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! :)

Pick of the Day: USDJPY - Trade Closed

Trade Closed: 2009-06-10 10:17

And yet another cruel day in the Forex markets...haha! Since I posted my trade idea, USDJPY did fall enough to trigger my long trade at 97.75. Unfortunately, today the pair went down further, just enough to touch my stop, take me out and rise back above 98.00...doh!

Stopped out at 97.10

Total: -65 pips/ -1.0% loss

I am a bit peeved at myself as I should have drawn the Fibonacci from 95.50 instead of around 96.50. Then I would have seen that my stop was the 50% retracement of that swing, but situations are always much clearer in retrospect, right?

So, another loss and that makes that two in a row....grrrr! Hopefully, the majors will give me another opportunity to make it back before the end of the week. Stay tuned!


Good evening! I thought I'd tackle USDJPY once again as a nice technical setup is forming on the one hour chart. Let's take a look!

As we can see on the chart, the pair has been on a short term uptrend in the one hour timeframe. Stochastics are in oversold territory, and the pair is about to hit the rising trendline. I also used the Fibonacci tool to find other potential support levels, and we can see that the 50% Fibonacci retracement area lines up around the rising trendline.

A quick look at fundamentals, and the US Dollar has been given extra support after the recent surprise in the US jobs data on Friday. The media seemed to have focused only on the headline number of jobs lost, so there was speculation that we are near the end of the recession sparked new speculation and that the Fed may raising rates to combat the potential inflation. Will the affect of jobs data and interest rate change speculation hold for long? I don't know, but for now the "trend is our friend" and the higher probability direction to trade with. Makes sense to go with it right? So, I will go with the trend for a short-term day trade, but wait for a better price. Here's what I am going to do:

Long USDJPY at 97.75, stop at 97.10, pt1 at 98.40, pt2 at 99.05

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

No major data for the US until Thursday with Initial Claims and Retail Sales, and nothing for Japan until Wednesday with GDP. I expect technicals to play out until then. Let's see what happens and stay tuned!

Premise check?

Quotable

“While payrolls slid by 345,000, much below the consensus guess, it was the usual hokey number, getting a lift from the wonderful birth/death model, which somehow summoned up 220,000 jobs and did so, magically, out of thin air.
“The harsh truth is that, using the regular payroll data, a rather formidable 14.5 million people are out of work. Moreover, if we look at the category we feel gives a more accurate picture -- the so-called U-6 tally -- which includes people too discouraged to keep looking for a job and those working part-time because they can't find full-time slots, the unemployment rate shot up to a new high of 16.4%. That means that something around 25 million folks are effectively on the dole. Ugh!”

Alan Abelson, Barron's

FX Trading - Premise check?
What if:

1. The world will be struggling with deflation instead of inflation?
2. US employment and housing experience another leg down?
3. China disappoints?
4. An Eastern European country defaults?
5. The US is on track to at least muddle through better than Europe?

…well, it might mean:

1. Commodities prices are “way” overvalued
2. Emerging stock markets are “way” overvalued
3. Long bonds are “way” undervalued
4. The US dollar is “way” undervalued

Is the recession nearing its end??

We've seen a trend of positive data lately, as economic reports are showing some improvements. Stock markets are rising globally, up 30% since last March. We are seeing money flow out of the yen and the dollar - and going into commodity currencies! Check your charts, the loonie and the Aussie have risen by 18% and 31% since last March! At the same time the "anti-dollar" (ahem, I mean the euro), is approaching December prices levels.

Economic reports have also been showing some positive signs. PMI reports have been rising globally, especially in Europe. Housing data from the UK is showing that the housing industry appears to be stabilizing. Australia even avoided a technical recession, with a GDP report indicating 0.4% growth. It appears the people believe that the recession is bottoming out. So the question to ask is, is it REALLY over?

We are seeing all these improvement in certain economic data but later we find out that they are revised lower. Some experts and market-watchers are saying that the government has been data downwards more often in the recent periods. In a way, they are implying that initial figures that came out were simply buffed up for political reasons. Of course, there's also the possibility that these were just oddities that tend to happen when an economy is in transition.

Let us take a look back on the differences between reported and revised data in the past.

Examine the US non-farm payrolls. The US NFP report garners a lot of trader attention as it has shown to be highly predictive of government data released a couple of days later. The NFP employment change for April printed that 539,000 people lost jobs, better than the 590,000 expected. Consider that statement void as the "actual" figure was revised down to a whopping 699,000 lost jobs! People had taken this as a positive sign that labor markets were improving. Um, isn't half a million job losses still half a million job losses? Kind of hard to be optimistic about that.

Here's another one: US core durable goods orders. The "actual" US durable goods figure for April stood at 1.9%, much higher than the 0.1% predicted. Later, it was revised down to -2.1%, a complete turnaround from the initial figure. The headline figure, which includes transportation items such as cars, was revised to-2.1% from -0.8%.

