William C Dudley: The economic outlook and implications for monetary policy
So, you’re just sharing this speech - do you have any thoughts / comments on it?
Hi Forexunlimited,
yes, I often only share them so other people can also read it.
However if there is a question of course I can share my thoughts:-)
I am slighlty bullish lately on the pair when trading the USD. We can see comments about tapering further on which is bullish, at the same time we can see that GBP and inflation will not pick up very fast which is a bearish signal. The economic reports also show a mixed report. As far as I see the US economy is recovering very slowly.
Drawing a conclusion on this report and on my own findings: I only trade US pairs on the fundmental news for short term, since I do not see any long term signals at the moment. I rather trade other pairs where it is easier to decide which direction the trend goes (like JPY, EUR or AUD). As soon as I get the picture as a whole, I may start trading longer term the USD again.
What do you think? How do you see the US economic situation?
This is how I see the US economic situation right now:
-Bonds are rallying. Rates are dropping in the US.
-Risk is on (for how much longer though…unsure). I use the SP500 primarily to gauge sentiment, alongside VWO (Vanguard Emerging Markets ETF- heavily weighted on Asian Financials / Tech / Energy). Both trading slightly off YTD highs.
-The USD is moderately weak currently (started off the year trading higher though).
-Commodity prices are rising almost across the board (YTD led by Livestock and Agriculture). Energy and Industrial metals have been rising since early May.
Tough to pin exactly where the economy is in terms of cycle.
Thanks for your reply!
In stocks I am not in so I cannot say something about that. However can you maybe write something about SP500 for sentiment? Do you think that I can use it for the currency market as well? I only use the COT report but would be great to extand my knowledge.
What do you think about Oil? That is the only commodity I trade, but I am not quite sure how high the prices might go and in the COT report I do not find so great sentiment explanation for commodities as it is for currencies. I hope the 104-105$ will be the final resistance for now.
No problem glad to help.
Not a problem- I don’t know your experience level, so I really can’t tailor a specific answer. I created a simple questionnaire on my website, which can potentially help gauge where you stand. I sell nothing, only offer educational advice.
As far as sentiment…I don’t have the time right now to break it down in words. Risk trends are in a weird spot right now, all on the cusp of major tech breaks. Pull up a D1 chart of the SPX500 (this is the symbol) on tradingview.com. Drop horizontal lines @ 1888, 1865, 1850, and 1810. Those are my levels. Breaks above 1888 open up a retest of all-time highs and potentially more bullish gains. Breaks below 1865 bring weakness. Closes sub 1850 is bearish, with 1810 in target. 1810 broken can open up room for sellers to run.
My sentiment: neutral-to-slightly-bearish.
I don’t look @ the COT, but YES you can definitely use the SP500 as a gauge for risk when looking to take currency positions. I monitor the SP500 on a daily basis, and am constantly aligning myself based on risk-on, risk-off price action. Equities are considered a risky investment. Whenever equity markets are on the way up, one can deduce that investors are willing to assume more risk for more reward. Equity yields are going to be much higher than bonds and some currencies (thus making them riskier). In times of complacency (“risk-on”) currency traders seek yield in AUD, NZD, etc.
In times of risk aversion or uncertainty, investors may typically pull their money out of equities and seek return in safer vehicles such as bonds (almost risk free) and safe haven currencies (such as the USD).
Pull up the SP500 on trading view, then drop the JPY crosses over it (USDJPY, GBPJPY, EURJPY, NZDJPY, AUDJPY). You should see something immediately stand out.
…JPY crosses are extremely sensitive to risk.
Oil is very expensive right now…actually had a release hit the wire today which showed a decrease in 7.2 million barrel in US Crude Supplies. I primarily trade using technicals, but will use some fundamental data alongside inter-market relationships to help project time frame as to how long I may want to hold onto a trade. Think about the relationship b/w commodities and how they are priced (in USD primarily). If the USD gets weaker, this can be seen as bullish for commodities. Vice versa for a stronger dollar being bearish for commodity prices. (See disclaimer below)
If you’re a newer trader, don’t try to get all fancy with diversifying your portfolio. If you’re good w/ Oil and Currencies, get better before trying to tackle equities or other futures markets.
I use a plethora of markets to try and understand where capital is flowing from and to.
Most every trader should be aware of these @ a minimum:
Bonds: 5yr, 10yr, 30yr US Rates. German Bund / UK Gilt yield curve.
