Keep It Simple, Stupid

03/13/2014 7:00 am EST

Focus: COMMODITIES

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Technician Greg Harmon of Dragonfly Capital sounds off on the tendency of some traders to complicate the thesis they construct to arrive at a trade idea.

I’m long corn and short copper, so I’m short China. That is the obvious play right? As China implodes copper will sell off and the scare will raise corn prices. Everyone is doing it.

Why is it that traders need to make everything so complicated? The latest story running around is that copper will sell off because the economy in China is at risk or imploding. And since copper is used as collateral for loans by some companies in China there will be a mass copper liquidation. So if you believe that China will falter, sell copper. What? If you think that China will implode why not just sell China? I suspect this course of action has been put forth by the same people who think that they are long on the housing market by buying Ford (F) stock (hey—they make cars and trucks, not houses) and suggest that you hedge your stock portfolio by buying VIX calls (a derivative on the S&P 500 puts and calls, which by the way have a higher correlation to those stocks). But I digress.

chart
Click to Enlarge

I understand that it may sound cool to be long VIX calls or short copper, but what is the point? I understood the point of trading or investing to be making money. And if you have a well-thought-out thesis, or from my technical perspective, the price action in a particular, sector, stock or ETF is giving an opportunity, then use that directly.

You don’t like China, then sell China. There seems to be a good reason to sell China in the chart above. It broke the neckline of the head and shoulders top on Monday and has a price objective to 1848 below. If you agree then just sell the China ETF (FXI) short or buy FXI puts (sorry the Shanghai Composite stock can only be traded by Chinese nationals).

But there is also the possibility of a double bottom and reversal at the 1990 level. Incidentally, the purple blob underneath is the price of copper. It is hard to see the same strong correlation between copper and China that has existed the last two days in the rest of the chart. Maybe because it is not there? Also with the breakdown in copper there are reasons to short that, too. Just don’t claim you are short China if you do.

By Greg Harmon of Dragonfly Capital

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