Back to Basics with HIP and LOP Patterns

If you want to be a successful trader, it is important and probably inevitable that you will learn Japanese candlestick patterns. These can be composed from anything to a single candle to a compound of dozens of candles. After all, 24 consecutive hourly candles taken together are a full daily candle, and so on.

Japanese candlesticks are based upon the relation of a unit of time’s open, high, low and close prices, and then usually how that related to at least one and sometimes several preceding candlesticks.

An understanding of Japanese candlestick patterns can be extremely helpful in developing success at trading, but sometimes we get too hung up on precise patterns. Is that candle a pin bar? Did it open and close within the top quarter of its range? Did its real body effectively engulf the previous candle’s real body if it was just a pip lower than it needed to be? A lot of the time we just don’t need to do this.

Before Japanese candlestick patterns became popular in the west, technical analysts used to draw price bars, not candles. Analysis of the bars tended to focus more on WHERE the bars were in relation to the other bars, rather than the exact shape of the bars. This looks like an old-fashioned and naive approach now, but it can be surprisingly refreshing and effective. It is worth a look.

The place to start is with J. Welles Wilder’s HIP and LOP. HIP stands for high inflection point. LOP stands for low inflection point.

They are both three candle patterns and are simply the mirror image of each other. HIPs are bearish, suggesting that the price is about to fall. LOPs are bullish, suggesting that the price is about to rise.

A HIP is any three-bar pattern where the high of the middle bar is higher than the high of both the immediately preceding and succeeding bars. For example:

USD/CAD HIP

A LOP is any three-bar pattern where the low of the middle bar is lower than the low of both the immediately preceding and succeeding bars. For example:

 

Now if you look over a range of candles and see whether you are getting more HIPs than LOPs or vice versa, you can determine the short-term trend, as well as using them for higher-probability entry points in line with the longer-term trend.

HIP and LOP Patterns

Busy, Busy, Busy

I’ve just got back to my office after a few days of much-needed holiday and it feels like the timing was good: last week’s market was quiet and dull, but now we are about to start a couple of weeks that look set to see a LOT of activity.

There are two reasons for my prediction: there are several major central banks that are going to be releasing monthly statements on their respective monetary policies; also, polling day in the U.S. presidential election is now only about ten days away. Together, these factors are going to create an active market with much more volatility than we have seen over recent days.

The currencies in question are the ever-important U.S. Dollar, Japanese Yen, British Pound and Australian Dollar. As well as central bank info, there will be highly important economic data releases, such as the U.S. non-farm payroll data due on Friday.

Monday will probably be quiet as nothing is scheduled that day. It looks like things will pick up on Tuesday and then truly get going from Wednesday to Friday.

It is no secret that I am bullish on the U.S. Dollar, because I think a Clinton victory is inevitable and that the markets will take it to rally the greenback at least over the short term, also because the currency is already in a long-term bullish trend.

Looking at the Dollar, I do not think we are going to see any surprises from the FOMC just a few days before a Presidential election. I do think that Friday is going to be the crucial day as that will be the day that “real” data will be released.

For these reasons, if you can limit your risk, I think it makes sense to get positioned long USD before the data releases on Friday, and carry it into the election results next Tuesday & Wednesday.

Which currencies to be short of is the real question. There is nothing to stop you using a basket in a case like this when the trade is essentially one-sided, but if I must pick one or two currencies looking weak right now I would select the Canadian Dollar and the British Pound. Both have crucial data releases due this week and the Pound will see its central bank report so that is something to watch out for.

The British Pound feels vulnerable for fundamental reasons, although technically it is beginning to show signs of a possible stabilization above 1.2000. It looks prone to bearish shock and collapse, which always suggests a good bet for a short. Regarding the Canadian Dollar, it looks weak technically, with the USD continuing to make new multi-month highs there.

The news today is dominated by the re-opening of the enquiry by the F.B.I. into Clinton’s emails. Possibly it will help Trump to some extent, but I think his supporters are in denial and are going to be very shocked and angry at how badly they will lose next week. It is just a question of by how many votes he will go down to defeat. I’ve said it before and I will say it again: Trump has just seriously offended too much of the electorate to have a serious chance of winning bar some wild catastrophe occurring over the next few days. A Clinton victory is almost as sure as bets come.

