Yen Short Gold Rut and Euro

I find this an interesting chart. The implications are to hold stocks, but nervously, and that the “Yen Short” is a bit old. Yet there is a vote for a new Bank Of Japan Governor. There are three candidates, all more for a ‘weak yen’ than the current occupant. Most likely the present levels of the Yen assume the ‘middle guy’ wins. So I would predict yen can go either way, based on who gets the position. Iwata, Muto, or Kuroda. I don’t like to make trades based on things like elections as it is basically a crap shoot.

But the chart is still interesting. If one HAD made the Yen Trade, what tickers did well? (And which would be shorts if the yen gets stronger?…)

RUT vs Yen and Euro Momentum MACD DMI 19Feb2013

RUT vs Yen and Euro Momentum MACD DMI 19Feb2013

RUT  -  Russel 2000 small cap US stocks
GLD  -  Gold ETF
FXE  -  Euro ETF
FXY  -  Yen ETF
SPY  -  S&P 500 benchmark ETF
EUO  -  Euro Short leveraged ETN
DXJ  -  Wisdom Tree ETF in Japan with ex-Japan exposure
EWJ  -  Japan broad market ETF
YCS  -  Yen leveraged short ETN

This chart uses the RUT Russel 2000 as the base ticker. It is showing continued ‘steady up’ trend. (Due to The Fed pumping in money and bonds starting to roll down). “Don’t fight The Fed” argues for that trend to continue “for a while”, though US Markets look very “toppy” to me. Likely not a good time to put in ‘new money’, but I’d use a trailing stop loss behind present positions rather than sell them out preemptively.

Of particular interest here is that two tickers both did rather well. The “leveraged Yen Short – YCS” and the “Stocks with sales in non-yen terms Wisdom Tree fund – DXJ”. These are the two black / grey lines on top. Short yen the upper one.

The two losing tickers are the “Euro Leveraged Short – EUO” and the yen FXY. Notice that the blue line, the FXE Euro, is rising. So a short yen / long Euro would have been a very good trade. The green line is the broad Japanese stock market, EWJ, and clearly did not get as much money flow as those export oriented companies with non-Yen income in the DXJ fund.

Finally, SPY is the redish line that ends up about 5% up on the right hand side. Less than RUT. So being “Long RUT” and short yen was better than many other strategies (including long Euro short yen or long EWJ short yen).

For indicators on RUT, I’ve used momentum and MACD with DMI. Momentum is clearly saying “hang in there”. MACD is above zero and more or less flat sideways, also saying “stay in” for now. A “sideways weave” is the hardest MACD to deal with as it does many regular crossovers that mean nothing much; then eventually does a crossover toward the zero line that “sticks” and then you ought to be out. So I watch for “how long has it been going on” and for “has the slope started to trend downward?”

With ADX at near 50, the trend is very strong. DMI+, the blue line, as started a new inflection up and continues high while DMI- the red line, is staying low. RUT has strength and is continuing. Watch for an inflection downward in DMI+ and / or ADX as indication of weakening trend.

The Yen Trades look to have “gone flat” at the ends, so pausing for the election of the BOJ Governor while the Euro has started to roll down a bit, likely getting worried about the Italy vote coming up. Watch the Euro for opportunities to short it if the election makes Italy a Poster Child for exiting the Euro. Watch the Yen for opportunites to continue shorting on resolution of their BOJ toward a ‘bugger the yen” ongoing position (though I think that trade is a bit old). At some point Yen will start a rally as the “big money” exits their trades (the Dead Cat Bounce). That’s about a 1 week ‘counter trend trade’ you can make if you move fast and use a fast chart.

Finally, gold has rolled over and is in an established down trend. That will “continue until it doesn’t” (which is not a cheeky as it sounds). Plan on a trend in progress to continue even through modest reversals (“dips” if up trending, counter trend rally in down trends). That holds until such time as the trend has clearly reversed with prices going to the other side of the Simple Moving Average lines and staying there (failure to penetrate on a reversal to the SMA stack). The most likely explanation is some very large Fat Wallets exiting their gold positions (measured in $Billions) for other trades. In particular, Soros has been doing the “long Japanese stocks short yen” trade and may well have funded some of that with gold sales. That the trend has reversed to the downside indicates someone figures they’ve made their bundle and are selling out. (It doesn’t matter what “The Story” is, nor who you think is buying or selling what. Actual sales and buys move the price, and the net price movement tells you the net-net of all “Stories” … so a down trend says selling is in excess at this time). IFF we get a sudden reversal of both gold and yen, it is likely some Fat Wallet ending that “yen short” trade and parking money in gold; but I’d expect to see the ‘parking’ to be done in another currency that is rising vs gold.

