Too Far, Too Fast for A Highly Connected Market?

FX Trading - Too Far, Too Fast for A Highly Connected Market?
The World Bank says contraction will be greater than expected; the global economy will slow by 2.9% rather than 1.7%.

Enter risk aversion. The gloomier-than-expected forecast spooked markets yesterday. Most notably, the commodities got hit. Crude was down; gold was down; copper was down. There was no love for stocks either.

The Japanese yen and the US dollar were well bid. The commodity dollars were hit hard. The European currencies also slumped. And emerging market currencies rolled over.

But not too fast – we can’t put too much emphasis on this one report when we don’t know what the headlines might say the next day. Hence, the euro and Swiss franc are leading the charge against the dollar today ... erasing all the ground the two gave up to the buck yesterday.

The thing is, though, it’s not an absolute reversal in yesterday’s risk-aversion move; not yet anyway. Stock futures aren’t doing much; commodities are stable. So what’s the deal? Why is the euro showing such strength this morning after such overall negative sentiment yesterday?

Perhaps it’s because the European Central Bank will unleash credit into the Eurozone financial system. They plan on offering up an unlimited amount of credit for 12 months at the current ECB rate of 1%. The offer is expected to draw huge demand because the ECB is expected to be finished lowering interest rates any further.

Not to mention, eyes keep turning to the better-than-expected business sentiment for the Eurozone and Germany over the next six months; a classic example of looking at the glass half-full.

So here we sit, watching the euro make a move that appears, to us, tenuous. Oh did I mention the German Ifo just downgraded German 2009 GDP forecast to -6.3% from -6.0%!

The $1.40 mark seems to represent a target level at which the euro has been hanging around. On its own, perhaps the euro can climb higher. But in this highly connected market, its going to need some confirmation from the risk-appetite entourage.



Of course, the Federal Reserve meets today and announces their policy decisions tomorrow. We wouldn’t expect too much activity before those juicy morsels hit the wires.

Unless of course someone knows something we don’t. (Not unlikely.)

USD/CAD - Time to buy ?

It looks there's a bit of retracement in USDCAD today, and this may be an opportunity to jump in the risk aversion moves that we are currently seeing.

On the chart, we can see the pair broke above last week's high around 1.1450. It looks like the pair has found major resistance around 1.1550 and currently falling back. Is last week's high resistance-turned-support? I don't know, but there's a good chance traders would watch that area and jump back in if the trend continues.

Fundamentally, fears that the recession will not quietly go away are creeping back into the minds of traders. Where will the new jobs come from? Who is going to buy into the growing inventory of homes? When will the credit markets unfreeze? Are we ever going back to "normal?" These are questions that probably no one knows the answer to right now, so until then I'm going with the current trend and that's long US Dollars for safety.

So, I am going long on this pair if it retraces down to the previous week high. My stop will be just a bit more than the daily range of 85 pips, and I will target recent resistance and beyond. Here's what I am going to do:

Long USDCAD 1.1450, stop at 1.1350, pt1 at 1.1550, pt2 at 1.1650

Remember to never risk more than 1% of a trading account on any single trade. Please adjust position sizes accordingly.

We do have a week full of US data to keep currencies moving this week, so don't forget to check out our economic calendar. Stay tuned and good luck!

Cross-Eyeing: EUR/JPY - Close Trade

As we can see on the four hour chart, the pair is in a medium term uptrend, and after finding resistance around 138.00, EURJPY has retraced back to the rising trendline drawn on the chart. Stochastics are indicating that the current move lower may be oversold as the pair moves toward the 61% Fibonacci retracement area. Also, 132.00 is a psychologically significant round number - possibly an area of great interest in the short term.

Fundamentally, we have a few economic events to push currencies later today during the European trading session. Better than expected numbers may come out for the Euro-zone PMI and German PMI, and if it does we could see a short term boost to the beaten down euro and a bit of risk tolerance return to the market. We'll have to wait and see.

So, I am going to buy EURJPY mostly on technical reasons. My stop will be a wide 200 pips (the average daily range), and if the pair goes back higher we could see it move back to the week's opening price just above 134.00. Maybe even beyond. Here's what I am going to do:

Long EURJPY at 132.00, stop at 130.00, pt1 at 134.00, pt2 at 136.00

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.

Good luck and stay tuned!

Cross-Eyeing: EUR/JPY

As we can see on the four hour chart, the pair is in a medium term uptrend, and after finding resistance around 138.00, EURJPY has retraced back to the rising trendline drawn on the chart. Stochastics are indicating that the current move lower may be oversold as the pair moves toward the 61% Fibonacci retracement area. Also, 132.00 is a psychologically significant round number - possibly an area of great interest in the short term.

