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> Barratt's Brief

Jonathan Barratt has been involved in the financial markets for the last 25 years having obtained experience in the Australian, London and Hong Kong markets.

Respect in the market has been gained to the extent that he is a regular commentator and guest strategist on Sky Business, CNBC Asia Television, Bloomberg TV, ABC 1 and 2, News Radio and NDTV India. In addition to this he is a guest writer for industry publications such as 'Gold Gazette', 'Your Traders Edge' and 'Oil and Gas Gazette'.

Jonathan was previously Managing Director of Commodity Broking Services and is currently the editor of Barratt's Bulletin. Barratt's is a new weekly bulletin that provides expert analysis of commodity markets, global indices and foreign exchange movements. ShareScene members can take a no-obligation 21-day trial to the bulletin via this link.

  
 
  
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Barratt's Brief
Barratt's Brief
post Posted: Jun 4 2012, 11:59 AM
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Just when you thought you had a little clarity on what the machinations of the financial markets are in walks Spain. Greece looks to be under control, well to some extent, the US economic data remains mixed with Facebook hitting a record low….however glimmers of optimism are appearing and China weighed into the austerity argument by pledging its support to the G8 by finally committing a lazy 315 billion USD to help support both her internal and external economies.

In Australia we continue to see mixed data and the potential for more political fall out in the current ruling party due to the richest woman in the world deciding to import her labor needs ahead of locals. The RBA also meets this week to decide on interest rates, we are tipping for a further 25bpt cut.

Before we look at Spain lets come to grips with the current situation in Greece. So far opinion polls are saying that the pro austerity parties will come back into play in the 17th June election. This sends a sigh of relief throughout the markets as it means that Greece will continue with the hardline measures already adopted in order for her to remain in the EU.

Although we have looked at Greece exiting from the EU this news suggests that people are now prepared to take the hard yards. The sensible approach is for Greece to remain in the EU, however how long will it take for the country to balance its books and will the people provide the mandate for a new government to do it. We can suggest that this story is far from over.

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In Spain, we are continue to hear the banking sector is in trouble and we have just heard that the ECB has rejected the bailout proposal of some of the countries major Banks. It is interesting to see the reasons ECB policy maker Nowotny sent a clear message to Spain that the ECB was a central Bank design to provide liquidity not for issues of solvency; that the issue of solvency has more to do with the nations government rather the ECB.

If the Government has problems then there are appropriate channels for which it can gain assistance. Spain, which has been in trouble over its debt laden regional banks, is also struggling to recapitalize one of its pillar Banks due to the bursting of the property bubble four years ago. Spain's economy remains weak and the fear is that it will drag the EU into a recession later on in the year. However, so far the EU equity markets are shrugging off the Spain concern.

Across the Atlantic the US is looking steady, we continue to get mixed economic signals about the economy and suggest the ebb and flow of positive data will remain with us for sometime. We have been looking for the Housing data to provide the lead for the economic recovery story however, the Case Shiller Index for Home prices have actually fallen to levels not seen since 2002.We expect the FED to back up some strong data claims as this will help then sell the end of "Operation Twist" to the market. We continue to feel that QE3 remains a remote possibility.

 
Barratt's Brief
post Posted: Feb 28 2012, 10:50 AM
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Oil Market - How Far Can It Go?

We had been long Oil for some time and glad to be ahead of the pack. Although we left a little profit on the table any profit is a good profit. So what is happening in the market at the moment?

It seems like the stories we have been following over the last three weeks are intensifying each day with the only negative story that we can find being the lack of demand in the US. It seems strange given we are looking for a sustained recovery in the US, however US crude stockpiles are projected to be down this week which will support the market. We feel that traders are marking up the Middle Eastern premium as tensions between Iran/Israel and the UN Nuclear watch dog intensify.

It is interesting to note Iran’s strategy on export sanctions imposed against her. Currently 18% of the countries exports go to Europe and in July Europe will impose oil sanctions against Iran. The lag was designed to help those countries that Iran supplies to find alternatives. However, Iran on the front foot has already restricted supply thereby putting an immediate squeeze on the price. Add today’s lack of progress during the two-day Nuclear disarmament talks with markets gossip of a pre-emptive strike by Iran if her interests were endangered and you have a recipe for a bid market.

