VIEWS OF GEORGE SOROS ON CHINA

The future direction of China is the "major" source of uncertainty facing the global economy at the moment, according to billionaire investor George Soros.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam," Soros, chairman of the Soros Fund Management, wrote in an opinion piece on the Project Syndicate website on Thursday.

Soros says there are "unresolved contradictions" in the leadership's current policies, which would have profound consequences for China and the world if they are not addressed.

"The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin," he said.

"But there is an unresolved self-contradiction in China's current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years," he said.

TRADING LEVELS FOR NIFTY & BSE FOR COMING WEEK

Oscillators in the daily chart are in the neutral zone but the negative divergence in the rate of change oscillator and relative strength index imply that there is no momentum in the short term. Weekly price rate of change oscillator dipping in the negative is worrying because it means that the medium-term trend is under threat. We will, however, need to see how this oscillator behaves next week to confirm this trend.

There is a bearish engulfing candlestick in the weekly chart of the Sensex and the Nifty that is negative from a short-term perspective. That both the indices are poised just above the 50-day moving averages also means that they are at a critical point from a medium-term standpoint.

SENSEX (20,851.3)

The short-term trend has reversed lower since the peak of 21,304. Continuation of this trend can take the index lower to 20,568; 20,039 or 19,959 in the near term. Key support zone for the short term is around 20,000. Investors can continue to buy during declines as long as the index holds above this level.

It is only on a break of this support that the next targets at 19,500 and 19,000 will come into play.

Short-term resistances are at 21,116 and 21,331. Inability to move above the first resistance will mean that the index will move lower in the near-term.

NIFTY (6,211.1)

The Nifty too, is in a short-term downtrend since the peak of 6,415. Continuation of this downtrend can take the index lower to 6,130; 6,072 and 5,964.

It needs to be noted that the index is currently poised just above its 50-day moving average.

A bounce from these levels can take the index to 6,288 or 6,360. Inability to move above the first resistance will be the cue for short-term traders to initiate fresh short positions

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Key short-term support for the index is at 5,922.

Fibonacci support as well as the presence of the 200-day moving average at this level, lends credence.

Short-term investors can buy during declines as long as the index trades above this level.

Subsequent supports are 5,770 and 5,617.

GLOBAL RISKS OF 2014

With another new year upon us mortals, we thought it is time again to check out the top 10 global risks ranked by Oxford Analytica.  Not surprisingly, from a geographical perspective, a majority of the top global risks come from the Middle East region (at 40%) and the Asia-Pacific region, specifically China, and North Korea (at 30%).  U.S., Europe, and Russia round out the rest.

Source: Oxford Analytica

The ranking is mostly based on the potential size of global impact.  However, putting them under the lens of probability, a difference picture emerges (see graph below)

Chart Source: Oxford Analytica

While the economic related risks such as a sharp slowdown in China, EU disintegration, and deflation in the U.S may rein supreme in terms of global impact, the probability of them materializing is actually less likely than the geopolitical risk in the Middle East (Syria, Iran, Pakistan and Afghanistan), and Asia (China, North Korea).

 In terms of the type of risk, seven out of the top 10 risks are geopolitical, while only three are financial or economic.  So if we look at probability from this perspective, we are more likely to see a war or regime topple before another financial crisis rippling through the world again.

Regarding the ‘U.S. Deflationary Trap’, the Fed said last month it would reduce its monthly asset purchases by $10 billion to $75 billion, while also expressed worries about inflation.  Meanwhile, Fed’s balance sheet has ballooned to $4 trillion, we seriously doubt the U.S. deflationary scenario after Fed’s helicoptered five years worth of QEs.

At this point, we at EconMatters believe that the Federal Reserve removing the Liquidity Punchbowl not because everything is fixed with the US economy, and we have fully recovered from the financial crisis of 2007, but because they have no other choice in the matter given the obvious asset bubbles they have created in the credit, bond and equity markets.

For now, the inflationary effect from QEs is mostly trapped in the stock and commodity markets (i.e. enriching the 1%), but inevitably it will manifest and spill over to the consumer side of things hitting hard on the 99%.  The removal of this liquidity, the resultant implications for financial markets, and potential future inflationary consequence of Fed’s QEs remain an under appreciated risk to the global economy in our humble opinion.

FRUSTRATION OF A TRADER

Top Trader Frustrations

1. I cannot trade my plan!
   • You need to develop the skill to execute your trading plan under duress.
   • Use visualization exercise to see yourself successfully executing your trading plan during the day. The greater level of detail a trader uses in their visualization exercise the greater its effectiveness.
2. I cut my winning trades too early!
   • Have profit targets
   • Take partial profits
   • Measure each day the missed profits that you could have obtained if you didn’t miss a setup, or if you didn’t cut your winning trades too early.
3. I am not consistent with my trading
   • Establish a playbook with setups that work for you, and setups that don’t work for you.
   • Define the risk that you should take in setups based on whether they are A+, B, C setups (based on risk/reward and % win rate).
   • Track the amount of risk that you are taking on similar trades, so that the results can be properly analyzed. Risk 30% of your intraday stop loss on a A+ setup, 20% on a B setup, 10% on a C setup, 5% on a Feeler trade.
   • Do a trade review
     • Did I trade the best stocks today?
     • Did I recognize the market structure?
     • Did I push myself outside the comfort zone?
     • Things I did well
     • Things I could improve
4. I cannot find a profitable trading system
   • Trading is a probability game, setups don’t work all the time, so don’t keep trying and throwing away trading setups without thoroughly testing them.
   • Get exposed to lots of different setups and trade the setups that make the most sense to you and works best for you.
5. I lack the confidence to take trades
   • Have a detailed trading plan, place orders in advance in possible.
   • Put on feeler trades with 5-10% of the risk that you normally put on. Once you start to become more comfortable you can then put on your regular trades again.

THINGS TO WORRY ABOUT

Things to worry about:

Worry about courage
Worry about Cleanliness
Worry about efficiency
Worry about horsemanship
Worry about…

Things not to worry about:

Don’t worry about popular opinion
Don’t worry about dolls
Don’t worry about the past
Don’t worry about the future
Don’t worry about growing up
Don’t worry about anybody getting ahead of you
Don’t worry about triumph
Don’t worry about failure unless it comes through your own fault
Don’t worry about mosquitoes
Don’t worry about flies
Don’t worry about insects in general
Don’t worry about parents
Don’t worry about boys
Don’t worry about disappointments
Don’t worry about pleasures
Don’t worry about satisfactions

Things to think about:

What am I really aiming at?
How good am I really in comparison to my contemporaries in regard to:

(a) Scholarship
(b) Do I really understand about people and am I able to get along with them?
(c) Am I trying to make my body a useful instrument or am I neglecting it?

TRADE MANAGEMENT

• Let winners run. While momentum is in phase, the market can run much further than might be expected. Do not exit winners without reason!
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• Be quick to admit when wrong and get flat.
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• Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop, then get out.
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• Remember: if one thing isn’t happening the other thing probably is.
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• Flat is a legitimate position.
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• Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Respect the potential for correlations to change—you have to deal with today’s correlation, not the correlation that existed when you put on the position.

• The crowd is not always wrong.
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• Most trading problems come from an incorrect perception of risk. If you’re trading with an edge, the “risk” of any trade being a loser is not actually a risk at all.
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• Intuition is real, but all traders develop it. Intuition, alone, is not an edge.
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• Intuition must be trained properly. It is very easy to develop incorrect intuition due to cognitive biases and the nature of the market.
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• Mental capital is just as important as financial capital. Protect both

THINKING PROCESS