Fundamentally, we have a few economic events to push currencies later today during the European trading session. Better than expected numbers may come out for the Euro-zone PMI and German PMI, and if it does we could see a short term boost to the beaten down euro and a bit of risk tolerance return to the market. We'll have to wait and see.

So, I am going to buy EURJPY mostly on technical reasons. My stop will be a wide 200 pips (the average daily range), and if the pair goes back higher we could see it move back to the week's opening price just above 134.00. Maybe even beyond. Here's what I am going to do:

Long EURJPY at 132.00, stop at 130.00, pt1 at 134.00, pt2 at 136.00

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.

Good luck and stay tuned!

Being in the Market

Quotable

“A few years from now, strange as it may sound, we might all find that we are hungry for more capitalism, not less. An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises—which were far more painful in those countries than the current downturn has been in America—we saw the pace of market-oriented reform speed up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to create jobs. The simple truth is that with all its flaws, capitalism remains the most productive economic engine we have yet invented. Like Churchill's line about democracy, it is the worst of all economic systems, except for the others. Its chief vindication today has come halfway across the world, in countries like China and India, which have been able to grow and pull hundreds of millions of people out of poverty by supporting markets and free trade. Last month India held elections during the worst of this crisis. Its powerful left-wing parties campaigned against liberalization and got their worst drubbing at the polls in 40 years.”

Fareed Zakaria



FX Trading - Being in the Market!
Some days I struggle for things to rave or rant about in this morning missive. Often, after bleeding at the keyboard for an hour or two, something seemingly worth saying pours on to the screen; but there are those days when only the keyboard is stained. Today is one of those days.

So, my guest columnist, if you will, is F.J. Chu. Mr. Chu wrote a wonderful little book titled “Paradigm Lost.” It’s a real gem of a book that I often return to, and consistently find increasing amounts of wisdom each visit. I was re-reading his section on “Being In the Market,” and thought you might enjoy it, especially as we start our week in the market. Here is an excerpt:

“We find it upsetting that the market, or at least the rational and quantitative aspects of it that are explained to us by the experts, only describe the surface of our investment world. But the truth is that market prices are determined by a set of complex variables that resist precise quantification. Beneath that appearance exists another world that is disclosed to us by volatile stock price movements and by direct experience. Unlike the familiar language of precise financial data, dry economic analysis, and quantitative rankings, this other world is increasingly throbbing and moving, driven by the basest emotions, and fed by rumor, misinformation, and fantasy. The investor is told that the first world is ‘objective,’ rational and real; while the second world is ‘subjective,’ irrational, and alien. For comic relief, a sage once suggested that someone who is skeptical of the reliability of his physical senses should by whipped until he is convinced of its certainty.

“Since we have already split market reality in two, which one is the one that predominates? That answer is that they both do, although the timing and the degree to which they determine actual market prices is refractory to investors’ power of anticipation. As a consequence, the investor is shunted between these two worlds, feeling like an anonymous and unwitting cog in the great game of the markets. Is there a way out? Now if this were merely an academic argument between university professors, we could dismiss it as the cogitation of overly refined intellects. But this duality infects the whole of our investment world and reaches deep into our portfolios.

“The unique and fascinating nature of the markets is due to the centrality of Being—the mind of the investor, many investors, and in its totality the mind of the market. Its uniqueness has to do with the way the investor stands out within time and in relation to time. In every trade (or every click of the mouse) the past, present, and future all converge in on instant in one physical space. The unique character of each investor’s mind—in infinite variations of reason and emotion, fear and greed—finds its expression in the cascade of market prices. What is suggested is no less than the Socratic ideal of an individual, intelligent, and informed investor who thinks for himself, uses independent judgment, and acts with deliberate choice. It is the real of—Being-in-the-Market—where extraordinary power of ideas takes shape.

“The fundamentals of our financial markets have been well explored by others, to the full accompaniment of graphs, charts, and statistical minutiae. But all the quantitative attempts by the technician are merely seeking to describe an emotional state of the market. The stock market is really too multifaceted and complex to be sufficiently captured by any single methodology or ideology. But all this discussion will probably have little ‘cash value’ for the economists and market technicians. They will continue to look through Being—Being-in-the-Market—because it is so transparent that they cannot see it. In the end, however, Being is what the market technician cannot account for. “And Being is what points the way toward a real comprehension of the markets as a whole.”