Fabricating higher prices of Oil will compensate Iran for the loss of sales. We can suggest the play is a little dangerous for Iran however, also can suggest that the stalemate will continue. Can the world do with out cheap Iranian Oil; the country is the 4th largest producer and 4th largest exporter? The answer will be in the size of the cuts China, India and Japan impose on her. China is the 3rd largest consumer, Japan the 2nd and India the 7th.

At the moment we continue to support higher prices and are looking for another entry opportunity.

On the Brent WTI spread we expect it to widen its cheap at US15 and expensive at US26.

Chart Point

Our target of US102.50 was reached with the market sailing through resistance at 103.75. At the moment you can adopt a buy on a break to new highs strategy, as the market is firmly entrenched in a trending mode. Remember if buying a break to place stops in at the low of the day of the break. It’s interesting to look at momentum studies as they are on their highs and provide no signal to buy, however, in situations like this experience should take over. Do not be caught short and try to use momentum studies to exit a trade, it could become very expensive. We have re entered the market at 106.35 with a stop at 105.70.

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Barratt's Brief
post Posted: Feb 10 2012, 11:14 AM
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Oil Market - At Last Signs Of A Break Out

As mentioned last week the oil market has tracked sideways for most of the holiday period, and with and unplanned outage at an Alberta mineral sands plant in Canada it looks like the bulls will outweigh the bears. Production from the plant is likely to stop for two to three weeks and put a crimp on supply of oil to the US which should see the price of WTI pick up.

Adding weight to the move was news that Iran is imposing its own sanctions on oil exports to Europe and continued clashes between militants and the Government in Nigeria is adding investor concerns. In addition, the latest round of US Oil Inventories as reported by the API showed stockpiles fell by 4.5 million barrels last week, which if the data from EIA supports the same should help underpin further price rises for the commodity. We have turned bullish the commodity and are currently long at 98.90 with a stop at (95.70 well out of harms way).

For those that continue to follow the Brent WTI spread we suggested last week that it would head back to US15.00, it has since traded as high as US20.00 which may represent an intermediate high given the outage in Albertan and subsequent bounce in the WTI contract. Lets see how the dust settles in Alberta before making judgment as we feel continue news from Iran and Nigeria will keep Brent bid over WTI.

Chart Point

Technically, as we have seen a solid bounce of support US96.00 we have to give the bulls chance as we can conclude that we are back in the range and suggest a move back to US100.00 then US102.50. Momentum indicators have also turned bullish which supports the move higher. We have been bearish the market whilst it traded to a low of US96US95.44 however the bounce last nights puts a new spin on the market. We are bullish with stops in at US95.70.



 
Barratt's Brief
post Posted: Nov 22 2011, 11:59 AM
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Trading – Market Psychology

Market psychology is often one aspect of trading that traders tend to ignore and in fact it is generally overlooked when investors look towards the more tangible forms of fundamental and technical analysis. In this “Pearl” we look at market psychology as a means to create a better understanding of the way the markets trade.

In the words of John Maynard Keynes the father of modern economics “We are concerned not with what the investment is really worth….but what the market will value it under the influence of mass psychology”. In order to have an understanding on how a market will behave we have to look at the players the “individual” and the “crowd”. This is a crucial point that tends to divide the fundamentalists and the technical analysts and some say is the main reason that technical analysis is the best approach to look at market behavior.

The individuals act alone and get caught up in the emotion of the trade. They do a lot of homework on each position and in the process they eventually become part of a particular crowd or herd that continually searches for confirmation that their view is the default view of the crowd.

The Crowds’ singular most important feature is that its sum of knowledge is less than that of the individuals that make it. The survival of the crowd/herd is the most important aspect. There are two main crowds in the financial markets, the bulls and the bears, and these two are always at war, with one always wining over the other. It’s the size of the propaganda that each crowd provides that will prove the trend and it is the technical’s that will pick up this emotion. It is up to us to pick this emotion when it happens as 70-80 % of the time the markets are ranging and 20-30% it is trending. It is the trending markets where good profits can be found and the best way to see this emotion is via the charts looking for continuation patterns.

 
Barratt's Brief
post Posted: Nov 18 2011, 01:55 PM
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Trading - Commodity and FX Options

Over the last couple of months traders have been seeking advice on the volatility of the market and how to hold onto positions. This volatility has made it very difficult to trade as many positions have been whipsawed from the market.