Leveraged funds usually have a “go flat” if the underlying asset just has a drop of rate of change. (They are often made from instruments like options that have a volatility premium in them, so just a change of volatility, or rate of change, can cause a ‘go flat’ or a drop.) This is useful some times as an early indication of a trend weakening, even if you don’t use the leveraged fund.

All in all, I see this as the “Great trade I missed” rather than the trade to do now. Yet still instructive. It shows what “Big Money” does and how fast it can move on Central Bank news. IFF you can watch the news that closely and react that fast, you can make a lot of money on Government News. The ‘swing trade’ ran for about 45 trade days ( 2 elapsed months ) and had onset in a couple of days. (That yen ‘leveraged short’ shoots up on the first move day). So there was time to be in the trade, even if you didn’t ‘catch it’ until the end of the first week. (When it then went flat for about 1.5 weeks, so would be a frustrating time to make an entry…)

In Conclusion

So “lessons learned” are to pay attention to ALL the Central Banks and what they say. When there is a major shift from “strong currency” to “weaken the currency”, you have a few weeks to trade, and watch the leveraged funds for clear inflection indications.

Knowing what specialized currency sensitive tickers exist for the major currencies / countries is very helpful. (I didn’t even know the Wisdom Tree fund existed). Planning in advance matters. Even if you end up waiting for years for a change of Central Bank behaviour. Do the trade plan now, put it on the shelf, and then it’s just pull the tab when the news flow hits.

Not likely to trade “short yen” going forward until after the BOJ election and the Italy election are out of the way. Oh, and the USA “sequester”. Gee, actual production of goods and markets not mattering, while government posturing and bogosity is driving things… Welcome to Global Central Planned Finance…

Here is a ‘live chart’ of the same tickers so you can see what is going on ‘going forward’.

RUT Russel 2000 vs Yen and Euro longs and shorts

RUT Russel 2000 vs Yen and Euro longs and shorts

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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9 Responses to Yen Short Gold Rut and Euro

  1. p.g.sharrow says:

    Well lately gold is down and/or US dollars up. Is that the gold / currency trade? Soros is known for trades using inside information on the changes in central bank policy. pg

  2. E.M.Smith says:

    @P.G.Sharrow:

    There are a couple of key points. One is “safe haven currency”. Gold trades like a currency. So when “something goes down” cash runs to the “safe haven currency” (or currencies).

    For a very long time, the Yen was one of those. (Swiss Franc and Yen were the two major ones and the $US was the ‘reserve currency’ but prone to slow drift down…).

    For a while, a lot of folks were running out of Euro (on Euro risks) and the USD (on print and spend risks) and into Gold and Yen. Then the Euro started a bit of recovery and the USD didn’t inflate as much as some other currencies…

    So that kind of removed some of the reason to be in gold. You get interest on Euro and $US deposits… So gold started a bit of a fade. (There was also a load of folks in it for the momentum trade who had to exit on loss of momentum.. that starts momentum the other way).

    As the Yen was advertized as “Bugger Now!” by the BOJ, all the folks in Yen for “safe Haven” had to run off to some other “currency”. But Gold was in a slow drift down… where to go…

    So the $US got a load of the action and the Euro some of it to. (Swedish Krona got a big jump when they said they liked a strong currency and the N.Z.Dollar jumped on their central bank saying they didn’t have the power to keep their currency down…)

    Essentially it is largely “momentum trades” based on a kind of Liars Poker and expectations about what is going to be a ‘safe haven’. Gold was drifting down and the “narrative” was that the economies were going to recover. In that context the demand for “safe haven” drops and folks start to leave gold. Further, the “inflate stock prices” by the central banks causes folks to leave “safe haven” for “inflating asset”.