Commodities: Oil, Gold, (Can also just use an index like the CRB to gauge commodity prices as a whole)
Equities to monitor risk: SP500, JPN225 (Nikkei), FTSE100, $VWO (Emerging markets ETF), VIX Index
Currencies: FXCM USDollar Index, DXY, Majors
Disclaimer: Inter-market relationship analysis is not a black-and-white thing. It’s incredibly complex, and is a beast of a concept to understand. Just because a USD index is moving up (hinting that the dollar is gaining strength) does NOT directly equate to Gold losing value. There is a relationship there, but, it’s not as clear-cut as this 100% of the time.
Wow, that was a great answer! I really appreciate it!
Well, I thought I give a quick overview about myself because as you said it is hard to give an advice if you do not know where I stand. I started to have interest on forex about half a year ago. I have never traded anything earlier. So I did not have any experience. I only concentrate on forex and the correlated commodities (as you also wrote Gold, Silver and mostly US Crude Oil).
Although half a year experience is not much, I tend to think (at least) that I am catching up faster with the experience than others. While most people tend to spend 1-2 hours with forex on a daily basis, the time I spend is way more and I made a daily schedule what I do every day to get better.
I will check out everything you wrote, however my schedule is quite full for today and tomorrow so I might be back on that in a couple of day and can tell you my experience with your site! I will definitely do that. What you write on currencies I can follow it all, I definitely liked your summary at the end of the post. When you wrote about Indexes, it was a bit more difficult because of my very limited knowledge. I will definitely do what you suggested because of sentiment analysis, but I do not go into that topic deeper until I understand currencies. Later I can diversify the markets but this is not the right time yet! As I read the books and many articles I also see that experience is not everything discipline is the most important. I try to concentrate on that issue a lot, I will see if I succeed or not.
I have though a dilemma where you can give me maybe an advice. It is difficult for me to concentrate on Crude Oil or on currencies more. Currency is easier to follow on my opinion because I see in the forex calendars for fundamental and I can get great analysis and up to date articles the whole time. However this makes the currency market also very “complicate” to see what is important and what is not so important. We have to make our decisions based on thousands of factors. My concern for Crude Oil is, that it is more driven on a supply demand basis which might not be an issue for central banks and for every single political news (I mean here not geopolitical issues). Crude Oil has a disadvantage though. It makes price changes often that I do not understand right away and the news on the internet are not so up to date as they are in currencies. In forex calendar is the one Iventory news on Wednesdays and that is all.
Summary: I think in long term it might be more profitable to study a market like Oil over currencies, but it is a lot more difficult to find the appropriate and fast news sources to make the right decisions at the right time.
I am waiting for you opinion for this last part and many thanks.
Hi Forexunlimited,
ok, now I am ready to answer:-)
I made everything like you said with the SPX500. However many things are not clear. How did you choose these values and what do they exactly mean? Do these values change and when yes, then how and when?
The other question is what you wrote in the end about what all traders should follow. How do you use all these indexes? I mean for sure you do not look at all of them by every trade. You just know by heart the values and keep in mind when you make your decisions?
I also made the questionnaire and I am interested what you come up with 
Thanks
The levels are based off how price reacted @ them- in other words what most people recognize as “Support” and “Resistance”.
The values won’t necessarily change- the only thing which will change is how price reacts to them as more candlesticks are printed. Some times support will hold, other times it won’t.
As for the indices I watch. To answer your question- no, I don’t pull up a chart before every single trade I make for each instrument. I do watch them a few times / week- or around key events to see how the market participants react. It’s important to try and gauge where capital is flowing to on a global/macro-economic level. This can help gauge longer term sentiment, and put you on the right end of trades in the short term. Traders will move away from markets where the perceived return isn’t as favorable in comparison to another market. I.e. Gold was recently stuck in a tight range, trading sideways. What is that indicative of? Are traders/investors interested in the precious metal when it’s moving no where?
No, so, they take their money/time/effort elsewhere into markets which are “moving” - volatile.
The concept of intermarket relationships is incredibly difficult to nail down because it is not black and white as we want it to be. Sometimes, XAU and the USD can move in unison, others the two trade inversely. Just because the USD is strong, does not mean that you should sell XAU- that’s not how it works. Think about it like this- that line of thought I just presented is a 2nd graders’ comprehension of intermarket relationships. It’ll do nothing but drain your account.
