MACD Update: Not Buy Yet & Seasonal Sector Trades: A Pound Bounce By: Christopher Mistal & Jeffrey A. Hirsch | October 06, 2016 | Email | Print

Consistent with October’s historical tendency towards volatility, September’s Employment Situation report, usually released on the first Friday of October when the Federal government isn’t in a total or partial shutdown, also has a tendency to induce sizable swings in the major U.S. indices. Over the past fifteen years October’s Employment report has resulted in mixed performance with a modest average gains by DJIA, S&P 500 and NASDAQ while Russell 1000 and Russell 2000 have modest average losses. DJIA has the best record with nine gains and six losses and has been up in five of the last six years. S&P 500, NASDAQ, Russell 1000 & 2000 have been up three years straight and four of the last six.

 

 

 

Great Britain is a multi-trillion-dollar economy and its largest city, London, is considered the world’s top financial trading center. Many market factors can influence the floating value of the pound versus other currencies such as the euro. However, when we compare the pound in terms of the U.S. dollar, we see several trading opportunities throughout the year.

 

Here is an interesting, relatively short-term trade, one that seems to have the same reaction with the trade direction in the yen, Swiss franc, and euro currencies during this time period. The British pound has a seasonal tendency to decline just ahead of the end of the third quarter and reach a bottom near mid-September.

 

 

We typically see rallies in October through the end of the calendar year (shaded in yellow in following chart). After that, the market starts to fade against the dollar again, before posting a bottom shortly before Britain’s fiscal year begins in April. Seasonally speaking, the pound tends to trade higher in value against the U.S. dollar from around September 17 until about November 3. In the last 41 years this trade has worked 25 times, for a success rate of 61.0%. 

 

This trade has failed in six of the last eight years as unpreceded monetary policy in response to financial crisis in 2008 has disrupted currency seasonality. This June’s Brexit vote dealt the British pound a major blow and it has been weak since. This week’s move by the pound to its lowest level going back to 1985 caught our attention as the FTSE 100 climbed to record highs. British pound sentiment also appears excessively bearish. The pound’s recent low against the U.S. dollar was just above parity which still leaves room for further downside, but the pounds recent weakness is already creating some benefits. Britain’s exports are getting cheaper and vacations there are less expensive, which could cause demand to rise prompting economic activity to improve sooner than expected. In turn, the British pound could quickly find support and begin to rebound.

 

 

CurrencyShares British Pound (FXB) is one way to gain long exposure to the British pound. Because of the volatile nature of this trade, FXB could be considered on dips below $120. If purchased an initial tight stop loss at $117.90 is suggested. Look for corresponding improvements in Stochastic, relative strength and MACD indicators prior to taking a new long position below the buy limit. This trade will be tracked in the Almanac Investor ETF Portfolio. 

 

 

 

As of today’s close, our Seasonal MACD Buy Signal is still on hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA and S&P 500 has been positive since late September, but our window for a signal did not open until October 3. On the first trading day of October, the MACD “Buy” indicator histogram was and still is trending toward negative (blue arrows in lower pane of DJIA and S&P 500 charts below). NASDAQ’s MACD “Buy” indicator was also trending toward negative on October 3 and went negative on October 4. It was fractionally positive at yesterday’s close and is negative again today. 

 

In order to issue our Seasonal MACD Buy Signal, DJIA, S&P 500 and NASDAQ MACD “Buy” indicators need to be in agreement and the negative trend in MACD histograms needs to be reversed.