US Dollar

The Bull Cross

A few days ago, I wrote about how the U.S. Dollar Index had just made a “golden cross” the previous week. This is when the 50-day moving average crosses above the 200-day moving average and is a very widely followed technical bullish signal.

You might ask why the “bull cross” is such a famous and widely-followed trading signal. Basically, it is due to how unbelievably well this signal has performed in forecasting the U.S. equity markets.

Equity markets in general exhibit a bullish bias. The U.S. stock market has over the previous half-century been the most bullish of all.

Since 1970, there have been a total of 24 bull crosses made by the S&P 500 Index, which is the major U.S. equity index. It is a capitalization-weighted index of the largest 500 publicly traded American companies.

Let’s suppose you had bought and held this Index from the end of the day when the bull cross occurred, for a defined amount of time. The results are shown in the table below:

S&P Index

These are very impressive results. Remember though that this is just the Index. If your stock-picking abilities are any good, you should be able to magnify these returns by a large factor, implementing a double whammy of buying top-performing stocks near the beginning of a new bull market.

Stock Market

U.S. Dollar Poised to Launch Higher | DailyForex

At the start of last week, I wrote about how as it is becoming increasingly certain that Clinton is going to win the election, there is going to be a resultant boom in the USD, and questioned the point of waiting until after the actual result. I don’t think there has been a U.S. Presidential election in as little doubt since 1996. I was predicting that over the coming week, the U.S. Dollar would start to move.

Although the overall move was small in percentage terms, it was a bullish week for the U.S. Dollar. There are a few bullish factors that stand out.

Technically, the U.S. Dollar index made a “golden cross” this week. This is when the 50 day moving average crosses above the 200 day moving average and is a very widely followed technical bullish signal.

The U.S. Dollar has made new key highs against the Euro and Canadian Dollars, and is looking strong everywhere with the possible exception, amongst the majors, of the Japanese Yen:

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It is true that recent data releases have not been so spectacular. The next real test coming from any scheduled fundamental news concerning the U.S. Dollar will arrive on Thursday, with the release of Core Durable Goods Orders and Unemployment Claims.

The only thing that might spoil the party would be an unexpected rash of polls showing Trump closing the gap. This could roil the markets. In the unlikely event that this does happen, I would just see it as a good buying opportunity. I have no doubt that Clinton will win.

USD Launch Higher

Clinton vs. Trump – Round 3

About ten days ago I covered the second of the three Presidential debates between the two major candidates, Donald Trump and Hillary Clinton.

Ever since the first debate, and particularly since the second debate, Trump has been sabotaged by his opponents very effectively using negative campaigning. He has been crashing in the polls and the release of a video from 2005 in which he brags about being able to grab women has certainly been the final nail in his coffin. As opinion polls have been showing him quite far behind in almost every single swing state he would need to win, there was a consensus among political pundits that his only chance of improving his prospects significantly would be to produce something spectacular during last night’s debate in Las Vegas, Nevada.

During most of the debate, Trump was relatively restrained and dignified (by his own standards). The candidates clashed fairly conventionally on the issues of abortion, immigration (Clinton refusing any large-scale effort to deport the tens of millions of immigrants currently in the U.S. illegally), Russia and harassment allegations against Trump (where it got a little nasty, with Clinton calling Trump Putin’s puppet and alleging he belittles women), Syria and Syrian refugees, and social security, at which point Trump called Clinton a “nasty woman”. The debate had little effect on the currency markets.

The voters’ reactions? Polls suggest that a majority of voters saw Clinton winning the debate. She is well ahead in the opinion polls in any case. Pundits also gave it to Clinton, although that doesn’t mean much as she has most of the political class in the bag.

The upshot is that while Trump might have delivered his best performance of the three debates, he still isn’t doing anywhere near enough to turn things around, and it is quite safe to assume he is going down to a heavy defeat in the actual voting two weeks from next Tuesday. So no change here: this was the position yesterday before the debate, too.

Trump and Clinton

Could Brexit Still Be Stopped? – Part 2

Yesterday I wrote about the legal procedures that have to be concluded before the U.K. can leave the European Union, and how they might contain one or two stumbling blocks which might stop the process.

I’ve just seen an item that I really want to include as a very relevant update to what I wrote: the British government has announced it is “very likely” that members of Parliament will be able to vote on whether to approve the final negotiated exit agreement that will eventually emerge following talks between the U.K. and the E.U.

