The U.S. Dollar Index breached a key support area and a the 0-year T-note offers up an opportunity, reports Jeff Greenblatt.
The U.S. Dollar is one step closer to disaster. Last week we viewed the dollar flirting with an intermediate trend line dating back to 2018. This week it has breached that line. Right now, we can say not only is it flirting with a major breakdown, it is also testing the waters (see chart).
Right now, markets remain higher on the hopes the reopening of the country will put down roots for a real recovery. There is a major divergence working. Notable among new highs above the February peak is the NYSE Arca Biotechnology Index (BTK), Amazon (AMZN), Netflix (NFLX) and Facebook (FB).
Other tech names are close. The divergence hits because charts like the Transports and KBW Bank Index (BKX) are not even close. The banking sector is light years from a new high. Biotech is leading this rally based on hopes there will end up being a vaccine before too long. Amazon and Netflix are beneficiaries due to people stuck in their homes with the best way to buy stuff is on Amazon while they download movies 24/7.
Other industries are not doing as well. Hertz finally went bankrupt over the holiday which puts their half million inventory of vehicles on ice. Sports is attempting to reopen but the baseball players can’t seem to come to an equitable business arrangement with the owners. What happened is the industry agreed earlier on a revenue sharing plan where the players would receive a prorated amount for a shortened season. That was before it became obvious the only way the stadiums would reopen is if the fans are not there.
Want a good indication of economic activity? If you’ve ever flown into the Phoenix area, the flight path for commercial aircraft is from the east, right over the freeway. As it turns out, my wife and I visited friends east of Phoenix on Memorial Day. Planes usually come in every few minutes. On Monday night (back end of a major holiday weekend), we didn’t see a plane in the sky.
Nevertheless, markets remain higher as the Federal Reserve continues to prop the markets higher. Does that mean trading is easy once again? Should a trader go back to the old rules of buy and hold because the market always comes back? Doubtful as risk remains remarkably high. If you take the contrary view, markets have been up for the past two months on the hopes times will get better. Recently, there have been thrusts to the upside based on hopes of a recovery. Now that someone bought the rumor, is it time to start selling the news?
The news is States are reopening but that doesn’t mean there will be the V-shaped recovery many are hoping for. Keeping that in mind, it’s important to realize in many situations that no trade is still going to be better than a bad trade. How do we make a good trade? For me, it means an excellent Kairos reading. Here’s an example on a recent 10-year Treasury note pattern.
The Kairos is 37 bars at a 37.5% retracement back to the high (see chart below). But in case you don’t know Kairos, you can still do well following one mantra. It’s time to test and retest. What does that mean? It means the pattern hits a specific pivot, comes off that pivot but retests again before the important move. The 10-year T-note is consolidating off the high. It hits a high of 139-12.5 and does not drop. It is only such time the pattern exactly retests 139-12.5 before the real move commences.
This is a good news, bad news scenario for a trader. The good news is when you wait for a retest you increase your odds of catching a good move. The bad news is it requires a lot of patience and discipline to wait.
Part of that discipline means the trader must be okay letting some moves go without them. The big question is whether you are willing to wait for a retest. In working with traders all over the world for the past decade, I’ve found one of the biggest issues keeping intermediate level traders from going to the next level is the mindset one has to rush into a trade because of the fear it will leave the trader behind. If you monitor your own activity, keep track of the times you took a trade based on the anxiety the move was going without you. You might be surprised at how often you get stopped out on those trades.
On the flip side monitor your emotions to see how many times you didn’t take a trade because you feared getting stopped out. The solution can be developing the mindset of waiting no matter what for your pivot to get retested. In this example there are two entries. The first, for those of you not faint of heart is right there after the 37-bar hits with the knowledge of a 37% retracement. But right before that was a what looked like a morning star. Using zero sum psychology, when a morning star like that fails, odds increase exponentially the bulls who bought the consolidation will be trapped out causing downward pressure on the pattern. That is an important reason why this big move down materialized. Once the morning star cleared, there are no buyers.
Retests manifest in a variety of ways, its not always a perfect double pivot. Many times, its close. As always, never act until you see a candle reversal formation going your way. It takes practice to get there. Traders don’t like simulators, but they serve an important purpose. Some educators say simulators don’t work because traders don’t take them seriously because they are not playing with real money. The reason to use a simulator is two-fold: Take the lesson from professional athletes, those who practice perfectly end up performing much better in the game. Just as important is the neuroplasticity aspect of trading. When you recognize a new pattern, the brain starts to grow new neuropaths. Your goal is to take those little seedlings and allow them to grow into great big oak trees.
In other words, when you see certain tendencies repeat over and over on a chart, you’ll develop greater confidence and conviction to do the right thing at the right time. In the end, adopting the test and retest mantra one will likely make less trades but will experience more high-quality trades. Isn’t that what you are looking for anyway?
