The Ruble is Rubble
By Ed Ponsi, Online Trading Academy Forex Instructor
Russia's economy is in serious trouble. Russia is the world's largest energy exporter, and with the price of a barrel of oil sliding back below $40, there has been a sharp decline in capital flows to this Communist country. Russia needs oil at $70 in order to balance its budget, but with the world economy sliding into a recession, even conflict in the Middle East and threats of further OPEC production cuts haven't generated a sustained rally in crude. Without that oil money coming in, the Russian Ruble is falling hard against the USD. Russia has devalued the Ruble gradually since November, and the move appears to be accelerating (see figure 1).
Figure 1: Ruble hits a six year low vs. USD as Russia devalues its currency. Source: Saxo Bank
In addition to the price of oil, there are other problems. Many of the debts owed by Russia are priced in U.S. Dollars; this means that as the Ruble grows weaker, it becomes harder to repay these debts. Since the Ruble has lost about 25% of its value vs. the greenback since August 2008, those debts are now about 25% harder to repay.
Another key problem is leadership; investment capital is fleeing Russia partly because of the unpredictable and gangster-like behavior of its leaders. Investors have withdrawn more than $200 billion from Russia since the beginning of August, according to BNP Paribas. Why should investors put money into a country where free market capitalism has a tenuous hold at best? Why gamble on a country that plays an annual game of chicken with its customers, cutting off gas supplies in the dead of winter in order to gouge prices? Why take the risk that the unpredictable leadership might nationalize your company, thus rendering your investment worthless?
If Russia's economic problems lead to political upheaval, will the current leadership use force to stay in power? The current regime has shown no aversion to the use of violence to achieve political and economic gain. Their mugging of Georgia on the night of the opening of the 2008 Summer Olympics (the timing was an attempt to keep the story off of the front pages) is evidence of that. Taking all of this into consideration, is it any wonder that investment capital is fleeing Russia faster than you can say "Mikhail Gorbachev?"
The Four Horsemen, Revisited
Almost exactly one year ago today, I wrote an article titled "The Four Horsemen, the S&P, and the Yen." In that article, I pointed out that the S&P 500 had formed a massive double-top, a very bearish formation that indicates the end of an uptrend, and that key stocks such as Apple, Google, Amazon, and Research in Motion had formed the ominous pattern as well. Let's take a look at the 1-year performance of the S&P 500 and those stocks since then (figures as of the Jan. 14, 2009 close courtesy of AOL finance).
Stock Symbol
Price
GOOG
-53.97%
RIMM
-53.24%
AAPL
-52.33%
AMZN
-41.49%
S&P
-40.67%
The article also pointed out a head and shoulders in the GBP/JPY pair and a double-top in EUR/JPY – two currency pairs that closely mirror the action seen in the equity markets. This is a good example of the following; whether you're trading an index, a stock, or a currency pair, technical analysis is a valuable tool. No matter which vehicle you choose to trade, a trend is still a trend, a reversal is still a reversal, and a double-top is still a double-top. This also means that if you understand technical analysis and how to apply it correctly, you can trade most financial markets.
Question of the Week
Q) Good evening, Ed. I have just completed your recent article regarding the time you spend during vacation catching up on reading. Thanks for the reading tips! I have a question; do you consider pivot points a reliable support and resistance tool? It appears that pivot point levels serve as a road map in determining the direction of the intraday moves. Can you give us your thoughts on the use of pivot points?
Ed Ponsi) Hi Renee, good to hear from you! Pivot points can be useful intraday, but if you think about it, you could get the same effect by simply selling a break below support or buying a break above resistance. You could also use support and resistance areas as targets instead of using the pivot points R3 or S3 as targets. To sum up, I think that pivot points can work, but they don't necessarily work better than good old support and resistance. Good luck!
Is It All in the Digits?
According to a Cambridge University study, the length of a trader's fingers may reveal the size of his income. The longer the ring finger is compared with the index finger, the bigger his pay is likely to be, a study of London traders found. The secret may be revealed in the "digit ratio", which reflects the length of the index finger divided by the length of the ring finger, according to a study of 44 London traders. Traders with long ring fingers made an average of about $1 million USD, compared with $90,956 USD earned by traders with shorter ring fingers, according to the study.
Previous research has found that the digit ratio reflects how much testosterone an unborn baby was exposed to in the womb. Those exposed to high levels of the hormone are more sensitive as adults to testosterone that creates feelings of confidence and encourages risk-taking.
The long-ringed-fingered among us should keep one thing in mind; while those sensitive to high testosterone levels (risk-takers) may make more money, they may be more prone to blowing up their accounts, too. In traders on a winning streak, testosterone will keep rising until the hormone eventually causes manic, irrational behavior, turning the boom into a bust, said J.M. Coates in a separate study published last year in the Proceedings of the National Academy of Sciences. Let's be careful out there!