The catch? Top lawyers are of the opinion that even if Parliament votes to reject the deal, as the Government would have already served notice of an E.U. exit under Article 50, the U.K. would legally leave the E.U. at this point in any case.

It seems the British government really is determined to not put a true vote to Parliament. They are correct to be afraid, as I believe that Parliament would refuse to ratify the exit if it were given a real opportunity to do so.

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Could Brexit Still Be Stopped?

The British Pound fell like a stone a couple of weeks ago, when British Prime Minister Theresa May announced that her Government would seek to trigger article 50 of the Lisbon treaty during the early part of next year. This would begin the 2-year legal process of Britain’s withdrawal from the European Union and the re-emergence of the United Kingdom as a truly sovereign and independent state.

Brexit is in the news today as it is being discussed in the English High Court today. There are a group of lawyers mounting a pre-emptive legal challenge to any exit that might be effected without some kind of approving vote in the House of Commons, Britain’s democratically elected Parliament.

May actually campaigned in favour of a remain vote in last June’s referendum, and I had thought that she might seek to fudge the implementation of a British exit, going for an effective membership of the European Union in everything but name only, and delaying even that for as long as possible. The referendum vote has no legal standing, so it is theoretically possible for it to be disregarded.

It seems I am not the only one who has been surprised by May’s hard line, as the market sold the British Pound furiously, and the Remain camp received the news with its usual howls of protest and demands for the democratically expressed will of the British people to be set aside.

As it is now clear that the Government will seek to implement an exit quickly, attention turns to possible mechanisms through which the exit plan might be sabotaged.

The first thing to note here is that it seems clear that the Government will want to exit without holding an express vote, and is currently promising only that Parliament will “have a say” in the process.

Why so coy? Essentially, it is because solid majorities of both Houses of Parliament strongly oppose an exit from the European Union, especially the “hard exit” which the Government has declared it wants. Could the Government be sure of winning such a vote? Would Members of Parliament defy the largest democratic mandate ever given by the British people? Even if they balked at such a concept, could enough of them bring themselves to actively vote for something they see as a highly dangerous and destructive move?

If the Government failed to win such a vote, it would almost undoubtedly feel compelled to resign and call a new General Election. The governing Conservative Party would find itself campaigning on a platform that the party itself has no Parliamentary majority for, which would be a recipe for chaos and bitter infighting.

The Government faces a further tactical dilemma in that the exact terms of any exit will be a matter for very hardball negotiations with the European Union. Securing a Parliamentary vote approving any terms before they are agreed would leave the British government very vulnerable to any bad faith that might exist on the side of the European Union.

The Brexit story is far from over yet. I believe a real vote in the House of Commons would fail to achieve a majority for Brexit, and would lead to political chaos with accompanying market turmoil.

brexit

Markets Might Get Moving Sooner Than You Think

Conventional wisdom is saying that markets are just going to chop around until the result of the U.S. Presidential Election becomes known late on 8th November. Then the markets are supposed to find a direction.

In this case conventional wisdom may be wrong. I think we are going to see directional movement getting underway before 8th November, quite possibly over this coming week.

The main reason this is likely to happen, is that it is now becoming crystal clear that Hillary Clinton is going to win the election easily. Donald Trump’s negatives are just too high with too many voters. The highly respected polling site 538 is giving Trump just a 15% chance of victory, and there are little more than three weeks and only one more debate to go. I just don’t see how Trump could possibly turn it around unless Hilary Clinton gets taken very ill very publicly. Even then he would still have only an outside chance!

I believe analysts are confusing the choppy action in the U.S. equity markets with election uncertainty. I think this is just real choppy action that we are seeing as the long-running bull market runs out of steam and faces the real prospect of another rate hike. As always, the spotlight stays on equities, and this sets the headline:

If we look to the Forex markets, and in particular the U.S. Dollar, we can see in the weekly chart below that this currency index is making seven month highs and closing the week looking pretty bullish:

The market believes that Clinton will win and that rates will be hiked in December. So why not be bullish already on the U.S. Dollar? The greenback is already either making or threatening to make new key high prices against all of the majors, although the Australian Dollar remains fairly strong against it, it must be said.