Traders have been finding it hard to hold onto positions as the swings have been so wide, with the common complaint that positions have been stopped out or triggered on a “blip” and then the commodity has resumed its trend. Very frustrating so what can be done about it?

Trading in a volatile market is hard as you have to be able to wear stops that are outside the daily range for the commodity or not place them at all. Not placing them is hard as you have to have very deep pockets in order to hold the position and by placing them you have a high chance of being stopped out. If you have been subject to this type of problem then looking at Options could be a solution.

Most commodities and FX pairs have puts and calls attached to them and most are liquid. On the Falcon Trader we have streaming real time puts and calls on FX as well as Gold and Silver. The good thing about trading options is that you have unlimited upside yet the loss is limited to the cost of the premium. The most prominent downside risk is that value of options decay over time and this decay accelerates as the time to expiry gets closer.

When looking at an option “pricing” is very important, some investors have their own calculator to work out what is a fair value. An option price is made up of five different pieces of data: the price of the underlying, the volatility of the market, the strike or exercise price, the expiry date and interest.

On investing in options I find the best approach is to trade them i.e. do not what until expiry, look for markets you feel have substantial upside. We tend to look for either short dated or long dated options where time decay is minimal or expansive.

Some of the most common mistakes we feel that people make is they hold onto their option trades for too long… in short they adopt the “hope and pray method”. As a rule if you are losing close to 40% of your trade then it’s better to close it out rather than lose 100% i.e. know when to cut your losses.

As an example of an options trade have a look at Cotton. We are already bullish the commodity and with the market being volatile in a narrow range the chances of being stopped out on the lows remain real. As such look for March 2012 120 Call at a cost of US 865, we have done the hard work on this. If the market drops below US 95 we will exit the position.
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Barratt's Brief
post Posted: Nov 17 2011, 11:29 AM
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The Anatomy Of A Trade: Gold

Since the last “Tweet” we did on gold indicating a buy at US1778 many investors have asked as how we arrived at the timing to enter the trade and what method we used to conclude that the trade was in fact on. It also seemed appropriate to do this as in last week’s “Pearl” we talked about how we used a combination of both Fundamental and Technical analysis to arrive at our decision to the put a trade on.

So we have decided to run through the decision making process.

Fundamentals

Gold, as we are all aware has been in an uptrend based on a series of fundamentals. On the journey we have bought the commodity at various times, made some money and lost a little however, overall we have gained a good feeling on how it behaves, its daily ranges, what will make it move and how the commodity will generally trade. We still believe in the trend for the metal, however since the beginning of September and the high of US1920 we started to get some diverging information.

The news in Europe and the US appeared to be getting worse and worse yet the price for Gold continued to sink.

Why?

Could this have been the increase in the value of the USD ie the inverse relationship, nervous longs or could it have been some large sellers. Well, as it paned it was a mixture of all however we remained convinced that the trend higher for gold was still intact. Our buy on dip philosophy would hold however, what was a reasonable dip and what would be the trigger to enter the market? We had to be patient, remember a good trader waits for the market to come to him rather than chasing it. The trigger to enter the market was technical.

Technicals

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Gold had a double top at US1920
(1) the fact that the market was not ready to trade through this level suggested a correction was imminent. Momentum indicators at the time showed signs of divergence
(2) and were over bought at the time so we could not enter a long trade and crazy to buck the trend and enter a short. We had to be patient. As time travelled and the market consolidated we could draw a trend line on the top side which was tested a few times
(3) ie the market also focused on this trend. Bearish momentum slowed down and after we bounced off US1762
(4) we could indicate a range US1920 to US1762. We worked off US 1762 as a low.
Then when a large sell order (5) was absorbed by an equal and larger order to buy the trade was on as the market failed to test lower.
The old low of US 1762 (6) provided the correct level for the stop.
Now that we are in the trade we have just added to the position on the break of the down ward trend line at US 1810. All going well the target is first US1825 then US1840 and beyond. However, hopefully by that stage we can run the trade as our stop loss is at a level that if triggered will not cost rather secure some profits.

Conclusions

Some after reading this would say that we need not look at the Fundamentals rather just look at the Technical’s however the fundamentals help us gauge the direction the market wants to go and the technical’s have helped us execute the trade at the correct level hence the profit on the trade to date. Remember from last week “we use fundamentals to help gauge the mood of the market and the technical’s to help enter, add to or reduce and exit trades”.


