It is important for traders not to single-mindedly pursue one market, but to move around between markets by riding rotational themes. Markets easily move between risk-on, risk-off modes, from rally to retracement, from one story to another. I call it rotational play here. It should be a fairly familiar concept to most traders and investors. The idea is straightforward: attempt to ride the sweet spot of rallies as they unfold rather than sit through boring, sideway phases.
‘Rotational play’ between forex, stock indices
Markets are ever rotating from one play to another. You can witness this phenomenon within and between markets. Within stock markets, we see rotational play as investor interest move from sector to sector, or between blue chips and penny stocks and so on. Between markets, it is no different as we spot this kind of phenomenon happening. This was why I tweeted this on 28 May.
— Soh tiong hum (@Sohtionghum) May 28, 2015
The driving force behind this kind of rotational phenomenon is simple. Stocks, currency pairs and so on do not move in straight line. Rather they move in zig zag motion alternating between primary movement followed by correction. In another manner, you can say that they swing between exciting rallies and boring sideway movement. Rotational play happens because sophisticated traders in the market are like ravenous sharks with a never-satisfied appetite. After a feeding frenzy that drives a stock or currency pair up, they leave after they sense that most of the gains have been captured. Whatever ‘victim’ that is left behind languishes while a new ‘victim’ is driven into a frenzy.
What happened on 28 May?
The community was preparing to go short into stock indices. We were looking at these. DJ30 and DAX had just broken significant levels and were doing pullbacks. These opens the way for a new impulsive movement.
DJ30 bearish expansion back below key level opens way for more losses
This was what I wrote then:
- Reminder to new students, WRMB = ‘wash n rinse many boxes’.
- It is a fake break of a prominent resistance/consolidation and is very significant.
- It is now printing a bearish expansion.
- Falling below green opens the way for price to correct to low of March and April.
- A rate hike that lifts DXY and USD is equally crushing to a bubblelicious stock rally driven by low to zero interest leverage.
- Even more telling when DAX, SiMSCI and HSI today doing the same.
If breakouts of consolidations are so compelling, it is equally so when such breakout fail.
DAX familiar 1-2-3-4 setup of ‘break level, sell into pullback’
- A-B-C is a setup that defines point 4.
- Point 4 = Blue A = 3+ day consolidation.
- Blue B = bearish expansion outside of consolidation.
- Blue C = pullback.
- A-B-C takes place at green. Below green, price resumes Week 16 – 19 down.
What is happening now?
Watch out. Easy gains may be temporarily over for now. If you look at the charts of DJ30, DAX30 again right now, they are near some technical support. The trend might continue/they might not but for now, early movers have eaten the low hanging fruit so there are no more easy pickings for late comers. What to do? Go look at something else.
DJ30 doji at support trend line, bullish reaction
— victoria yam (@PatissierYam) June 10, 2015
— looi may siew (@maysiewmai) June 10, 2015
DAX30 nears 11k psychological level
— Farrago (@iamfarrago) June 10, 2015
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
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