An additional reason why this week looks likely to be the time when prices truly start to get moving is that there is lots of central bank input due, and a fairly heavy schedule of economic data releases. We are going to see the monthly reports for the Euro and Canadian Dollar, as well as minutes from the recent policy meeting of the Australian central bank.

There are times to hang back and times it might pay to jump in a little ahead of the crowd. If you are sitting on the sidelines waiting for the election result to get long of the U.S. Dollar, you might be acting overly cautiously.

FOMC Meeting Minutes for September 2016

Yesterday we got the big event of this week’s Forex calendar: the release of the minutes of September’s meeting of the FOMC. The FOMC is the committee of the U.S. Federal Reserve (the central bank) which decides upon the interest rate. The minutes of its monthly meeting, released a few weeks after the fact, provide insight into the minds of the committee’s members regarding monetary policy, and also record the vote taken regarding whether to raise, lower or leave the interest rate unchanged.

The biggest surprise was that there was real dissent against the decision to leave the interest rate unchanged last month. Three of the ten members voted to raise rates by 0.25%. The Federal Reserve very rarely decides to raise rates so close to a presidential election, so it sends a fairly strong message that a hike of 0.25% is going to happen sooner rather than later.

The market responded quite quietly, although the USD did strengthen somewhat. However, the moves were not dramatic and have mostly been given up within the day.

It has to be said that despite the three dissenters, implied odds on the expectations of further hikes really have not changed. The market is expecting two further quarter point hikes by the end of 2017, with a 56% change of the first hike coming in December.

Although the Federal Reserve’s remit is to act independently of any political considerations, it is hard not to conclude it is nervous of hiking rates so close to a presidential election. Perhaps it would have been more inclined to do so if the economic situation was a more normal kind of overheating. The FOMC members will have been mindful that the last rate hike, in December 2015, was accompanied by a lot of market volatility for two months which saw the S&P 500 Index fall by about 13%, which at the time looked a lot like the start of a bear market. It is safe to assume that the next rate hike, when it comes, will be followed by something similar. The Federal Reserve would not want to be seen to trigger that kind of volatility just days away from a presidential election, as paradoxically, it would interfere with their impartial image.

For traders, all this means there is no real change to the strong U.S. Dollar environment.

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The Strong and the Weak

The USD continues to strengthen. It has spent most of the past two years consolidating, and there is a lot of speculation that it is finally coiling up for a directional move.

The chart is beginning to say it is going up. Are there any fundamental reasons for this?

You could argue that it now looks as if Clinton is going to run away with the U.S. Presidential election. She is seen as a “business as usual” candidate and very friendly to Wall Street. So it would not be a surprise if her election victory, or prospect of such a victory, is greeted by a strengthening greenback.

Once the election is safely in the bag, the Fed can raise rates if it dares (excuse my cynicism). It would be amazing if the FOMC release due tomorrow was anything but just the same as it was last time (bullish on a hike soon but no actual promises). The expectation of a hike is bullish for the USD, and an actual hike itself if and when it finally comes should be bullish too. Of course, it may make a fairly fragile stock market react badly: that is the concern.

As I’ve said before, it is not so much that the U.S. economy is doing very well, but more of a situation where its doing better than any other significant economy.

Taken together these factors make me think that barring any upsets or sudden market drops, the USD has the strongest case for a bullish move over the coming months.

The question of what to be short of against the USD is more interesting.

It is not often that currencies make record prices and rapid and sustained breakaway moves. Yet right now, there are two currencies whose behavior fits the description: the British Pound, and the Turkish Lira.

The British Pound made a 31-year low last week. Everyone knows why: the government is really determined to leave the European Union quite soon and it looks as if nothing can stop that happening. There is major uncertainty now over Britain’s economic prospects. Pro-EU forced have talked up the economic consequences so greatly that there is much fear as to what will happen next. The fall may not continue, but the odds today are that it will, and there is no telling how much further it is going to go down.

The Turkish Lira is also making really record lows. Turkey was recently described as a “political basket case” by a leading Turkish economist. The country now appears to be arriving at a period of authoritarian rule with no end in sight, and there is plenty of fear as to how that may turn out. In any case, the country’s economy is very heavily dependent upon foreign capital, and that plus the instability equals a seemingly endlessly weakening lira.

Strong Forex trends are few and far between, but when they do arrive, if you have bravery and patience, it is possible to make a very high return taking only a relatively small amount of risk.