    In the end, we have folks leaving gold, buying Japanese stocks, shorting / leaving yen, and going into Euro / $US.

    OK, one more layer…

    “Carry Trade”. Big players borrow money in the cheapest currency on the planet (lowest interest rate) and use that to buy productive assets like bonds. So for a long time the Yen was the carry trade currency. You could borrow at near zero interest rates and then buy things like US Treasuries or stocks. (For a while you could see yen move counter to US stocks as money flowed into / out of the “carry trade”). With the BOJ getting active and the US Treasury driving $US rates down to near zero too, the $US started being more of a carry trade currency.

    In that case, shorting Yen gives you a chunk of money to “put somewhere”. You can’t put it in yen, as that is what you are shorting… so you park that money in another currency. Euro or $US are the only things really big enough to absorb $Billions without blipping… so you get a little Euro and $US rise (thus also gold drop…) on ‘short yen’ into carry trade currency.

    Now all of that is going on at the same time, so deciding ‘how much is which’ is not easy (and not worth it, really). All that matters is the end game. Yen and Gold drifting down as “yesterday’s trades” and Euro / $US drifting up as “new safe haven / carry trade currency” with some Japanese stocks rising as a hedge / trade vs short yen.

  3. p.g.sharrow says:

    Pretty sorry condition to think that the US dollar is less worse then the other alternatives in this rush to the bottom. The pricing of gold, silver and oil leads me to see as much as 200% inflation being baked into the works. Food is also started up that ramp. I think I will need a larger garden and more canning jars. ;-) pg

  4. E.M.Smith says:

    @P.G.Sharrow:

    Use the Kiwi Dollar as an easy yardstick. It WAS at 1/2 a buck for a very long time. Now at about 85 cents and rising… When it hits parity, you know the $US has been cut in half. The Australian $ was about 70 cents. Now it is about parity…

    Gold and silver are prone to “bubble and bust” along with fads and Central Bank manipulation (for gold). Hard to use them as a standard of measure. Broadly traded things with competitive prices are a better measure. Bread and postage stamps work OK… Each now about 10x what they were when I was a kid…

    Oil is highly volatile with economic cycles and political winds, so hard to use also.

    But a can of food is pretty standard… At the local Lucky’s store they wanted $2 for a can of name brand peas… (Got it at Walmart instead for $1) Remember when peas were 25 cents a can?… So yeah, a garden and more jars. When you can get 2 bucks a pint for canning, it’s worth it…

    I’m thinking my “toy garden” it going to be converted to “production garden” this year. Less seed experiments and more “for max produce”…

    FWIW, I suspect we’re having “round robin” currency devaluation in an attempt to hide the overall trend downward. So first it’s US down and Euro up, then Yen down and US up, then Euro down and Yen up… all the time the ups are 1/2 the downs… So why I’m looking at minor currencies for my ‘yardstick’…

    I think I need to try making a “Gasogen”. If you have one of them, and an old car, you can run wood gas into the car and have it run a generator. Couple of kW for the price of yard waste and wood. Tell the power company to go stuff it. Pretty easy to make.

    https://en.wikipedia.org/wiki/Wood_gas_generator

    or you can just buy one pre-made:

    http://victorygasifier.com/

    Though I like these folks Open Source kit ideas:

    http://wiki.gekgasifier.com/w/page/6123754/How%20to%20Build%20and%20Run%20the%20GEK%20Gasifier

    I’ve been thinking of making a tiny one to run a small Briggs & Stratton type generator set. Don’t have the room to do it right now; but if the power bills get too high, well, folks put out tons of “yard waste” each week and “free” is a nice price for fuel…

    So with electricity (and byproduct heat) for near free and food from the garden and a paid off house; well, the water bill isn’t much ;-)

  5. I’m going to make another equity dump. Dump half my remaining SPY into cash but continuing to buy SPY at regular intervals. These fantastic prices without any underlying fundamentals and on weak volume is scary. Could be stealth inflation, though. With luck it will start to tank soon and I will begin moving back out of cash into SPY again on the way down. Problem is that historically when things were configured like this, there was no “way down”, it tends to make one hellacious drop in a single day or two. I just don’t have a lot of confidence in the equity markets right now and believe we are seeing a lot of fed pumping where the money has no place else to go so the banks are just buying stocks for their own accounts.

