Trump Throws down the Gauntlet

Monday, 6 January 2020
Melbourne, Australia
By Murray Dawes

  • Markets
  • A Birdseye View of ASX 200

Have you had enough of people saying Happy New Year to you yet? Well here’s another. Happy New Decade.

I stood on the lawn last night with my five-year-old son and our new tri-colour Border Collie pup and saw the biggest rainbow I have ever seen. It was clear as a bell from end to end and shone bright due to the dark cloud behind it.

It felt like the starting gun to a great year.

Trump on the other hand has started the year by lobbing a hand grenade into world politics and killing General Soleimani of Iran.

I can’t overstate enough how big this news is. When I first read it in The Australian, it was below all the recent updates on the bushfires, but from the perspective of world politics it should have been the only article on page one.

This was the sort of event that will be looked back on in years to come as a turning point. I don’t have a clue what happens next, but there is no doubt Iran will be fuming and will want revenge.

Do they start attacking US generals? Or do they realise they have poked the bear a bit much of late and retire hurt while considering their options?

I’m hoping it’s the latter.

Before we go any further, let’s take a look at the markets…

Markets

Over the weekend, the Dow Jones Industrial Average closed down 233.92 points, or 0.81%.

The S&P 500 closed down 23.00 points, or 0.71%.

In Europe the Euro Stoxx 50 index closed down 19.87 points, or 0.52%. Meanwhile, the FTSE 100 gained 0.24%, and Germany’s DAX closed down 166.76 points, or 1.25%.

In Asian markets Japan’s Nikkei 225 is down 464.76 points, or 1.96%. China’s CSI 300 is up 0.50%.

The S&P/ASX 200 is down 16.90 points, or 0.25%.

West Texas Intermediate crude oil is US$64.65 per barrel. Brent crude is US$70.68 per barrel.

Turning to gold, the yellow metal is trading for US$1,578.13 (AU$2,273.52) per troy ounce. Silver is US$18.45 (AU$26.58) per troy ounce.

One bitcoin is worth US$7,538.36.

The Aussie dollar is worth 69.40 US cents.

*****

The prospect of war between Iran and the US is too horrible to contemplate. I can’t imagine either side would want such a thing. The US is already tired of the endless wars and Trump has always said he wants to bring the troops home and stop policing the world.

So why would he assassinate the most important general in Iran?

We all know Trump can be impulsive. But he is usually quite calculated as well. He likes to surprise his opponents with a few curve balls. This curve ball is an absolute doozy. I don’t think Trump really knows where this will end up. But he has thrown down the gauntlet and it is now up to Iran to respond.

My job as a trader is not to know what is going to happen next. The assassination of Soleimani is a great example of what we face as traders and investors. It doesn’t matter how good your analysis is, there are always unpredictable events that will throw a spanner in the works.

If things deteriorate rapidly from here with Iran and oil spikes through the roof, equity markets could tumble. Should you cover your positions? Hedge part of your portfolio? Buy more oil and gold stocks?

How can you know what you should do, when you don’t know what Iran’s response will be? Should you wait for a few weeks to see what happens? How many weeks?

If your only way of making decisions in the market is based on your guesses about what might happen after huge macro events such as the killing of Soleimani, you will end up losing your shirt.

You can’t keep guessing right. You will hedge at exactly the wrong time or cut your positions just before a big rally. The volatility of the market will toss you around like a ragdoll.

As you read more articles about the big event you will become confused about how you should interpret it.

Let’s face it, there will be 1,000 articles written about this event around the world over the coming weeks and months, but not one of those articles knows what’s coming next.

We don’t know the future. Accept it and plan for it rather than kidding yourself that you’re smart enough to work it out.

My own method for dealing with the fact I don’t know what’s coming is to take part profit as soon as possible and then adjust my stop-loss to a point where my initial capital is protected.

Then I don’t care what comes next.

I will either breakeven or make money from that point. What’s not to like about that?

The moment before I take part profit I am watching every tick, feeling great as prices rise and fearful as they fall. The emotional turmoil of watching your P+L fly around is very real and it is incredibly draining.

