How to "See" the True Message of the Markets (Part 2)

How to "See" the True Message of the Markets (Part 2)


Many traders feel that Fib ratios offer clues about whether a move higher in an established downtrend, for instance, is a pullback in the downtrend, or whether the move higher is a change in trend to the upside. In particular, some traders view the 61.8% Fib ratio as the dividing line. If price has been in a downtrend and manages to rally past the 61.8% Fib ratio, it’s likely that the move higher is a new emerging uptrend, not a rally in an established downtrend. And you can see on the second chart in Part 1 of this article that this trader was pointing to price’s failure to test or break above the 61.8% Fib ratio before turning back lower as a likely sign that the recent up move was merely a countertrend rally.

The new student then added what he considered to be the most probable path of price. After doing his pre-trade analysis, he had decided price was about to resume the downtrend. With this view in hand, he would be looking for price to test the red, down-sloping upper Median Line parallel after a slight rally. Note that he expected the next rally, the one that might test the upper parallel, to be lower than the prior swing high.

When I work on pre-trade analysis with a trader in mentoring, I am examining the trader’s analysis and ability to “read,” or “see” the market structure clearly. In my mind, I am asking, “Can the trader “see” the market structure clearly? Has he considered both the downside and upside scenarios during his pre-trade analysis? Is he projecting a realistic probable path of price? Is he being objective or is he choosing his analysis to support his view on the market?” Often, the only way for me to determine if the analysis is objective is to start from scratch and do my own analysis, in front of the trader. Let’s see what steps I went through with this trader:



The first thing I generally do when analyzing a market is look closely at the market structure. I want to know the major swings, how they formed, and where the market is currently in terms of swing structure.

On the daily gold futures chart above, I removed the red Median Line and its parallels—and that makes it much easier for me to see and mark the major swing highs and lows. Note that I marked higher highs and higher lows in green, indicating price was in an uptrend. I marked lower highs and lower lows in red, indicating price was in a downtrend. And I marked congesting or contracting areas, where price was making higher lows and lower highs, in blue. This simple analysis gives me a feel for the length of swings for this particular market, shows me visually how price generally confirms trend changes in the market, and of course, it shows the current trend of the market.

All other analysis flows from this simple structure analysis. When I do my own pre-trade analysis on a given market, I may or may not have to draw in these swings—my eyes are well trained at this point, and it is easy for me to see market structure. But if it is a market I am not familiar with, or if the structure is not instantly visible to my eyes, I clear off any lines drawn on the chart and do this simple swing analysis—and the market structure instantly becomes recognizable.

More in Part 3…

Currency Traders: The Fed Has No Clothes! Part 5

(Or, in other words: What’s Going To Happen With the US Dollar?)

Let me explain the state of the currency markets in the 1980’s: More than ninety-five percent of all cash currency transactions were made through banks. Brokerage firms did not offer cash FX prices, companies had to deal through banks and cash brokers only dealt with banks and a select few Investment Firms. The banks controlled the flow of all the cash currency transactions and other than outright position limits and cash FX trading was basically unregulated in the bank arena.

Today, only roughly fifty-five percent of the transactions in the cash FX market go through banks. The rest go through exchanges, FCMs that make markets in cash currencies to retail and institutional customers and through the electronic brokerage service, a brokerage clearinghouse that allows very large net-worth individuals, corporations, banks and investment firms to deal direct. These days, General Motors can sell dollars directly to a large private speculator through EBS. The days when the handful of large banks in the world controlled the cash FX markets and could really influence flows are gone. Banks no longer have the risk tolerance to carry the huge speculative positions we routinely carried in the 1980’s—they have credit risk and mortgage portfolio problems to worry about. Risk has shifted largely to the speculating crowd and the central banks don’t have control of that crowd. For better or worse, control of the cash FX market has shifted from the few to the masses and that has greatly diminished whatever power the central banks had, IF they ever had the power over the cash FX markets traders attribute to them in ‘the good old days’ of cash FX.

The dollar is currently in a very strong down trend. Until that long-term trend changes, the central banks know that buying US dollars against the major currencies is throwing money away. They do not have the reserves or the sheer power to turn these long-term trends in the cash FX market. And in the case of the United States, the Federal Reserve has so many other urgent matters it needs to address, the dollar’s level is not even on the list of policy items worth pondering.

Currency traders shouldn’t spend any time or emotion worrying about whether the central banks are going to stop the dollar’s slide. The truth is quite simple: when the flow of capital out of the United States ends, the slide of the dollar will stop. It’s well known amongst the larger market participants that the countries that had traditionally held the majority of their reserves in US dollars have been diversifying their reserves out of US dollars and into other currencies. China and Japan have sold a huge amount of US Treasury Instruments and then sold the US dollars they received from these sales—many insiders estimate that China now holds less than 1/3 the US assets it held three or four years ago.

With the emergence of several new large economies [Europe, China and India] that are beginning to rival the US in buying power, investors around the world realize that ‘flight to quality’ may not necessarily mean a move into US denominated assets. As little as six months ago, when I mentioned it might soon take three US dollars to buy one euro, people generally felt I was overreacting to a short-term down trend in the dollar. But these days, it’s become clear that the United States is not in the driver’s seat when it comes to determining the level of the dollar, the level of their own interest rates and the capital flows in and out of their own country. The markets will take the currencies where they take them and the central banks, like all other traders, can go with the flow or stand aside—anything else will result in losing positions that eventually will be liquidated.

I wish you all good trading!

By Timothy Morge