1.328Número de quejas años 2004-2007

The next relationship is the CCI or CRB with bonds and, in particular with US treasuries which is yet another of our key relationship. What does the CRB or CCI vs US bonds relationship tell us?

First, there is generally a positive relationship where higher commodity prices will see bond yields rise and bond prices fall, reflecting risk appetite and rising inflation as investors seek higher returns in riskier asset classes.

The second reason is one we touched on previously, which is the leading aspect of commodity prices. As commodity prices tend to lead inflation they can often signal likely changes in interest rates, moving forward. The reason for this is that it takes time for higher commodity prices to filter through into the economic system and ultimately be reflected in the data and statistics produced by governments and central banks. Statistics such as the CPI and PPI numbers, which we are going to look at in the next section of the book, once we start to focus on fundamental analysis.

Therefore, in comparing the Commodity Index with the yield on the 10 year US Treasury note,

gives us a unique view on the potential for interest rate rises and, of course the corollary, falls in interest rates, which are equally important.

Ultimately, rises in interest rates drive an economy back into recession with the Commodity Index falling as bond yields fall, as money flows back into bonds and away from riskier assets.

Unfortunately, in the last few years the US bond market has become distorted by the action of the US Federal Reserve in its attempts to weaken the US dollar severely by printing money. In addition, the currency wars continue unabated as central banks around the world desperately pursue measures to ensure that a triple dip recession is avoided. No one wants a strong currency which is leading to distortions in all of these once key relationships.

Indeed, whilst writing this book, we have had a situation with a falling US dollar and falling commodities. The relationship has broken down temporarily, and is a stark reminder that no relationship, no matter how solid in the past can be guaranteed in the future. This has been proven many times in the last few years, with markets distorted by so much money. And, as I said earlier in the book, the rule book has been torn up. So, it is just as important to understand this fact as it is to understand these relationships.

In this example we have the CCI and the 10 Year US T-Note yield over a three month period and what we expect to see is the following :

If commodity prices are rising, and the CCI is rising, then this signals positive risk sentiment, which should be reflected in the yields on US T-notes ( and others ) in rising yields, as money flows from bonds and into risk assets. In other words, this is a positive direct relationship.

Equally if yields are falling then the CCI or CRB should be falling as well, reflecting money flow into safe haven and away from risk.

But as you can see from the charts in Fig 11.30 and Fig 11.31 almost the exact opposite is happening.

Yields through December rose, yet the CCI index fell. Finally, in January the relationship stepped back into line with rising yields and a rising CCI index. But not for long, breaking down again in the last few days of January with an inverse relationship back in place.

Fig 11.30 GCC - ETF Daily Chart

Fig 11.31 10 Year TNX

And the reason has to do with the US dollar. If the US dollar relationship, which underpins all others, falls out of kilter, then this will also be reflected in all these secondary relationships and ratios which are underpinned by the first.

As we saw earlier, in November we had a falling CCI index and a falling US dollar index which is an anomaly, and largely triggered as a result of a headlong rush back into risk assets.

This was triggered by benchmark stock markets moving higher very quickly and through some key technical price levels, having broken out of an extended period of sideways price action.

Furthermore, this behaviour also has to be seen against the backdrop of the last few years, with investors constantly fearful as one financial crisis has followed another, with safe havens

being sought out in both paper and hard assets.

The move higher in 2013 was much the same as a dam bursting, with a flood of money into risk as investors, fund managers and hedge funds scrambled onto the fast moving train, selling

anything and everything in an effort not to miss out. Commodities were no longer in demand as the key risk asset, and consequently fell with the US dollar index. Bond yields rose as

expected, but with the underlying distortion of the US dollar selling off, these once reliable index relationships stalled, and reversed.

Market behaviour over the last few years, and probably for the next few, is likely to be

characterised in this way. This is part and parcel of understanding how the markets work, and in their own way give us another important signal – an anomaly of what we would normally expect to see. This in turn makes us ask the question – why – which hopefully will then lead us to a common sense conclusion based on sound market analysis and based on the knowledge of market behaviour at that point in history.

A valuable lesson learnt and one I cannot stress too strongly so let me just recap on the above.

Normally when the USD index falls, then the CRB or CCI would rise because it is an inverse relationship.

As the USD index falls, then bond yields rise, as money is flowing out of safe havens and into riskier assets.

From the above we should expect to see the CRB or CCI rise with bond yields in a positive relationship.

In other words one relationship, CRB/USD is inverse, whilst the CRB/T-note yield is positive.

