to love the fundamentals and view them as a primary driver of my trades. If the trend can be likened to the tide in the ocean, the fundamentals are the ocean itself.  The fundamentals lay the foundation for the house to be built on, they prime the canvass so that the master can create a painting and are the waters from which the market tide will flow.

My description may sound esoteric and philosophical but its true. Imagine a foundation being laid for a new building. As more and more details about that foundation become apparent you get a feel for what the building is going to be. Each brick of the building is important, and adds to the whole, but on an individual basis means very little in terms of what the building will look like. The foundation, the fundamental basis the building is built on, gives the building its character. Is it a house, an apartment building, an office? Once you get a feel for what the building is going to be you can start to make educated guesses, speculations, about what it will look like, how many rooms it will have and when it might be finished. The same is true for the financial markets. When you have a grip on what the fundamentals are you can make better speculations on where the markets are going.

What Is Fundamental Analysis

In terms of trading, fundamentals can refer to a couple of different things, depending on which market you are talking about.  Sometimes there is more than one fundamental driver of an asset, sometimes those drivers are in line with each other and other times not. For a stock fundamentals can include the state of the economy, the health of the business, revenue, product pipeline, consumer sentiment, inflation and other economic indicators. For a commodity supply and demand is the biggest fundamental driver although economic conditions have a lot of affect as well. These factors are used to determine if an asset is under, over or fairly priced.

Fundamental analysis also ties into the greater market cycle. The economy cycles between growth and recession and those cycles drive market values. GDP, Gross Domestic Product, is one factor that can be followed as an indicator of the greater market cycle. This is the sum of the output of a region, a country or the world.  Rising GDP, expanding or contracting GDP growth and expectations for growth/decline can affect prices from the near to the long term.

Another thing to consider is how fundamentals affect individual assets. A bullish economy may be good for stocks but it is not good gold and can be both good and bad for oil. Rising GDP and rising GDP expectations are closely associated with a rising stock market. Rising GDP is also associated with rising currency value. When a country is doing well its money becomes stronger.

Within the GDP data, which is usually released on a quarterly basis with monthly revisions, are other fundamental economic drivers of the market. These shorter term data points are drivers of shorter term trends within the greater market cycle. Employment and jobs are perhaps my favorite but there are numerous gauges of inflation, manufacturing, housing  and the consumer that must also be included. Each of these gives a different view of the underlying economic conditions and has the power to move the market

How I Trade The Fundamentals

I like to keep abreast of the economics and the current data so I have a grip on what’s going on, a view of the foundations so to speak. I let the data come and the market do it’s thing. I don’t use any one data point as a trigger other than what the market tells me to do. I have a an understanding of the fundamental conditions but I still let the technicals dictate my trades. A rising tide of fundamentals will show itself in the charts in the form of an uptrend or bull market. As the fundamental picture unfolds there will be catalysts for rallies and corrections and all will be present in the chart as a signal in one form or another. When the technicals and the fundamentals agree, and the signals are in line I make a trade.

My approach to fundamental trading is exactly the same as technical. When the fundamental trends are up, I trade up, when the fundamental trends are down I trade down.  The technicals provide my signals, when they agree with my fundamental look I know I can make a good trade with confidence.

 

Bernanke Influences Binary Traders

Economy Still Ok But Risks Lie Ahead

Ben Bernanke began his statements today in tandem with a surprising New Home Sales Report. The January figures for new home sales showed a whopping 15.6% gain in January and seemingly went unnoticed in the face of those statements. The housing data is great and continues the trend we have been seeing in that sector. In fact, it may even be indicating further improvement. Many economist, analysts and pundits believe that housing is picking up and that it will lead the economic and employment recovery this year.

Other data revealed within the report helps to support this theory. First, prices are up. This is good because it shows active buying and also that builders are able to pass through increase in prices they themselves are seeing. Second, inventory of new homes is at low levels. This could lead to further price increase, more building and more hiring, all good for the economy. In a nutshell, the housing data today combined with what we got last week supports growth in the housing sector and Ben Bernanke’s statements concerning the benefits of QE and the health of the economy.

Hanging over Mr. Bernanke’s testimony and answer session is the spending sequester. All the positives he sees in the economy are shadowed by the sharp cuts in spending set to begin on Friday. He told the Senate that it would have significant negative effects on the recovery and long term debt reduction. What he also said is that the economy is improving and that growth may have picked up. The tepid growth seen in the fourth quarter was influenced by weather and other factors that are not expected to have long term effect. He also said that the FOMC’s $85 billion in monthly bond purchases would also continue because “the benefits of easing are clear”. His message was also clear, he thinks that the FOMC has helped to support and stimulate growth but that the Senate and the sequester are standing in the way.