Intermarket concepts require a college education (in comparison to a 2nd grader’s knowledge base).
It really is a never-ending learning experience, because market dynamics are always changing.
If you’re interested, here’s how to start. Go to tradingview . com, pull up some charts, and start overlaying multiple indices together. Use logic- try to piece together the puzzle by understanding where traders are buying, where they are selling, and where there is no interest. Read up about economics and how these markets “typically” interact with one another. Sometimes one can lead, and another follow- which may be representative of large trend changes in the market overall. For example–if we start to see the SP500 and other equity-based risk trends pull back strongly, these moves can have a negative impact on JPY-cross currency pairs.
Commodity prices, such as Oil (USOil WTI) (kind of a beast of its own), also can help us in determining USD strength (Oil is priced in USD). If oil prices are falling, it’s because investors perceive the value of 1 barrel of oil to be worth much less units of USD- it takes less dollars to buy 1 barrel. Couple that with a dollar index (USDollar, DXY, etc) gaining strength against other global currencies- and you have yourself a [B]very basic[/B] analysis/snapshot of intermarket relationships. Eventually, you can get to a point where we can decipher whether or not big impulsive moves in the market are substantial and note-worthy or just liquidity-based.
The market always attempts to find fair value for an instrument, based off participant fear and greed.
A price chart is all you will ever need to make a decision @ the end of the day to buy, sell, or hold.
Every single emotion and economic piece of information will be factored into price the millisecond you pull up a chart and the candle starts to move.
Hi,
wow thanks for the great answer!
Ok, I did not see them that they were your support and resistance level. Thought you got those values somewhere. Interesting your point of view about moving away from markets where there is range trading and not much possibility of volatility. I am long in silver and really nothing happens. I might liquidate it. I think about it on the weekend to what to do there.
Well intermarket relations. First I read about it more in the School of Pipsology. I have to tell you honestly I might look at an index from your list when I buy a product in the subcategory but intermarket correlations… My problem is that even in the School of Pipsology they write for example: “Look at the great correlation of xy currency pair and zy stock index!” Honostly, the correlation was often about 50% so I do not need it because that does not help me. And the other problem was if the correlated pairs were getting away one from the other then the site says: “Do you recognize how zy gave a signal for xy?”. Well no, I do not see it because if I take the opposite end of the signal, lets say I take the signal of xy in the above mentioned question and try to interpret where zy goes then I am exactly on the wrong side. Well I do not know if you can understand what I mean, it is confusing how I wrote it:-) Anyway, all I say that when I tried to look intermarket correlations I got many missed signals. I guess I need more experience in that field. Especially when somewhere is: “Do you recognize how the two markets move together and then at a certain point they start to be the inverse of one another?” Awesome… that is a great help but for what exactly… If they do not move together like “they should” then I have to decide if the index or the currency is leading and which one is going to follow. So I am not any closer to the solution.
It is interesting to see the analysis and I really think I should get deeper in it. However at the moment I think I have more important things to learn and try to master the COT report first!
Thanks a lot for your kind answers!
So, the COT report comes out 3 days after the fact…this is a major factor.
COT, fundamentals, Intermarket relationships, indicators, price action, etc- these are all tools we use to analyze the markets.
Most traders try to focus on a single aspect of trading, such as candlesticks, which is why retailers blow their accounts so often. We need to be dynamic.
The COT’s value lies primarily in its tool to gauge where the “potential energy” of a currency is. Lets take Kiwi for example… For about the last month… The positioning of open kiwi positions has been in the 90+ percentile for longs over the past 5 years. This means that the “potential energy” of the kiwi is down, even though the fundamentals behind the currency are still very strong. Typically you’ll see this type of situation at the end if a long trend and is a key indicator of a trend reversal.
Aussie was in the 90th percentile for shorts back in February… Now it’s fully corrected higher and positioning is about even.
Lol, Bd has just summed up in a single post what it has taken two ‘educators’ pages and pages of words.
One of these then entitled his work a ‘bible’, the other some sort of ‘secrets’.
Another difference, Bd’s post costs us only a little brain usage, not so the two distinguished authors.
Hi Bigdiddy999,
thanks for your answer! I am short on NZD/CAD. Would you share your opinion on that? I guess you talk about also only the non-commercial segment when you talk about percentile. You mentioned the Aussie, well how do you decide when to quit then the position. For example if positioning is about even, then is there any indicator in the COT report which help to make a decision? (besides the normal technical and fundamental factors).
