A recent article here cited a short in the Australian Dollar as a position held by Bridgewater Associates at the turn of the year. Often global macro investors like both a fundamental case and a technical case for their positions – the bias one way or the other is a style point for differentiating between managers. The previous article gave a fundamental case for a position, this article gives a technical case based on a re-test of a (very short term) key level.
In another article here about macro trading the (at-the-time) CIO of a $9bn global macro shop (he is now CEO and CIO) disclosed how he traded FX in 2010. He explained how observing the technical developments allowed him to change position size as markets unfold through time. A key attribute of a successful (macro) trader is to reflect the probabilities of gain/loss on a position through sizing. When the investment hypothesis on which a position is taken is confirmed by market action macro traders either initiate a position or add to it. In pattern or trend terms these could be the break-point (of a trend), a key reversal, or a successful re-test (see second graphic here). A successful re-test is very powerful because the odds of success shift considerably – the amount that can be lost is much smaller than the amount that can be gained because the spot price is much nearer the stop (just through the key support/resistance level) than the first take-profit level. This set up is illustrated below for the A$ – US$ rate.
Graphic 1. A$ v US$ over the last year
The set up is that an ascending triangle formed from October through early February with some acceleration in the uptrend (Graphic 2). This took the rate into the significant price band shown on the 1 year chart (Graphic 1). Note there was not a close above 1.0808 – the A$ traded above there versus the US$ intraday once but did not hold above that level. And the low close relative to the high that day (29th February) is a weak reversal signal.
Graphic 2. A$ v US$ over the last six months
The short horizontal lines at the 1.0668/1.0633 levels bound a narrow band of resistance – reflecting the candle body of the 22nd February and the market action on the 5th and 6th of March (the second and third of the three down days in a row).
The investment hypothesis is that the A$ is going down based on a fundamental case. The consolidation after the ascending triangle – the break of the uptrend on the 10th February, and sideways move since – has been done with lower lows and only one day of a minor new high (which was the weak reversal signal mentioned above). The rate has broken below 1.0668 this week and markets have tested that level yesterday and today, and bounced off it. A weak close today (on a Friday too) would increase confidence for a trader that the A$ is reversing, and is a good short against the US Dollar now – as Bridgewater Associates have been looking for for some months.
A good macro trader would also use technical inputs other than chartism to support/undermine the assessment of market condition. Flow information, market positioning data, volume and market action all feed into the view.
All the above are used to illustrate when a global macro trader would turn a long-to-medium term fundamental view into an actual position – when the market begins to show that it is acting the same way. That is when the probabilities of upside/downside begin to tilt towards the profit potential. So it is game on for Bridgewater’s A$ short position.