Welcome to the new financial year and the beginning of what is shaping up to be an interesting time in the markets. This article is something you wouldn’t expect to see around Safety in the Market, yet we are ten years from the financial crisis and the global economy and financial markets could be entering a new era of potentially radical change that will make the next decade look very different from the last, so it’s worth looking at all perspectives.
As a Gann trader, I am often immersed in charts, taking a technical and quantitative approach. Yet, to have the expertise in any field, you need to understand what your competitors are doing. I have found in my trading that it is ideal to have an understanding of different perspectives in order to strengthen the overall view.
David suggested in the Ultimate Gann Course that it is not always essential to have a fundamental view, yet he found that by having a loose monitoring of the so-called fundamentals, it could assist with his trading. If you turn to the Trading Plan Chapter in your Ultimate Gann Course, Trading Plan Number Six is designed to monitor the fundamentals.
A pure technical analyst would argue that fundamental reasons for price moves are irrelevant and that it is the price move in itself that is what makes you the money as a trader. Regardless of the truth, David suggests that the market usually leads the fundamentals by about six to nine months.
I have used David’s example below from the Ultimate Gann Course on page 241. He says:
“You would expect to see the economic conditions improve six to nine months after a major bottom on the stock market. The value, then, in understanding the fundaments, albeit loosely, is that if the market makes a strong recovery from a major bottom, and six to nine months later the economy continues to deteriorate, the sustainability of the bull run must be questioned. This allows you to be a more cautious technical analyst.”
I will get to the point now; this month’s article will be focusing on the macro fundamental’s, allowing you to monitor loosely over the next six to nine months. While it is not essential, it is the 21st century. Therefore, having some economic understanding will provide alternative perspectives for your trading.
We live in a world of insecure security, derived from direction scope of monetary, fiscal, trade, geopolitical and exchange rate policies. Media-fueled stories rule the news headlines, regardless of their clarity, so I will use this article to condense the macroeconomics themes that will likely be in the headlines within six to nine months.
Macroeconomics will be the focus of this article, looking at topics that will likely affect an economy at large. For anyone who studied a business, accounting or finance degree you’d be aware of macroeconomics and microeconomics. For those who don’t know, these can include fundamentals such as unemployment, supply and demand, growth and inflation, as well as considerations from monetary or fiscal policy and international trade. Let macroeconomics be the focus as we live in a global economy.
As the media have already portrayed we are currently in a post-crisis global environment which has been shaped by institutional regulation and dominance by the central bank (I am sure you have seen the Royal Commission interviewing the CEO’s of our major banks lately). The restrictive policies weaken growth in productivity and employment, reduce inflation, abandon trade and lower macro and market volatility.
It all becomes humorous as uneducated media professionals try to spin a new way of looking at things, or more accurately, sell more papers. The more recent commentary is about the falling property prices. My question is whether the market is really falling or whether it is just hard to get a loan through now the banks are under investigation? Maybe that’s what has slowed the rate in which property transactions happen?
Regardless of what happens, we are at a point in the economic cycle that shows a very different macro landscape, and for better or worst it will emerge. The shifts are already underway; The monetary-fiscal policy mix is changing as central banks retreat and fiscal policy becomes more expansionary, the regulatory discussion is moving from the financial to the tech sector, and economic nationalism and protectionism are on the rise.
If we break the key macro themes down in a simpler nature, there are five fundamentals fronts that I will be watching evolve over the next six to nine months. The below table will allow you to understand the theme and what markets to watch from a very basic standpoint. We will discuss the potential scenarios likely to link up between the technical and fundamentals.
|Fundamental Theme||Markets to Monitor|
|The US Fed has started to run down its balance sheet, the |
European Central Bank (ECB) inched closer to the exit from
its asset purchase program, the Bank of Japan (BOJ) reduced
its sovereign bond purchases and various other central banks
European Bonds (Germany)
|The US Embarked on a major fiscal expansion via tax cuts and |
higher federal spending planned over the next several years.
European Bonds (Germany)
|A serious trade tussle between the world's largest nations |
raised the spectre of a full-blown trade war.
|The geopolitical situation in the Middle East and on the Korean |
Peninsula dominate headlines.
|A larger than expected depreciation of the US Dollar unfolded |
during the end of 2017.
Table from Key Macro Themes
If we apply some of our Gann Analysis to a number of the charts, you can start to build scenarios around what the fundamental themes suggest is likely to take place and what the price action is telling us.
The chart below is of the US Dollar (DX-SPOTV) in ProfitSource). I have applied a Ranges Resistance Card (RRC) to the 2008 and 2017 range. The 50% level holds around $87.44, a place where the market seems to have found some support. We have seen a rally recently that has overbalanced time and price in the last 12 months. If we take the very first initial reaction back in 2009, it gives us a range of $16.10. If we project this from the 2017 top, we have a target of $87.72. This again clusters with the RRC 50% level.
Chart 1 – US Dollar Monthly Bar Chart
Fundamentally, the US Dollar is going to play a big role in all of the macroeconomic themes. Likely if the 50% level is broken, you’d assume the fundamentals will see a negative correlation with these macro themes.
The European Central Bank will also play an interesting role amongst the macroeconomic themes. If we take a look at the Euro (FXEUUS in ProfitSource), the market has been able to break back above the 50% level of the ATL/ALH Range Resistance Card. The market initially touched the 50% level at 1.2065 and reacted before it had a re-test and was able to hold above this level prior to falling back below.
Chart 2 – Euro Monthly Bar Chart
If you take an interest in the energy sector, such as Crude Oil, it’s always good to keep note of geopolitical events taking place. At present, the trade war sparks interest. An assertive China under a strong authoritative leader with a clear long term vision shows dominance as rising power. If you had ever read Graham Allison’s Destined for War, this will be something to observe as conflict arises amongst rising powers.
For example, Athens at the end of the 5th century BC., Germany at the end of the 19th century, and now China, are all countries that challenge the ruling power. In China’s case, this is challenging the US. Obviously, the Thucydides’ trap is not inevitable but there is likely to be tension caused by China becoming a global economy and military superpower, which the US tries to be more assertive in the area of trade. Chinese leadership has a long term orientation, and the Trump administration is more short term focused, given the presidential election cycle.
Regardless of what the fundamental speculation may be, if you take a look at Crude Oil (CL-SPOTV in ProfitSource) you can see we have recovered well from the 2016 low. I have applied a High’s Resistance Card (HRC) and the market has come up recently and hit the 50% level at $73.14. This is a pivotal point which you should have been watching for.
The bigger picture FRO was 225 trading days and that projected from the June 2017 low gives a target around 14 May 2018. The market topped on 22 May 2018, which was the 100% in price and 231 trading days from the June low. We have seen the market recently rally and test the HRC 50% at $73.14 on 3 July 2018.
It’s hard to determine what will be the likely outcome from the geopolitical events taking shape, but based on the charts we have now repeated 100% and cluster with a major 50% level. If tension between countries is the fundamental driver, you’d assume that Crude Oil will start rallying higher and we will see a break of the 50% level.
Irrespective of what happens in the world, remember it’s not essential to have a fundamental view as a Gann trader. David has allowed you to monitor the fundamentals loosely with Trading Plan Six, and I have found that it provides a level of clarity. Instead of being guided by what the so-called experts say, you can have your own views and opinions and more importantly, be able to act on what your judgement says based on your research and understanding.
It’s Your Perception,