Fasten Your Seatbelts

Wednesday, 8 January 2020
Melbourne, Australia
By Murray Dawes

The news this morning that Iran has responded to the killing of General Soleimani by shooting 13 rockets at al-Asad air base and Erbil in Iraq has knocked the stuffing out of US equities and caused strong buying in gold and oil.

As I write this, the E-mini S&P 500 futures are down 42 points at 3,193 in the overnight market. Gold is up $27 to US$1,601 and WTI Crude Oil has jumped 3.4% to $64.80.

Iran is threatening to bomb Dubai, United Arab Emirates and Haifa, Israel if Iran is bombed on its soil.

The can of worms is most definitely open and the little critters are crawling all over the place.

My own assessment of the situation is that both Iran and the US have no interest in a hot war with each other.

Iran must respond to the death of Soleimani to save face, but I don’t think they’re about to run head on into a fight with Trump.

If the US withstand this initial onslaught by Iran and take it on the chin, I think things will eventually die down again.

But what do I know? About as much as every other talking head that will fill the airwaves with their two cents worth on the situation.

How things evolve from here is completely unknown, even to the principal actors.

I reckon Soleimani was nipping at the US’ heels to hasten the exit of US troops from the region. He knew Trump wanted to get out. He probably thought by causing Trump headaches with attacks by proxy groups controlled by Iran he could force the issue.

But he miscalculated and it led to his assassination.

Iran would prefer to spread its wings in the Middle East without the US sticking its nose in. Confronting the US in a major way now as a result of Soleimani’s death will probably put their regional plans on hold for the foreseeable future. It also risks igniting a more forceful response from the US, which is a battle they can’t win.

The direction things take from here is now up to Trump. He has shown in no uncertain terms that he is willing to act aggressively if pushed. He has made his point. Showing restraint while Iran blows stuff up to show how angry they are would be the most statesmanlike response.

I’m not 100% convinced that Trump has it in him. I guess we’re all about to find out.

US equities are having such a strong bull run that prices will need to fall a long way to change the longer-term technical situation.

But in the shorter-term I will turn slightly more bearish if the E-mini S&P 500 manages to close the week below 3,206.75, which would confirm a weekly sell pivot. Prices have returned to that level right now so it’s anyone’s guess whether it will happen.

Before I continue, let’s take a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 119.70 points, or 0.42%.

The S&P 500 closed down 9.10 points, or 0.28%.

In Europe the Euro Stoxx 50 index closed up 6.73 points, or 0.18%. Meanwhile, the FTSE 100 lost 0.020%, and Germany’s DAX closed up 99.84 points, or 0.76%.

In Asian markets Japan’s Nikkei 225 is down 341.72 points or 1.43%. China’s CSI 300 is down 0.48%.

The S&P/ASX 200 is down 10.60 points, or 0.16%.

West Texas Intermediate crude oil is US$63.58 per barrel. Brent crude is US$69.34 per barrel.

Turning to gold, the yellow metal is trading for US$1,590.76 (AU$2,314.31) per troy ounce. Silver is US$18.51 (AU$26.93) per troy ounce.

One bitcoin is worth US$8,303.00

The Aussie dollar is worth 68.70 US cents.

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The beauty of having a concrete set of rules when trading can’t be overstated. It makes the whole game so much easier to navigate. If prices close the week above that level, things are still pointing up in every time frame so there is no need to take any action to protect the portfolio I run for Alpha Wave Trader members.

If prices close below that level, I can start making plans for a short trade in the E-mini S&P 500 futures next week.

We already have a trade in BBOZ which is the betashares strong bear fund over the ASX 200. It moves inversely with the ASX 200 and is an easy way to hedge a portfolio with a bit of leverage because the price of BBOZ moves about two to 2.75 times the rate of the ASX 200.

The reason I sent out an alert to buy BBOZ was based on the fact the ASX 200 confirmed a weekly sell pivot five weeks ago (the price of BBOZ goes up when the price of the ASX 200 goes down).

Did I know that Trump was going to assassinate the top general of Iran? Of course not. All I knew was that the weekly trend was now pointing down and I could enter a trade with a defined set of risk/reward characteristics.

The actual entry point is based on being patient and waiting for price action to rally after the weekly sell pivot has been confirmed. That’s the secret sauce that turns an also-ran system into a winner.

The BBOZ trade that we have on may still turn out to be a loser, but I am happy we have it on as a partial hedge for our portfolio with volatility picking up.

You could call it luck that we happened to have a hedge on when the bad news broke. But the fact is the momentum in the ASX 200 has been falling way behind that of US equities and the weekly sell pivot was the concrete sign that our market was running out of puff.

Our market had also had a false break of the high set in July last year. It is also bumping up against the all-time high set in 2007.

So there are a few reasons why I am happy to lower the risk in our portfolio.

If the ASX 200 does blast higher and breaks out to new all-time highs then we can get out of the hedge and go back to being 100% long. The loss on the hedge will be negligible compared to the profits in the portfolio, but while momentum remains weak on the weekly chart, I rest easier at night with the hedge on.

The reason I give you details about how I am managing the portfolio is to get you thinking about various ways you can manage risk. Being involved in the markets is all about being faced with constant uncertainty.

Stress levels can get very high when you are constantly reacting to events that you didn’t see coming. You end up jumping at shadows.

The volatility of the market is frightening at times. Traders are constantly whipsawed out of their positions and it is only the traders that expect the unexpected who manage to survive.

You must remain incredibly humble and accept you haven’t got a clue what’s coming next. Even if you’ve had 20 winners in a row it doesn’t prove anything.

Our job as traders or investors is to protect our capital at all costs even if you are wading into the higher risk end of the market.

Just because you have bought a penny dreadful biotech stock for example, there is no need to plonk your money into it and then forget about it and hope for the best. You can manage the position in a professional way and steer yourself into a free carried position where every outcome is in your favour.

Stress levels can get very high when you are always reacting to events that you didn’t see coming. You end up jumping at shadows.

The assassination of Soleimani is a perfect example of what we face as traders and investors. It is a huge event that creates a lot of uncertainty. Traders are positioning themselves and volatility is picking up, but no one really knows how it will play out.

The mad punters are getting short hoping that a collapse is imminent, and they will be squeezed out of their positions by strong rallies along the way. The nervous nellies will be dumping their positions in fear of losses to come and may regret it if the market continues to power higher.

The professional traders will have their levels already mapped out prior to the events taking place and will act accordingly.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader