Dynamic System generates a dozen or less signals per year to catch only the very big trends in which we stay in for weeks to months.

In the previous two years (since the inception of public trading signals) we lived up to our promise and clients enjoyed tremendous profits with few trades. 2008 offered merely five trades to make a 42% return, 2009 another 61% return with seven trades. In the current market environment we cannot stick with a trend as long as we used to.

You might have noticed that the market swings up only to reverse entirely. It is stuck in a range with the S&P 500 basically unchanged for the year. Not that our team wants to bloat with our 25% return for 2010 but when I conceived Dynamic System, I was aware that markets do not only trend. It is therefore optimized to exploit ranging markets with great efficiency, as well.

Our client base has been growing consistently with very low fluctuation. I am very thankful for the trust our clients give us. If you have any complaints, please do let me know. Although trend following still requires a bit of active money management, I’m sure it is absolutely worth the effort. So let us strive for a good second half 2010 and hope for more lasting trends to follow.

Market participants have been observing what is supposedly called a head-and-shoulders pattern in the S&P 500. Once its lows were violated, they anticipated further downside but this scenario failed to materialize as our benchmark made a u-turn at 1010 points. Dynamic System correctly signaled a long entry.

Since then we could recover quite a bit and rescue ourselves back into the safe zone of 1050 and above. Currently we can consider this a fake breakdown, to levels which the market is unlikely to return to again.

The rally on July 20 was a very encouraging day for bullish investors because on that day we marked a higher low in this new uptrend. Therefore, setting a stop loss order there is the maximum allowance we should give this market.

We are now looking to break the 200 moving average that has been quite a problem area recently, and would welcome a decisive breakthrough of the 1100 mark in the coming few days.

There is always a major trend that dictates the wiggles intraday. This has to be the focus to be a successful trend follower because only then the activity being observed day by day can make sense. Just because someone says it is “merely short-covering”, does it mean a trader should better not reap the profits of a rally? It could go down anytime, we are told.

The average investor is missing out yet another huge opportunity because he is being fooled into believing that the next crash is just around the corner. So after the dot-com bubble, where he refused to cut losses and after the financial crises, in which he was forced to give up his holdings, he is now in denial and – as always – doing precisely the opposite of what he should be doing.

Fortunately, at Trend Architect we have the vision to make trend following available to everyone. We put great effort in making this as easy and affordable as possible. With just $39 per quarter you can join the big trends of the financial market.

Before the trend bent recently, we exited the market on April 27 (subscriber content), on time to protect client money. Year-to-date Dynamic System is beating the benchmark with a +9.24% return, compared to a loss of -0.16% in the SPY (S&P 500).

Chances are high that the sell-off last Thursday was a trigger to put an end to climbing a wall of worry. Whether it was a computer glitch or not, it definitely was a reason to awaken the long-term buy and hold folks, and get them back to reality.

The bullish scenario we envisioned roughly two months ago is put on hold, as the index smashed through the 200 EMA like a hot knife through butter. We will therefore stay on the sidelines and observe the market closely for a new entry. Be there when Dynamic System gives a signal.

Now that we reached a new recovery high and are about to break through the 200 weekly EMA, chances are high that the market will go for 1250-1260, a gain of 8.7% from here. Consequently, this EMA is expected to turn around bullish.

If you have been a day trader and observed the S&P 500 closely back then, you will definitely remember how the index reacted strangely at the 1260 levels pre-Lehman Brothers. Not merely on one occasion, but each time we ranged in that area on several days.

During those days, I have been active in trading groups, and kept pointing it out to other particpants. I know other traders found this level weird, as well. We could not explain why, but “something was there”. So as we recover back to this area, I’m going to be very watchful.

Subscribers are already perfectly positioned to exploit such a move. A trading signal has been published on February 25 by Dynamic System. This trend following position is paying high dividends to all of us. Learn more about Dynamic System, if you like to follow our trading signals.

The conclusion is that we can expect a bounce here. The first challenge is awaiting us at the upper range of the downtrend channel from which we sold off yesterday afternoon. Breaking this can be an attempt to break the intermediary 1,100 resistance. Dropping below the 200 EMA, however, can result in some serious outcry.