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Barratt's Brief
post Posted: Nov 16 2011, 11:18 AM
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Fundamental Versus Technical Analysis

Do not mess up a good trade with Fundamentals” this is the catch cry of many Technical Analysts however being an economist this is extremely difficult to do as the “numbers” say it all. The debate between the two continues to rage however at the core is the ability for each one to be able to perform.

Which one produces the best result?

Well in our experience in trading you cannot discount one over the other each has an important part to play. Our preference however is to use both in differing degrees as each has a unique quality which we will discuss below.

Technical Analysis is the use of charts to help us find the direction or trend the market will be following. It encompasses, trend line analysis, pattern recognition, momentum indicators, Fibonacci, Elliot wave, candle sticks and depending on the instrument volume analysis.

It is estimated that 80% of the market players use some form of technical tools to help analyse their trade before they enter it. It is comforting to know that everybody is looking at the same data so you can use this to your advantage by looking for “pressure” or “bifurcation” points on the chart. These points tell you that a change in direction or a continuance in the trend is possible and are used to enter, add or close a position. If a move is on then the chances are that others are looking at it as well...so it becomes self for filing.

Fundamental Analysis is the study of the economic data that an economy produces. It relays the strengths and weaknesses of the economy so that the Government and Central Banks can adopt the correct policies in order to stabilise the economy when needed whilst allowing it to grow moderately.

The Government tends to look more at the fiscal measures and the Central Bank focuses more on monetary measures. Both interact when needed on the economy in a balanced way to help guide the players in the economy so that it ensures good prospects for all. We divide the data into tiers, first, second and third and so on. As an example tier one data usually includes leading indicators such as Consumer Price Index (CPI) Producers Prices Index (PPI) Unemployment and Employment figures, Industrial Production, Durables Goods and Factor orders etc. I like going to http://www.fxstreet.com/fundamental/economic-calendar as it provides some useful information on up and coming data.

Combining the skills;

After an extensive period of time in the market testing both we can safely say that both can be used independently and or combined to secure the best outcome. After all you are using the tools to better understand the psychology of the markets and it is through their use that you can gauge the markets strengths and weakness. This takes a lot of time and it is only through time that you will be able to learn this as more often than not it is a journey about yourself, your strengths and weakness that will determine whether or not you can be successful at investing and trading using these methods.

As a tip and from experience we use fundamentals to help gauge the mood of the market and the technical’s to help enter, add to or reduce and exit trades.


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Barratt's Brief
post Posted: Nov 14 2011, 01:21 PM
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How to create the perfect investment portfolio

Being in the markets and investment sphere for 26 years you end up experiencing a lot, whether it’s the stock market crash of 1987, 2008, recessions, the invasion of Iraq 1 and 2, or the Asian crisis you tend to be asked as to what are good and what are bad forms of investment.

Investment in finance is allocating money with the expectation of gain which has a high degree of security and security of return within a specified time frame. In the past many investors particularly SMSF's, who have been looking for these types of investment have been hurt when equity, property, currency or commodity markets turn. In fact some investors have inter-generational debts that are being paid off due to the fact that the timing to buy the investment was wrong or the investment was too illiquid to jump ship when needed.

Timing is crucial for any investment, however you cannot always get this right and nor should anyone expect you to. As professionals we too find it hard to get the correct timing on investments. The key we believe to successfully structuring your portfolio is diversification of your investments and then choosing the correct investments to buy. Doing your homework and understanding what you are going to invest in is also crucial to a well balanced and performing investment portfolio. If you are not sure then ask people that know. So what makes a good portfolio?

A portfolio has come to mean a collection of investments you work towards to which you can rely on as an income stream when you retire. A well balanced portfolio should have the following:

1) Real Estate - is an investment that provides rental income, the good aspect about rental income is that it is indexed to inflation. So your income received will always be rising and keep in line with the general increases in prices around you. The only concern is that it is not liquid.

2) Cash - Cash in Bonds, Bills or other securities is liquid and earns a good safe return; however you need to check the inflation rate as many have been caught where they value of the cash has been deteriorating over time due to inflation. Example with interest rates at 4% and inflation at 4% you have made nothing

3) Equities - are good as they can provide a good yield by way of dividends and have the potential for some good capital gain. The capital gain should only be considered as a bonus. Equities are not indexed to inflation so keep a check on what is happening in the broader market.

