Wednesday, October 16, 2013

Goldman Lesson and some Odds and Ends...

I want to start with Goldman Sachs first, you may not recall and I don't blame you, but I've seen this so many times that I make a point of following the information, on Thursday October 3rd, Goldman Sachs (GS) came out with one of their infamous "Free Trade Ideas", as you know we've tracked something approaching a dozen of the last GS free trade ideas and this was no different.

I mentioned it first in a midnight futures post on Friday October 4th at about 12:53 a.m. as follows...

"Interestingly, the VAMPIRE SQUID, better known as Goldman Sachs who trades against their own clients, is out with some free advice from Mr. Stoppler, which is an ironic name because the last 6 or 7 trade recommendations he's put out have been "Stop-plerred" out. 

Today GS and the Stop man put out some FREE trading advice and rec'd:

"We recommend going short $/JPY (USD/JPY) at current levels of about 97.30 for a tactical target of 94.00, with a stop on a close above 98.80." 

Short the USD/JPY huh? Free advice from Goldman huh? Other than the fact the trade is a 2:1 risk/reward ratio, WELL BELOW the minimum of 3:1 any decent trader would consider to be the bare minimum, the fact is GS fully expects this trade to be stopped out because they don't spend millions on research to give you their trade ideas and have you competing and taking away their edge and profit, they aren't a charity.

This simply means, GS is buying $USD/JPY, they aren't dumb, that means a risk on currency pair should be seeing upside action and that's helpful to the market, but what does 3C show?

 15 min Yen futures look a little negative...15 min $USDX futures look VERY positive, so despite their recommendation, it looks like the USD/JPY pair is set to gain, stopping out those taking advantage of Goldman's generosity and making GS money as well as providing a risk on carry pair a potential engine for higher market prices!"

So even the day of their recommendation, it was obvious Goldman was going to be doing the opposite of their recommendation, 3C that very day had said the USD/JPY was going higher and it was part of our market analysis for price expectations.

Today, as usual, the free GS trade call was stopped out at a loss, never approaching their downside target, here's what the whole debacle looks like in case you ever decide to listen to any Wall St. free advice and that includes Goldman alumni, "Cramer".

Above is the date of their (Tom Stoppler's) short call, the lowest price the pair made which was no where near their target and the trade going completely wrong almost from the start for any taking it right to today when the trade was stopped out above $98.00. 

What may be even more interesting, being GS was in my opinion positively doing the opposite of their call, is if Technical Traders follow the T.A. Dogma of Technical Analysis in which Dr. Alexander Elder (an author I actually like) originally laid out, 

"When a trade goes against you (I'm paraphrasing and a bit out of context), then switch positions in the opposite direction"

Effectively that would mean USD/JPY shorts who just lost a boatload and were stopped out, "should and may" reverse their position and go long the $USD/JPY.

3C was correct about the direction of the currency pair the day GS announced it, right now 3C is showing the following re: the FX pair (and by proxy, risk-on support for the market via this particular carry trade).

As the Yen has dropped during the USD/JPY rise, there has been a 3C positive divegrence forming on the 15, 30 and 60 min charts. In fact, just last night in the Daily Wrap, I was showing how the USD/JPY had an incredibly tight correlation with SPX futures; what I was really showing you was how a currency carry pair can either support or send a market lower, take a look at the post. 

However the important part for our purposes here was the following from a post last night...

"That leaves the $USD, in my opinion from the 3C charts, this is the currency that is most likely to see downside "

 (*It's true that the legacy correlation with the $USD has been a falling $USD makes stocks, precious metals and commodities more expensive, but in the context of a carry trade, the exact opposite is true and that has been the correlation just about since November of 2012*)

Also from last night...

"The Yen finally is inline on the 1 min and has definitive positive bias beyond 1 min charts, which could be trouble ahead if there's nothing else moving the market like bi-hourly Congressional leader cheerleading...Strength in the Yen, which I'm 80% convinced is coming, will damage the carry cross like the Euro/JPY above in candlesticks, when you look at how ES (purple) has been hugging the pair both up and down the last 4-days (yesterday up, today down, tonight up), you understand why a falling EUR/JPY (like today during regular hours) is damaging to the broader market."

I know that's a lot to take in if you are not use to Currency Pairs and how they effect the market, especially the "Carry Trade" pairs;  the posts above from yesterday show you the correlations. 

When you buy the USD/JPY you are long the $USD and short the Japanese Yen. Goldman recommended doing the opposite on October 3rd and that trade (which had barely any profit potential vs. risk) went bust today, but not before GS could accumulate it on the cheap due to those selling it short and then squeeze them and sell the same trade for a nice profit... leverage in FX can be huge.

However the charts I have been showing the last several days or so have been showing this trade looks highly probable to reverse which would probably suit GS just fine as their target stop is likely the same area they'd be done selling to shorts who were covering at a loss and if retail technical traders do that, "Take the opposite trade if you are stopped out", they'd likely be going long just as the FX pair looks ready to drop. Beyond that, although this is only 1 of the 3 popular carry trades, it has been used a lot lately so it also has market implications.
So what we can take away from this other than "be careful taking free advice from Wall St, is that this becomes a piece of the analysis as I am demonstrating above. The USD/JPY in the green/red candlesticks has had a very tight correlation with the SPX futures in purple. Very often the Currency pair moves first (especially overnight and the market follows, so that helps to answer the chicken and the egg question). Last night and over the last several days a trend of a stronger JPY (Yen) and a weaker $USD has been developing as per the posts quoted above from yesterday, if this correlation holds, that's a bit of interesting and useful analysis.

WHILE WE ARE ON THE SUBJECT OF GS...

I opened a GS call position (which was closed today) on October 8th if I recall, this chart from October 8 showed what I expected to be a decent bounce, in fact that was the caption under the chart.
If I had expected a larger move without too much chop, I would have just went with GS long equity, however since the profit potential seemed limited because this was only a 5 min positive and the market had been very volatile, I decided to use November $160 calls.

This is the same chart today...
You can see the original positive divegrence that made a long trade interesting, but since it has gone to a relative negative with 10, 15, 30 and 60 min charts negative. In addition, there was decent intraday momentum earlier which I prefer to close a position, but the afternoon trade was flag-like, but consolidating in the wrong direction which I've seen turn in to a mess, thus my preference to close it, even if at a small loss.

This is the P/L for the GS $160 call...



At a cost of $6.00 and a fill of $5.96, the loss was 7/10ths of 1% or .007% so almost break-even, I just didn't see the edge there any more.


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