There seems to be a material lack of confidence which plagues opportunities across various markets. Can setups in crude oil and GBP/USD overcome the lack of conviction amidst illiquidity and low volatility?
Talking Points:
- I believe there is a third analysis technique in addition to technicals and fundamentals - market conditions
- Market conditions evaluates systemic considerations behind a market or financial system: liquidity, regulation, asset maturity
- If we start our analysis through an assessment of conditions, the pictures of US oil and GBP/USD can materially change
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Breakouts set against the backdrop of fading liquidity are not good trades. And yet, a fixation on technical analysis alone encourages many traders to pursue such developments despite the conditions stacked against them. Fundamental traders are not immune to tunnel vision either. Focus on a particularly important theme or the presence of a key event risk can raise traders' confidence that a productive market development is at hand even when there is no market to convert those lofty beliefs into tangible momentum. I am a strong believer in a third type of analysis in 'market conditions'. In generally, its focus is on factors that lead to systemic changes in the underlying financial structure: liquidity, regulation, cross-asset correlations, the emergence or deterioration of assets, etc. For those that do account for these big picture factors, it is too often grouped into one of the two traditional analysis techniques and in turn its importance minimized relative to a breakout or monetary policy shift. Yet, there is material value in setting this out as its own analysis filter and starting our evaluation of opportunities with it in mind.
One of the most prominent features of an analysis into market conditions presently is conviction. There are a number of dramatic breakouts and high-profile trends across various markets, but there is a material lack of confidence that these developments will offer productive opportunities. While this unease can be assessed in subsequent levels of technical analysis and lack of pace via technical analysis or explanations of a waning theme through the likes of monetary policy speculation, the better assessment is through the conditions underlying the markets themselves. We have seen through the past months and years a steady and material reduction in participation that has come hand in hand with volatility. That is a systemic change brought on by among other things the massive amount of monetary policy across the globe. Yet, with this reality in mind, our understanding of any pace from global equities, breakouts on markets like emerging markets and so much more can take on a very different outlook.
With a backdrop of structural illiquidity and low volatility combined with the seasonal drain typical in the Thanksgiving holiday period, I look at two dramatically different technical and fundamental pictures. First is US oil. This commodity has thrown off its conviction in the supply-demand debate and references to OPEC headlines, but it has seen another provocative break to close this past session. The commodity cleared $58 just before the holiday drain, and speculators are no doubt hungry for some emergent trend. Yet, how much follow through can we expect without a reliable fundamental wind to affix to and the knowledge that markets will be extremely thin. Are these the conditions that can override the hesitation that has plagued us for months and years? Alternatively, we have GBP/USD. A budget and FOMC response pushed it to a seventh consecutive advance; but the entirity of the move fits neatly into a restrictive range. This pair and all Sterling crosses have been sidelined consistently due to Brexit uncertainties. Yet, perhaps that less appealing range in normal trading circumstances is much more appropriate given our conditions. We discuss a higher top down approach starting with market conditions in today's Quick Take Video.
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