I hope you had a great week. I just got back from vacation in Mexico and can confirm that the Mexican economy is alive and well (in fact, looking at a weekly chart MXN might well be some good trading ideas there!). I was also there to witness their football team beat Germany to pull off perhaps the biggest shock result of the World Cup so far. Having thoroughly enjoyed my break away from the markets, I wanted to share my review of some trading setups that I had identified in our recent Trading Club meetings which I caught up with in this week’s video.
All of the Checklists you see below were prepared on May 31st for the month ahead (June) and made available immediately for Trading Club members to access. Accompanying this are a series of weekly reports and videos which provide all the indicators and insights you need to be fully prepared before you start trading. If you would like to join me for next week’s video, as well as an archive of our 12 most recent videos plus all of the above, check out the membership options for more information. (Please also do not forget that all information presented on our website is for informational and educational purposes ONLY and you should not make your investment decisions based on the information presented on our website. You can review our full disclaimer & risk disclore here or in the footer of our website displayed for your information and convenience at all times).
We begin with our Market Indicators Checklist, which was showing a score of -2 (suggesting that traders should prefer ’safety’ to ‘risk on’ trades).
The following chart showing the relative performance of Industrials (XLI) vs Consumer Staples (XLP) demonstrates how this played out in the sector rotation out of cyclical stocks and in to staples such as Proctor & Gamble (PG), which is the largest constituent of the XLP ETF.
Whilst risk markets like equities were expected to face headwinds at a macro level, we managed to identify some great single stock ideas using our Company Analysis Checklist this month. Here you can see our analysis of Disney (DIS), and the +10% rally that took place during a relatively quiet period for the S&P 500.
Another winning idea that we also featured was home furnishings business Williams Sonoma (WSM). The stock has broken out of a huge 2-year consolidation and is also up double digits since we featured it in our Trading Club video analysis a couple of weeks ago.
Clearly our long ideas are playing out nicely, outperforming the market in the past month. We also looked at the short case for Tesla (TSLA), which appeared to be validated by our Company Analysis Checklist. However, as we emphasised in our recent short selling masterclass, it is absolutely critical to analyse the technical picture and wait for price to reach an extreme before initiating a short position. At the time of producing the video on Tesla, price was within a range and we subsequently saw a huge short squeeze of almost $100 take place all the way from $280 (ouch!). For those of you who avoided the consensus trade until the entry opportunity presented by the overbought (>70) RSI and DeMark exhaustion signal (green ‘9’), well done! With the 50 day moving average still below the 200 day moving average, this may prove to be a great short entry with the fundamentals and technicals aligned... (remember our usual disclaimer - all examples we discuss here are for educational purpose only and you should not make investment decisions based on this).
Moving away from equities (there are even more stock ideas in the video) and turning to currencies, I want to share a couple of currency trades with you (again for educational purpose only). The first is, for example, shorting GBP/USD, following the negative score of -1.5 presented by our Currency Checklist. At the time of producing the June report sterling was oversold (first chart, ‘June 1’), having tumbled in recent weeks as our checklist remained negative.
However, the chart analysis suggested that 1.33 might be a good level for short sellers to take some profits. I also explained in that video that I expected cable to retrace towards 1.3450 in the short term, before providing a second opportunity to re-sell GBP short with a final target of 1.3086.
As you can see in this updated chart showing the price action that followed, we touched each of these levels and traded within a few pips for a great risk/reward payoff with the weight of the fundamentals behind us.
Another interesting idea generated from our currency league table was, for example, shorting EUR/CAD, going long the highest ranked currency and short the lowest ranked currency. (Please do not forget our usual disclaimer - all examples in this article are for educational purposes only and you should not make investment decisions based on the information presented here.)
When we looked at the chart on June 1st, price had already moved a long way in the direction of the idea. Therefore, we opted to keep this on our watchlist looking for a potential retracement to sell EUR/CAD short.
This updated chart shows that cross is approaching the 50% Fibonacci retracement level (1.5535) that we noted in our earlier analysis, within a few points of an overbought level on the RSI. The Canadian dollar can be difficult to trade, but this setup could work well if we fail to record a swing high above 1.5681.
Finishing our tour of global markets with commodities, lets begin with Gold. Gold has been pretty weak this year following the rally into year end 2017. It has failed several times to break 1360 and our Checklist has kept us on the short side of the range for some time now. This month it remained negative, although it was not a particularly strong score at -0.5.
This score suggested that gold may be technically driven in the short term, with a slight negative bias. Following a rebound from an oversold RSI and 61.8% Fibonacci retracement level at 1285 it looked like 1300 would be a psychologically significant level to potentially sell in to (first chart). We noted 1264 as an initial downside target if we were to make a new low below 1285.
As you can see in this updated chart, price retested 1300 and failed to close above the level, subsequently breaking below 1285 and low ticking our target of 1264 perfectly for another well executed trade. Sometimes technicals can be 'noise', but when combined with fundamentals can turbo charge your PnL and risk adjusted return.
No commodity analysis would be complete without a look at crude oil. Our checklist suggested further weakness in WTI with a score of -2.5.
At the time of producing our analysis on June 1, crude had reacted by selling off the $72 level that we had identified as potential resistance a couple of weeks before when our checklist was also negative. The technicals didn’t show an extreme in price, although the futures were trading towards the bottom end of their upward trending channel. At the time of recording we were watching for this to break with downside targets of 63.40/64.80.
As you can see, this played out almost exactly as anticipated by our Checklist Trading process (we even had a little bounce off the first downside target with an opportunity to re-sell before the second target was reached!). For now there is some bullish divergence appearing on the RSI oscillator, and with price shedding double digits in the past month or so the move may be done for now. We’ll have to see how the Checklist looks going in to next month which of course will be available immediately to Trading Club members.
I hope you found this roundup insightful, and if you would like to learn more with our Million Dollar Traders course or join me in applying the process to live markets each week at our Trading Club, please get in touch with us (you wont regret it!).
Have a great weekend,
James Helliwell | Chief Investment Strategist
Disclaimer: Our service is intended for educational and informational purposes only and should not be considered investment advice. Do not make any decisions based on the articles and material presented on www.lexvandam.com and never trade with money you cannot afford to lose. We cannot be held responsible for your trading results. For more information, please check Risk Disclosure - T&C.