By looking at the intraday activity, we can observe a cautious uptrend toward resistance areas. These are especially the 20 and 50 EMA in the daily chart (also visible in the Dow Jones). If bears are able to defend the resistance areas and break the small uptrend in that process, we should get more defensive.

Closing above the moving averages, however, can be an attempt to reach for January’s highs.

As trend followers, we try to hold onto this trade for as long as possible. I would like to give a short update on what is currently being observed: A very visible uptrend channel in the SPY, which took shape since mid-August, has been violated today. Another reason for concern is the break of the multi-month support level at around 109.00. Both of these breaks signal more intermediate weakness ahead and do not happen for no reason.

Yesterday’s announcement by the Federal Reserve to leave the interest rates unchanged was celebrated with cautious enthusiasm initially. It dissipated entirely today and we are resuming our downtrend.

The easiest way for the individual investor, is probably to buy the EWJ (U.S. Dollar denominated ETF which represents the Japanese market). I have done this manually by buying the NIKKO ETIF 225 directly at the Tokyo Stock Exchange and financing this with a Yen carry trade. Next visible target area is 12,000, another 20% upside potential from yesterday’s close.

We have been yen bulls for an extended period. Now that we have reached our long-standing target of ¥85, we think that the risk-reward for holding long JPY positions is less interesting. Indeed, there are a number of factors which suggest that it’s a good time to book some profit in USD shorts and begin to use the JPY as the funding currency.

The roadmap for the 2009 FX market can easily be captured by the “punish the printer” theme. The most aggressive printers, namely the US and UK, have seen their currencies underperform, particularly against those currencies where the risk of printing was always close tozero — namely Australia, New Zealand and most EM countries such as Brazil. This theme has pushedv aluations to an extreme in most cases.

While the UK and US still have issues with respect to successfully reversing their balance-sheet expansion, and for that reason we still think the dollar and sterling will struggle to fully reverse this year’s losses until it is clear they can successfully exit their QE programs, the level of the yen on a relative basis suggests to us that it is a good time to substitute some dollar shorts for yen shorts. Playing a reversal of the “punish the printer” theme is perhaps one of the biggest currency
opportunities available in 2010, and we will continue to monitor it accordingly.

As can be seen in Exhibit 1, a basket of long USD and GBP against EUR and JPY is at fairly interesting levels for those inclined to fade the heavily populated “punish the printer” theme amongst the world’s four most liquid currencies. If we are right about USD/JPY, then this could start to turn now, especially as the EUR is around 30% expensive against both sterling and the dollar.

Why do we think USD/JPY is close to a bottom?

We think that Japanese authorities will want to resist yen strength around the ¥85 area, given that a break of this level sets up a test of all-time lows in USD/JPY around ¥80. Japan has not intervened in the currency market since 16 March 2004, not resisting the recent bout of dollar weakness. And despite risks to the domestic economy from the strong currency, they have kept to the spirit of the G20’s desire to deal with global imbalances. This has also been at a time when China’s renminbi has
been linked to a very weak dollar. Japan has been a good global citizen, but after this week’s surprise announcement of further liquidity measures by the Bank of Japan, it is perhaps an early indication that they are getting increasingly concerned about their economic prospects at a time when other central banks are thinking more about their exit strategies.

This might also imply that if the yen were to strengthen further the probability of intervention would rise quite sharply.  Coordinated intervention cannot be ruled out either, given that Federal Reserve Chairman Bernanke has recently talked about a strong dollar being a source of global stability and that the Fed is attentive to the implications of changes in the value of the dollar and will formulate policy to guard against risks to their dual mandate. The recent Fed minutes also referred to the link between the dollar and inflation. There are many countries which are currently unhappy with dollar weakness (strength in their own currencies) or the low level of the federal funds rate such as the Eurozone, Canada, New Zealand, Switzerland, Brazil, Hong Kong, China and other Asian countries. A general stabilization of the dollar would suit everyone’s needs and help to contain any inflationary pressure in the US.

Source: Morgan Stanley: FX Impulse: Time to fund in Yen instead of Dollars?