Hi peterma,
I just “love” comments like yours. I believe you have might have a good knowledge of the markets but for such comments you do not have to waste our times. I respect the people and help or do not say anything. When I critisize then I try it so that the people will be better in the future. This post is also to learn. So if you do not wish to participate you do not have to. But you can just save these very intellingent comments for yourself if you do not have any better ideas. As I see we are the bible and whatever you wrote but you are here the “smartie” without smart ideas.
Have a nice weekend everyone
Bigdiddy999,
It would be great if you joined the conversation at 301 Moved Permanently Your comments are welcome! Especially if you comment the trade ideas, what you like in them and what not.
here is the breakdown of what happened to aussie…
below is the non-commercial positioning table for the currencies in mid february… Aussie is in the 99th percentile for shorts over its last 5 years of positioning history. The US dollar is also stretched to the long side and is in the 88ish percentile for long positioning.
At the end of March the aussie positioning is less stretched, but still heavily short. The USD also begins to rebalance.
lastly, below is last weeks report which shows aussie and US dollar are about balanced now, with both extreme positions having been equilized.
Here is the price chart with some of the key points… the red dots mark the COT reports that I posted above.
I didn’t have enough space to show the long bearish trend that caused the aussie to have such extreme short positioning, but that is what led up to the aussie being so heavily shorted. About this time, the currency pair stopped declining even when bad news was released. This indicated that the market was entirely saturated with sellers already and price could not fall anymore. When this happens (confirmed by the COT positioning) one simply needs to wait for the slightest bit of good news to come out, and this will have an exaggerated bullish affect as the only place for the currency to go is up. People are eager to buy at a low price, which causes price to go higher, which in turn causes the bears to start closing their shorts, which in turn drives the price higher, which will then hit the stop losses of the bears who didn’t close, and these positions being liquidated feed into the bullish retracement even more. At this point it is a full on short squeeze, and anyone trying to short it on its way up is playing a dangerous game. Once the COT positioning has leveled off (back to the middle of the bar) then price action becomes more stable and explosive, corrective moves become much less likely.
Hi Bigdiddy999,
thanks for the great charts. My question is: how did you decide that 16% and 84% are the “overbought” and “oversold” territories? Is it just a value or how did you choose it?
The other thing is the MXN in your table. In the COT analysis it is very bullish for non-commercials, in your table it is quite balanced. How di you come to this conclusion?
At what extreme levels do you like to take your positions? 85%? 90%? or 95%?
Thanks
Hi FE,
You are aware that the two most known ‘educators’ in the market that write about the COT report are of course Larry Williams and his book ‘the Secrets of the COT Report’, the other being Steve Briese and his book ‘The COT Bible’
Both these books have devoted many pages that can be summed up in BD’s post - i.e. the value of the report extremes.
Briese developed the ‘COT Index’ with the purpose of visually displaying these extremes.
My last post is making the point that sometimes it is not necessary to spend money on such books, but better to understand the mechanics, for example why would the commercials be net short when price has been rising on cable.
Sorry for the time wasting - you are probably right
I assumed most on this thread were aware of these ‘educators’, and their work if not then apologies for not making it clear.
Hi peterma,
sometimes it is hard to say but:
I AM SORRY.
I understood your message wrong. In this other view, I would rather say thanks for your help, I buy books regularly (every month) to learn as fast as possible.
I did not know these two books, they are on my list now. It would be good if you visited “Trading based on market sentiment” thread, maybe you would say some good suggestions:-) However no mean ones
Have a nice Sunday evening
The percentiles are based on the currencies current positioning compared to its recent historical positioning. The the MXN has been positioned bullish for the last few years, so even though its recent positioning is also bullish, that is relatively normal compared to its historical positioning so it’s relative percentile is around 50%, which is balanced.
I don’t automatically open a trade when a currency reaches an over bought or oversold position on the COT, it merely enhances the trading decisions I make. For the Aussie, I used the information to stop shorting the pair and only look for longs. It also kept me from trying to short it as it squeezed the shorts higher, saving me from painful losses.
It’s simply used as a gauge to help determine where the path of least resistance is to the currency. Once a currency falls to either end of extremes, the current trend is most likely nearing an end and you will either see a period of consolidation or a reversal.