Welcome to trade ideas
I'm Jake Merle sitting down with Steve Strasse co-founder of the chart report Steve great to have you back on the show
Thanks for having me
so we've seen this dovish pivot by the Fed over the past six months and just
Last week Jay Powell came out and kind of gave us the green light
That this rate hiking cycle is coming to an end and we saw the dollar weakened. We saw a gold spike
So what exactly are you looking at right now? So that's a great point
I guess the Fed Chairman might have caught markets off-guard last week and now
If you look at Fed fund futures are pricing and I think about a hundred percent chance of a rate cut
And at the next meeting in July, so we saw the dollar sell-off
Obviously global equity markets love this. It's it's more easy money or
Furtherance of the easy money policy that we're seeing central banks around the world
Dollar sold off and that's usually positive for foreign equities and also commodities
so there's a couple different ways that you can craft a trade around this we're hearing a lot of people yell about gold and short
The dollar that's a very simple way to play this but there's other stuff going on in the global equity landscape
I think we could find pockets of strength in equities. So what exactly are you looking at?
If you look at the performance of different global benchmarks since the last time US equities peaked
Which was April 30th what you see, is that pretty much the rest of the world, Europe Asia
You could look at the whole country world index ex-us S&P emerging markets. They all corrected through
May and into June and have recovered since but if you look at frontier markets
They barely even corrected
so they're very resilient during the most recent sell-off and they're actually up about seven percent over the same period
When all these other global benchmarks are about flat at best, so I feel like frontier markets. Don't get much love at all
Yeah, so why are you looking at frontier markets versus let's say emerging markets in general
Partially for that reason because they don't get much love and that's great from sentiment perspective. It's always nice to be looking in areas
where other people are not
But why don't want to play emerging markets?
Typically sure a weak dollar environment would be great for yeah, it'd be great for emerging market equities
but right now with the environment we're in geopolitically with trade related headlines coming out every day the
Tariffs for heating up between China and the US China makes up about 30% of the emerging markets index
I don't want that headline risk right now
Frontier markets are so insignificant to the global economy hate to say that but they're really insulated from any trade related risks
so
Is there a particular frontier market you're most interested in or you're just looking to play it from a broader perspective?
If I had to pick one, I'd pick Argentina. It's one of the better-looking trends right now and
among foreign equities
I think it's up about 15% in the last three weeks makes up about 8% of the frontier markets index other large weightings are Kuwait
And Vietnam together they make up almost 50% of the index those three countries
So this is really the junk of the global equity trade be like trading micro caps in the US
So as we're seeing things heal
in the international equity
Markets, we want to be in the strongest area
And if you look back since April 30th, the last time markets were at highs by far frontier markets have been your leaders
So that's where we want to focus
That's where we want to drill into and that's where we want to put our money to work right now
So in terms of putting on an actual trade, would you be buying Argentina? What are you buying the ETF?
How do you exactly go about doing it Argentina is a bit extended right now?
So from a risk/reward perspective that won't kinda already left the station
You're still gonna get exposure to it. If you're in frontier markets what we saw in frontier markets recently is
about since February
It's been consolidating about a four percent range between about 28 and 29 dollars very tight
and if you go back to about last August
It's been in a bit of a 10 month consolidation a nice little basing pattern and it's tested that
$29 level I think five or six times in the past ten months and the more time level is tested
It does not get stronger. Actually. What happens is each time
It's tested some of that overhead supply the sellers who are sitting there waiting at that level. They're absorbed by the buyers
so each time a rally goes up to
$29 and the sellers absorb it there's fewer and fewer sellers to do that going forward in the future when that level is tested
Finally in May we got a breakout of that $29 level. We ripped for a while
We moved about a dollar higher which is a met moved from the rectangle 28 to 29
Measured up a dollar is about 30 and in this past week the Monday morning of last week
we gapped all the way down to 20-day moving average 50-day moving average 200-day moving average right back into the middle of that range and
Buyers just gradually throughout the week gained control and prices moved higher on Friday
We saw another flush out and another strong hammer candle where buyers were able to regain control throughout the day
Basically engulfed the prior three days range and closed on the highs of the week
So another bullish characteristic about this trade setup is whenever prices are consolidating in a tight range
You like to see volatility expand when price is resolved either to the upside or to the downside in this case
We saw prices resolve to the upside and we got a breakout of this 10 month consolidation, right? So prices were trending very tightly
since about February and you saw a volatility
Really really contract to an extreme low level and you can measure that in a variety of different ways using different
technical indicators one would be the
Average directional index better known as the ADX line or I prefer the Bollinger Bands
Bollinger Bands you put right on price chart and you'll see them on that chart that I have
and
You'll see them start to expand as prices broke above that $29 level and then in the bottom pane
What I have is the Bollinger Band width which simply measures the width of the Bollinger Bands
It's one standard deviation on each side of the moving average
And as you see that line start to rise all that's indicating is that we're now
exiting a sideways trending or an on trending market and we're entering a market that's now trending and whenever a breakout starts to occur you
Want to see that happen and this is a characteristic that we have in this chart setup
So in addition to the factors, you just laid out. Are there any other technical as you're watching? Yeah, I just want to
Really reinforce. Just how important this $29 level is if you look at the
2014-2015 bear market in frontier markets if you look at the longer-term chart of FM
The 38 percent Fibonacci retracement is actually at that $29 level. So not only do we have buyers and sellers battling at this level
Over the past 10 month period during this consolidation
But this is a very important level base 20:14 bear market from Fibonacci retracement perspective. So when we have a confluence of
Resistance or support at the same level it only reinforces that support or resistance and makes it stronger
We also have a Viwa from all-time highs coming down right about where prices
Exhausted on their first leg up before they gapped down last week so that V WAP also
Represents a bit of a level of resistance. We basically we have a confluence of
Interest at this $29 level from anchored V watt from the highs
The 20 50 and 200-day moving average and from simply the resistance level that was been tested multiple times at 29
So on a breakout above that level we're expecting a pretty powerful move
We already got the little whip. Saw move back down to retest it
So now we should be off to the races and I think you could target those
2018 highs so that $29 level that's where you'd be entering the trade. Yep
I'll be buying weakness towards 29 and you could even give this trade
till about
$28 the view up from the all-time lows what you'll see on the weekly chart
Which is also the bottom of that rectangular range from February until now so that $28 level
Would that be your stop-loss?
Yes
And you're really given yourself a lot of room you could probably play it off 29 if you want to be a little bit more
Aggressive but if you play it on move back to the highs from 2018
That'll give you about a four and a half time risk reward
If you give yourself 28 as a stop and over what time horizon do you expect this to play out? This is a
Broader market index. So you want to give it about six months. It's gonna be a little bit slower moving
So I'll give it at least till the end of the year. And so Steve with all this in mind
What would you say is the biggest risk to your trade?
honestly
The biggest risk is like I just talked about if we do
fall back below 29 that breakout level there could be some
Opportunity cost in there we could get stuck back in this sideways range for a while between 28 and 29 and there might be other
Areas in the market that you'd rather be in you're still protected because you have your stop at 28 and the most you're gonna lose
Is four-and-a-half percent 5%
But if you want to avoid that you can set your stop at 29. Well Steve. That was great
We'll see how it plays out in the months to come. Thanks so much for joining us. Thanks for having me
So Steve is bullish on frontier markets specifically. He likes buying the iShares MSCI
frontier 100 ETF ticker symbol FM 229 with the stop-loss at 28 and a target price of
36 over the next six months that was Steve Strasse co-founder of the chart report. And for real vision, I'm Jake Morrell
You