FX Trading - Point/Counterpoint

Since I penned my Comdol falling off a BRIC wall piece the other day, the commodity currencies and oil have of course rallied nicely—they didn’t follow the plan. But, hope springs eternal in the world of investing, and hope also usually gets one into trouble ... as we know.

We hope our views are right and our losses don’t get bigger; and we worry we might give back that profit we made because our view may be wrong. This is the market mentality that takes away our money by allowing our losses to run while cutting our profits. It is supposed to be so simple: cut your losses and let your profits run…

Because we hope, we tend to seek out views that validate our hope, often closing ourselves off the stuff that would vitiate it. So in that vein, I print this little ditty, of hope, from columnist William Pesek, a smart guy who covers the Asian markets for Bloomberg:

“Green shoots could be great news for black gold.

“That is how some traders are reading signs that global growth is returning. They are bidding up the prices of oil and other key commodities, and there are two primary reasons: U.S. stimulus efforts and China. Optimists may be wrong on both accounts, particularly the latter.

“Expectations of a quick U.S. rebound cooled in the last 10 days. U.S. stocks slumped this week after Standard & Poor’s downgraded the credit ratings of 18 banks. Optimism is still coursing down Wall Street, though, that the worst is over.

“The more obvious area of misplaced cheer is Asia’s second- biggest economy. China bulls argue government largess will not only boost Chinese growth, but global demand, too. In this scenario, recent gains in commodity prices will be sustained over the next few years. Things may be more complex than that.

“’The reality is not so rosy,’ says Jamie Dannhauser, an economist at Lombard Street Research in London. ‘Exports show no sign of life and the increase in domestic spending reflects a massive state-led program of raw material stockpiling -- hardly the foundations for sustained gains in domestic final demand in an export-dependent economy.”’

Despite having to publically share my view each day, I have lost enough of my own money, and unfortunately others, to learn viscerally that “each moment in the market is unique,” as penned by Mark Douglas, Trading in the Zone. Thus, don’t fall in love with your own story. We’ve actually printed the Douglas quote on the back of our business card, in case we ever forget.

So, my choice of Mr. Pesek’s view today wasn’t printed to simply validate my own story (though I must admit that is partially true), but rather to point out that this move in commodities and stocks is far from a one-way bet.

Now, I think I know what you are thinking: the fact that I am saying it’s not a one-way bet, and others believe that too, means there are still plenty of people left to capitulate to the trend and push stocks and commodities a lot higher. Good point indeed!

Mr. Market Price Action continues to be king, so here is one of the charts we continue to watch…



Last time we had a decent divergence set up between stocks and the Aussie, stocks tanked and the Aussie followed. We have another similar divergence setup now. But, we never know who is leading and who is following, so careful we must be.

Stocks and comdols are bidding higher again today; so is oil, and gold and stuff ... capitulation to the trend time? The stock market may tell the story as the day wears on ...

Stay tuned.

Have a great weekend.

AUD/USD

Good evening Forex friends! It looks like AUDUSD is pulling back from rally mode on broad US Dollar strength. Is this an opportunity to jump back into the longer term trend higher at a better price?

Fundamentally, Australia has been one of the rare economies that unexpectedly dodged a recession during the recent credit crisis. GDP rose 0.4% in the first quarter on a rise in exports and consumer spending. Other signs of strength include a rise in home loans and consumer confidence. Expectations are that the RBA may raise rates within the next 12 months. So, a lot of good things going on for the Aussie and coming up on the calendar we have employment data. This should cause a bit of short-term volatility in AUDUSD, and hopefully get me in at a better price.

Conditions in the US aren't as rosy as unemployment continues to rise, lending continues to be frozen, especially as bond rates rise, and the government continues to spend and grow the deficit like there's no tomorrow. With the Fed running the printing presses all day and night, I continue to expect demand for the US Dollar to fall in the medium to long term. We have retail sales and initial jobless claims coming up in the US trading session. Expect short-term volatility during those news releases as well.

Technically, the pair is pulling back from its rally and approaching an area of previous resistance and a rising trendline. Will this area hold as support? I don't know, but it is a high probability that a lot of traders will watch it to see what happens.

I plan to go long mostly on technical reasons and hopefully the Australian employment data will bring enough volatility to get me a better price. Here's what I am going to do:

Long AUDUSD at .7900, stop at .7800, pt1 at .8000, pt2 at .8100

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.

Stay tuned for updates and adjustmesnts...good luck! :)