What does all this mean to binary traders? A lot. The spending sequester, coupled with political uncertainty in Europe stemming from the Italian elections, have definitely got the bears out in force. I see downside potential in the S&P near term. The drop from last weeks peak is around 2.5% at this time and looks like it could go another 2.5%. This would take the index down to the 1455 area. There is a support zone between 1465-1475 that dates back to the 2008 market reversal that could prove significant during a drop to that 1455. For the upside, resistance exists at 1490 and 1500 that could keep the index in check until there is a resolution to the spending sequester. I am sure a solution will come, just like it always seems to. Longer term the economy is improving, jobs are improving and housing is improving. Sequester and Italy will both become the past very quickly and the market will be able to continue on to retest the all time high.

I see two possible trading opportunities here for my binary option practice account. First, binary option puts with an end of the week expiration. There is a significant chance for the market to continue lower into the end of the week and the sequester deadline. Second, binary option calls with an expiration of 3-4 weeks. Once the sequester passes and fear subsides in Europe the world markets should be able to move to new highs. Of course,there is a third possibility, trading both in a kind of binary option hedge. The put would provide some protection from the market turning against the call trade and there is also the potential for both trades to expire in the money. This is not a suggestion to buy or sell binary options but meant as an educational discussion of possible binary options trades. I encourage comments below, I promise to answer every one.

 

While listening to the Q&A session Mr. Bernanke responded to one in particular that caught my attention. When asked about Japan and its current fiscal policies aimed at yen devaluation Mr. Bernanke said unequivocally that he supports their actions. I take this as one more nail in the yen’s coffin, so to speak. The Prime Minister is planning for more, the finance minister is helping, together they have nominated a BOJ Governor who is an advocate of the policy, the G-7 made no move to stop it and now the FOMC Chairman endorsed it. Its almost as if the magic 8-ball is telling me all signs point to yes. Despite all this the USD/JPY traded down today. I think this is a potentially great spot to get into binary calls with monthly expiration but there is still some near term downside risk. Today’s trade brought the pair below the short term moving average. It may be prudent to wait for a break above that average or some other bullish sign. Again, this is meant as an educational discussion and not a recommendation to buy or sell binary options. Please join in the discussion and leave your comments below.

Eur/USD Outlook For 2/19/2013

Eur/USD Correcting

The Euro began a near term correction two weeks ago when Mario Draghi made comments concerning risks to the economic recovery in Europe. Since then the EUR/USD pair has retreated from a resistance line, dropped below support, dropped below the 30 day moving average, created some bearish candle signals and developed some bearish technical indicators. In previous posts I have talked about the longer term trend of the Euro and I think that is unchanged.

Long Term Trend Bullish In Eur/USD

 

The underlying fundamentals of the world economy are basically unchanged. Current news reports are updates on current policies, not announcements of new ones. Japan is doing some money printing but the G7 and G20 didn’t make much fuss over it. The ECB has made no mention of a change in policy and neither has the FOMC (minutes released Wendesday). Unexpected weakness in EU and German GDP was met with little fanfare because all eyes were on the forward looking statements. These statements pointed to a rebound for the EU in the second half and a sharp rebound for Germany as soon as the first quarter. The dip seen in Europe, and here at home for that matter, in the fourth quarter GDP figures was expected, it was baked into the cake. A return to growth in the EU is expected as well and that is what is driving the long term trend in the EUR/USD. Unless the long term outlook for Germany and the EU change, or there is a shift in ECB policy, this trend could continue for some time.

Euro Short Term Trend Down Versus The Dollar

In the near term however the trend is down. Expectations and eagerness drove the Euro/USD to highly overbought levels and now it is correcting. Near term bearishness could bring the pair down to 1.3250 by the end of the month. This level coincides with the long term trend line and a previous support/resistance level.

What does this all mean for binary traders? It looks to me like the EUR/USD is bearish in the near term. It also looks like the pair could continue with the longer term up trend once the correction is over. For educational purposes there are two potential binary trades here. The first would be to buy puts with end of the week or end of the month expiration, depending on how bearish you are. The second would be to wait for the pair to retreat to the moving average. At this point there could be opportunity for good bullish day trades as well as weekly or monthly trades. One thing that I wish my binary broker would offer is the ability to set trades with contingent orders. If that were the case then I could set both types of orders in my demo account now and then check on them later.

There is always the chance that I am completely wrong. A break above 1.3400 would have bullish implications in the shorter term. A break above 1.3500 would be bullish longer term and could send the pair up to 1.3750. As always, the trading ideas presented in this article are ideas only and intended for educational purposes only. They should not be taken as advice to buy or sell binary options or any other trading vehicle.