All these relationships do fall out from time to time and the key is to understanding first, what they SHOULD be, all things being equal. Second, if they have fallen out, to ask WHY?

ETFs

Moving on to consider some of the other 'secondary' relationships that can help us to

understand and answer this question, as well as others, let us now consider exchange traded funds or ETFs.

These are a relatively new instrument, having originally been introduced to the US markets in the early 1990s, the first being a fund which tracked the performance of the S&P 500 index.

Since then, the market for these instruments has grown exponentially and they are now widely available in all markets.

They are traded on most of the international exchanges, and just like any other stock or share, their price changes second by second during the trading session as the underlying asset or index moves accordingly.

In other words, they are derivatives or derived from an underlying asset, which for the purposes of this book are currencies, all of which are quoted against the US dollar.

There are different types of ETFs. Some work inversely. In other words, they rise as the market falls. However, for the purposes of this book I am only going to focus on those ETFs which track their underlying asset.

One final point. The fund which underpins the ETF holds the physical currency or a futures

contract to buy the currency, so in buying or selling these instruments, you are actually holding the physical currency at the face value of the ETF.

In many ways this is a classic example of how currencies have moved from pure speculation to one where they are considered to be an asset class in their own right.

However, as forex traders why should we be interested in ETFs?

First, it is possible to trade forex markets using these instruments and, just like a stock or share, they can be bought and sold in a regulated exchange.

Second, the reason they are important to us is that, just like a stock or share, these instruments report volume, because they are bought and sold through the exchange. And, as I have said many times before, and will, no doubt, do so again, volume and price are vital in forecasting future market direction. With ETFs we have true reported volume associated with a currency – a rare thing!

The question, of course, is who is buying or selling? In this case it is hedge funds, private individuals and speculators, but predominantly hedge funds as a hedge against currency movements in large portfolios. It is primarily the professional money.

This is important when we start analysing volume. As traders we want to make sure any

analysis is based on following the professional (the insiders) money! We don’t want to follow the retail traders who are generally on the wrong side of the market.

Richard Wyckoff, one of the great iconic traders of the past who understood the power of volume said there were “usually one or more large operators working in every stock.

Sometimes there are many”. His purpose in studying the charts was to uncover their motives, their “game plan” and in doing so would ensure he was trading with them and not against them.

In many ways this is the main purpose of this book. It is to explain how you too can learn to trade with the professionals, the insiders, the “large operators”. And not be crushed by them!

Finally all the ETFs I mention here are plain, vanilla and not leveraged. There are a huge number, and many of them have hidden dangers. Some are VERY highly leveraged to gear up profits fast, but equally losses can grow just as quickly. Some work inversely to the underlying market, so as the market rises, the ETF falls. So you have been warned.

The following is a list of ETFs to watch which can give a different perspective on the currency under investigation. As always we start with the US dollar and I’m going to list all the tickers here for you, and then tell you where you can find live prices, which is free.

UUP : US Dollar

FXA : Australian Dollar FXB : British Pound FXC : Canadian Dollar

FXE : Euro

What we have in effect is a chart for each currency, with exchange volume. And the best place to get live data, for free, on all the above ETFs is at: http://www.freestockcharts.com/

You will need to download the software onto your own pc but the software is excellent and provides a great free resource for watching the ETF market.

The ones I suggest you follow from this list are the UUP, which is the biggest ETF by market capitalisation. The UUP tracks the US dollar index, so once again this gives us an alternative perspective on the US dollar, coupled in this case with volume. As I have said many times before, another chart to which we can apply our technical analysis techniques. The UUP has a simple direct relationship, so as the US dollar index rises, so will the UUP and visa versa.

Next in terms of size comes the FXA with the Australian dollar, which confirms the importance of this currency, followed by the Canadian dollar, the Swiss franc the Euro and the yen.

It is interesting that the commodity currencies have larger market capitalisation than the Euro and the British pound. The British pound fund, by the way, comes after the yen. As you would expect, the larger the market capitalisation, then the more liquid the pair and the more volume activity you will see.

Some of the smaller ETFs above may move very slowly so my advice is to focus on the larger ones highlighted above.

Finally, a word of warning. PLEASE, stay away from some of the exotic leveraged ETFs and inverse ETFs. Over the years I have received many emails from traders who failed to

understand how they worked. One in particular was very sad where the person concerned had lost over 70% of their pension in one such fund – so please be careful. They are, of course, a valid way to trade and have many advantages and we will return to them again later in the book.