  6. crosspatch says:

    Soros already dumped most of his gold, but look at this:

    Gold has moved through the “death cross” where the 50 day has dropped below the 200 day.

    http://www.businessinsider.com/gold-goes-into-a-death-cross-2013-2

  7. E.M.Smith says:

    @Crosspatch:

    I didn’t expect him to be holding much in a downturn of this length, but was too lazy to look it up. He’s a trader, so not prone to holding long term dropping positions.

    IMHO the “Death Cross” is over rated. By the time it shows up, the trend has already run a long ways. I use a 50 vs 75 day ( or that 24, 48, 72 SMA stack) or sometimes a 50, 100, 150 stack. Waiting for the 50 / 200 you just have too much movement gone by the time it says something and often it’s getting nearer the end than the start. IMHO, of course…

    But yeah, it is strong confirmation of the trend (that I’ve been talking about for weeks…)

    But if it is making the “major news”, perhaps time to start doing a ‘bottom watch’ ;-)

    FWIW, my favorite and nearly infallible gold and silver indicator is the rate of ads selling gold and sliver on the financial news shows. (Mostly CNBC). When the ads are fast and thick, they are having trouble filling the buy side of their contracts, so pay to advertize. Be a seller then… When the ads suddenly are gone, time to buy… Right now there is still a high rate of gold and silver ads, so not time to buy…

    Never had it fail yet.

  8. crosspatch says:

    FWIW, my favorite and nearly infallible gold and silver indicator is the rate of ads selling gold and sliver on the financial news shows. (Mostly CNBC). When the ads are fast and thick, they are having trouble filling the buy side of their contracts, so pay to advertize.

    Hehe, I thought I was the only one who came to that same conclusion. When you hear the airwaves thick with “buy gold” ads, it’s an indication they are looking for suckers to unload on. Anyway, now that it has shed some $200/oz since last October, it might be a good time to start accumulating a little.

  9. E.M.Smith says:

    Above I’d said:

    A “sideways weave” is the hardest MACD to deal with as it does many regular crossovers that mean nothing much; then eventually does a crossover toward the zero line that “sticks” and then you ought to be out. So I watch for “how long has it been going on” and for “has the slope started to trend downward?”

    With ADX at near 50, the trend is very strong. DMI+, the blue line, as started a new inflection up and continues high while DMI- the red line, is staying low. RUT has strength and is continuing. Watch for an inflection downward in DMI+ and / or ADX as indication of weakening trend.

    It looks to me like, on the live chart, we have ADX inflected down and DMI+ inflected up so the ‘dip’ is likely starting now. Next step is a MACD crossover to clearly a down trend angle. So it looks like “toppy but no exit yet” is turning into “inflecting down, be out”.

    As this is an established trend up, the “be out” is subject to “buy the dip” rules. The bias is to “be in” and you keep a ‘buy if touched’ point above the ticker as it drops, buying back in when the trend returns. (When it returns to the SMA stack, you evaluate it again for “Stay in a rising trend” or “sell at the SMA stack in a new down trend”.)

    @Crosspatch:

    WAIT. We are in an established gold down trend. This can have “long legs”. Any buy ought to be on a fast chart and with the intent to sell at the SMA stack return. (That stays in effect until a clear uptrend is established via price above SMA stack in ‘up’ order and failure of price to penetrate the SMA stack to the downside). So only “counter trend rally” trade and “exit longs or short at the SMA stack approach from the bottom”..

    Ten day 15 minute chart still showing “stair steps down”.

    http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Fund&symb=gld&x=44&y=13&time=18&startdate=1%2F4%2F1999&enddate=2%2F20%2F2013&freq=7&compidx=aaaaa%3A0&comptemptext=gld+rut+tbt+jjc+tip+uso+qqqq+jjn+tlt&comp=gld+rut+tbt+jjc+tip+uso+qqqq+jjn+tlt&ma=4&maval=24&uf=0&lf=2&lf2=4&lf3=65536&type=4&style=320&size=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=15

    At most put a ‘buy if touched’ above price and let the market buy you in. Catching this falling knife with no support below it yet and shorts running is a very high risk…

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