If you don’t take action to lower your stress levels as quickly as possible it will lead to bad decisions.

You will dump a position that is oscillating around your entry point just because you are sick of the rollercoaster. Then the stock will fly soon after you get out.

Or you will take all your profit too quickly because you have seen so many winners turn into losers.

Jumping off the rollercoaster is what you need to do if you want to become consistent trading the markets.

Accepting that you don’t know what the future holds is the very first step.

Once you have done that you can make yourself act when you don’t want to.

It can be hard taking part profit on your position when the stock is flying. All you see are dollar signs and you feel so bulletproof that it is easy to convince yourself to hold on.

When you know you don’t know the future you take part profit at the level you decided upon before entering the trade without a second thought. Your desire is to jump off the rollercoaster and taking part profit is the ticket to a relaxed state of mind. So, you do it.

When viewed in this way, trading is first and foremost about risk management. Technical analysis is therefore a risk management tool. Nothing more and nothing less.

You can’t predict what’s going to happen. You can just say that the odds are favourable that prices will hit ‘A’ before they will hit ‘B’.

Then you take part profit quickly, sit back and see what happens.

Building up multiple positions in this way is like planting seeds. Who knows which one will flourish? All you know is that whatever happens you will live to fight another day. Every position may go bad, but you will still have your original capital.

When curveballs like the killing of Soleimani happen, you are in a powerful position to make clearheaded decisions about what needs to happen rather than reacting emotionally to your fear of losses.

Technical analysis can help in the decision-making process because you can map out levels of support and resistance across different time scales. Then you can act once levels have been hit rather than reacting to what you think might happen.

I have put together a video for you today below this article which does exactly that in the ASX 200.

I take you through the semi-annual, quarterly, monthly and weekly charts in the ASX 200 and give you the key levels that I will be watching over the coming six months. I show you why I am bearish in the short-term but bullish in the long-term. I also follow up from my last ‘Week Ahead’ update before Christmas when I told you that the ASX 200 was looking tired and would probably sell-off. Which it did.

The predictions made in my ‘Week Ahead’ updates (which you receive every Monday in Port Phillip Insider) should be understood in the context of what I have written above. I am usually just looking for good odds of mean reversion and then taking part profit once it occurs. It’s not rocket science. But it’s very effective.

If you’d like to know more about my Alpha Wave Trader service, you can check it out here.

Please continue reading below to my Week Ahead update and video.

 

A Birdseye View of ASX 200

 

[A new year has begun, so I’ve put together a video for you outlining the technical situation in the ASX 200 from the semi-annual charts into the weekly chart. Click on the picture above to learn how to analyse markets across different time scales.]

With a new year kicking off, I thought it would be good to have a look at the ASX 200 from the big picture to the small so you can understand the lines in the sand that I have set up based on different time frames.

The confusing thing about analysing markets is that they can be bullish in the long term but bearish in the short-term. It’s a difficult concept to get your head around.

We like to have clear definitions of things so we can make sense of the world around us.

Saying that the market is both bullish and bearish at the same time sounds like an impossibility to most people. But when you look at markets across different time scales, that’s what happens. It is necessary to analyse markets across different time scales to build up a picture of where the key support and resistance zones are.

My own model of market behaviour is based on analysing the most recent buy and sell pivots across different time scales to give me a sense of market direction. A market can have a quarterly chart where the most recent pivot is a buy pivot but a monthly chart with the most recent pivot as a sell pivot.

It is rare to have all time scales agreeing at once and the trick to trading is understanding how all the different time scales interact with each other.

As it stands in the ASX 200 we have a bullish semi-annual, quarterly and monthly chart but a bearish weekly chart.

So I am expecting to see some more weakness in the days ahead as a result of Trump’s surprising move of killing Iran’s most senior general, but there will be lots of support beneath the market. I will not get extremely bearish on our market until we see a semi-annual close in the ASX 200 futures below 6,304.

I explain everything in detail for you in the video above.

Happy New Decade to you and I wish you the greatest success in your trading and investing in the year ahead.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader