Ending the Trading Year in Style

Hello traders,

I hope you’ve all had a good week.

In last Friday’s post I showed how our Checklists had helped us to identify opportunities in gold and equities this month. Whilst the setup in gold came from already oversold levels, the US stock market looked rather overbought with a daily RSI reading above 70. Last week’s selloff in equities provided a short term setup to buy in to the longer term trend given the positive score seen in our Checklist.

Here’s the chart. After 3 consecutive days of losses last week, the market has rallied on a more favourable outlook for central bank stimulus. Against an already bullish backdrop depicted by our Checklist, this catalyst was sufficient to send the market to yet another record high. If you’re a fellow fan of technical analysis, then the Fibonacci extension level at 3816 looks likely to be the next upside target for the S&P 500.

It has also been a good week for gold, which was a high conviction setup as we began the month with a score of +2.5 on our Checklist. Having bottomed on an oversold RSI reading at the 50% Fibonacci retracement level, the spot price is some 7% higher. And as with stocks, the past few days have seen more gains on renewed optimism around fiscal stimulus to manage the impact of Covid-19.

Here’s a reminder of how our Checklist looked, with liquidity, the real interest rate and seasonality providing the main support, and speculative positioning in amongst derivatives traders being on balance the detractors.

I have of course been sharing these themes with you throughout the month. However, have also referred to some of the great setups that we have seen in currencies too. Let’s begin with a look at the US dollar. Economic activity and the real interest rate were the only two positives on our Checklist. Key data fell short of economist estimates as represented by the negative score for economic surprise. Speculative traders in the futures market were also dragging on the dollar, following recent short covering. Price momentum was also negative, which gave a final score of -0.5.

Here’s how it played out over the month-to-date, with two clear ‘overbought’ RSI readings providing opportunities to short the market before it broke down below 90.5 (DXY).

Despite ongoing worries around Brexit, things looked more constructive for the pound with a total score of +0.5. The main negatives were in the economic surprise and real interest rate, with the other factors ranking positively.

Whilst there was a fair amount of volatility to bear, this did provide three highly effective long setups from oversold conditions (I discussed these in more detail in this week’s Trading Club meeting, if you wish to check it out).

Yet it was the Euro which stole the show in FX this month. With a clear directional score of +2, the market looked set for gains. With the exception of economic activity, everything else on our Checklist supported this idea.

At the time we updated the report, the euro was trading around 1.1950 per dollar. Today the exchange rate is at 1.2250, equivalent to appreciation of 2.5% (pretty good for a major FX pair!).

With the help of Fibonacci, we can see how after the market broke to new highs at 1.22 (123.6%), it retraced before continuing to the next target at 1.2250 (161.8%).

And to round things off in FX, here’s the yen. A score of +1.5 favoured owning the safe haven currency, although this didn’t agree with the general ‘risk on’ message given by our various other Checklists.

Nonetheless, you may have taken the trade (particularly on opposing ‘overbought’ price extremes) and turned a handsome profit on a couple of occasions. The chart below shows USD/JPY, which shows the yen strengthening (fewer dollars per yen) as price declines.

That concludes my round up of the main setups in markets that we have been following this month in our Trading Club. It feels like a great way to end things before the Christmas period, and frankly see off 2020. With trading volumes expected to be light between now and the New Year, I will sign off by wishing you all a happy time with your families away from the trading screen. I will of course be keeping an eye on things and be returning ready to take on 2021 with even more great setups here at the Academy.

If you would like to join us for our analysis in real-time including new insights each week, or learn from the ground up with Lex in our MDT online course and take your financial knowledge to the next level right away!

Have a great weekend,

James

(PS Here’s the link to our latest video on YouTube)

Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information. For more information go to www.milliondollartraders.com

© Copyright 2020 Lex van Dam Financial Education. Further distribution prohibited.