4) Currencies - are only for the professional - they provide increased return in particularly if you have an international portfolio of equities or Bonds. However, you need to be aware of what you are doing and how to go about it.

5) Commodities - are good as they trend well with economic cycles and you have a better chance at getting on a trend and sticking with it. The only issue here is that commodities do not pay a dividend or interest rather you are in it for capital gain or loss.

So overall if you just look at Real Estate, Cash and Equities then the simple maths suggest that your portfolio should have approximately equal amounts in each. The amounts invested will change depending on the market conditions at the time, however all combined they should provide the basis of a steady income stream down the line.

 
Barratt's Brief
post Posted: Sep 27 2011, 01:15 PM
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Today I thought we could have a look at trading the break.

Break out trading is an art as the timing and levels that are needed are crucial to the success of the method. Basically the skill is determining the correct level to place the sell or buy stop. Remember you are entering the market above the price if you are buying and below the price if you are selling. We use the stop entry order mainly when looking to add to a position that is moving in the right direction. How do you find the correct level?

Some traders have developed systems so that it automatically buys or sells the break however more often more than not they tend to get stopped in at either the top end of the range or the bottom which often results in stops loss orders being triggered. The reason for this is the fact that the market spends over 75% of its time ranging and not trending. So the secret in trading this method has to do with identifying the correct level to place orders and to be nimble once the order has been triggered.

One of the simplest ways to identify the correct level we have found is to use "chart recognition patterns" that display continuation patterns to identify the entry. Patterns like an ascending or descending triangle, flags and pennants, rising and falling wedges. Basically if it looks or feels like a continuation pattern then the chances are that it is. Just place you entry a little above or below the highest or lowest point of the pattern and remember to place a stop loss below the level of the day of the break as you do not want enter the position on what may turn out to be a ranging move. This is one trap you do not want to see yourself being caught in getting long or short a market at the wrong end.

In the chart below you can see the perfect trade in copper to help illustrate this.

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Barratt's Brief
post Posted: Sep 1 2011, 04:40 PM
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Today I thought we could have a look at spread trading in commodities in particular the WTI/Brent Oil spread?

What is a spread? In the commodities market a spread involves the simultaneous buying and selling of a futures contracts in the same or like commodity looking for the differential between the two contracts to widen or narrow. The Trader if he buys the spread is looking for the spread to widen and if he sells the spread looking for it to narrow. He is not really interested in the direction of the commodity rather how the commodity will behave over time.

There are mainly two types of spreads that Traders can look at for futures, i.e. inter-month or inter commodity. The inter-month or calendar spread involves the selling or buying different contracts of the same commodity over a number of different delivery months and is very popular in the grains markets especially during periods of harvest. An inter-commodity spread trade is a spread that involves two different but related commodities for example the “crack spread” between crude oil and gasoline or between Brent Crude contract traded in London and WTI Light Sweet contract traded on Nymex. Let’s look at the WTI/Brent Oil Spread.

WTI/Brent Oil Spread

This spread has a consistent history as it is only up until recent times that Traders have focused on it. Traditionally, the two trade within a few dollars of each other with Brent Oil, because it is heavier grade then WTI trading at a discount; however the recent events in Libya caused the spread to behave erratically and then spike in one direction. Basically, as Libyan oil mainly goes to Europe the civil war caused a shortage of the commodity. In fact close to 1mio bpd then over time the demand for Brent picked up as stockpiles of Libyan oil shrank. The result was the price differential or spread between the two widened to an historic US25.57. Now with the demise of the Libyan regime there is a possibility that as production picks up in Libya the spread will come back. If you believed that then the trade is to sell Brent and buy WTI.

The chart below represents the price action for the two commodities as you can see the pink shaded area represents the normal state of play and the yellow area seen since the civil war commenced. One would expect that since the civil war is over (nearly) then the market over time should come back to the norm i.e. back to pink. This also makes sense as the Brent contract is heavier than the light sweet from Libya and WTI and thus should be in as much demand as before. Currently Brent is trading US25 over WTI which is really expensive and should be closer to US2. If you feel this is the case then you could profit from selling Brent and buying WTI. If this appeals to you, then look at either using Futures or if this is too many dollars per point look at using the CFD.







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