It doesn't end there. Core retail sales also shared the same tone. In April, the Census Bureau printed a 0.9% decline which was later changed to -1.2%!


What we see here is good data that the media, investors and traders eat up as signs that the recession is turning, but are later revised to show that things are still pretty gloomy. Moving on, let's take a look at other data that has been released.


First quarter GDP reports carry no hint of optimism. The US posted its third consecutive quarterly GDP contraction while Canada reached its second straight GDP decline. In Japan, economic activity slowed by 4%, its biggest quarterly GDP contraction ever! While the GDP is a lagging economic indicator, the recent data suggests that the world's largest economies appear to be digging a deeper hole.

The labor market is miles away from a recovery, with unemployment rising all over the globe. Weaker employment implies lower personal incomes and thus reduced spending. Who wants to spend if they might lose their jobs? If this persists, then economic activity will continue to contract. In the UK, we have seen the unemployment rate jump from 8.9% to 9.2% in April while the jobless rate in Canada is expected to climb from 8.0% to 8.3% this month. US unemployment is forecasted to rise from 8.9% to 9.2%, largely a result of General Motors bankruptcy filing which caused it to shed more than 21,000 factory jobs.

Not only has the recent GM bankruptcy injured the US labor market, it also casts a dark cloud on the nation's sales and industrial production. Retail sales dropped 0.4% in April after a 1.3% decline in March, confirming unemployment fears are prompting consumers to hold on to their money (in fact, recent reports have also shown that the savings rate is up). Across the globe, industrial production has already been falling, with worse-than-expected declines in both Euro-zone and UK.


So, what exactly is happening here? We are seeing some positive data from some reports, only to be revised down. We see lots of bad data in key reports, only for investors to eat up the "not so bad" news. Heck, even swine flu can't stop risk appetite!

As of now, it is too early to say what will happen. In the words of my barber (they tend to always have pearls of wisdom don't they?) - "These are unprecedented times - we just don't know what will happen." It is difficult to say whether the storm has passed as it is still raining outside. For the time being, I'll just be patient and wait for my pizza to arrive. Maybe when the rain stops, that's when I can have a picnic outside and enjoy the meal.

Sentiment extreme?

Quotable

“An additional lesson learnt from the party’s near-death experience in Tiananmen was that it must co-opt social elites to expand its base. The pro-democracy movement was led and organised by China’s intelligentsia and college students. The most effective strategy for preventing another Tiananmen, the party apparently reasoned, was to win over elite elements from Chinese society, thus depriving potential opposition of leadership and organisational capacity.

So in the post-Tiananmen era, the party courted the intelligentsia, professionals and entrepreneurs, showering them with perks and political status. The strategy has been so successful that today’s party consists mostly of well-educated bureaucrats, professionals and intellectuals.

“…With any self-respecting multinational rushing into the Middle Kingdom, those who refused to recognise the new reality risked being outcompeted. In China, they also found undreamt-of freedom in doing business: no demanding labour unions or strict environmental standards. Wittingly or otherwise, western business has become the most powerful advocate for engagement with China. Its endorsement, along with the pragmatic policy pursued by western governments, has lent a legitimising gloss to the party’s rule.

“Ironically, this political strategy has worked so well that the party is now paying a price for its success. With the technocratic/conservative alliance at the top and the coalition of bureaucrats, professionals, intelligentsia and private businessmen in the middle, the party has evolved into a self-serving elite. Conspicuously, it has no base among the masses.”

How Beijing kept its grip on power, By Minxin Pei

FX Trading - Sentiment extreme?
Ladies and gentlemen step right up and place your bets.



It seems a lot is riding on this opportunity for more “green shoots” this morning. Most expect the dollar to tank on better than expected jobs news; but few seem to be thinking the dollar will rally on worse than expected news; that’s because it’s a foregone conclusion the dollar will continue to weaken no matter what. Thus, it seems a sentiment extreme may be in the air.

We see the usual suspects once again calling for the dollar to be trashed and we just can’t seem to find anyone who likes the dollar. Fact is they may be right. But nonetheless it has the feel of a crystallizing sentiment extreme. And often that’s the best time from a risk-reward perspective to start looking in the other direction for a trade setup.

A simple look at the dollar index in the chart below shows the latest leg down in the buck has been vicious and powerful (red box on the price data). This is a healthy trend supported by an increase in open interest (red box with yellow background at the bottom of the chart). This open interest increase shows there have been a lot of players jumping on this trade and riding this move; a bit of a one-way bet in play. Granted, we have seen much heavier positioning against the dollar in the past. But relative to recent positioning, it is high.



Price action perpetuate into self-reinforcing trends as the players in the currency market add to positions when price goes their way; and that process alone hardens their belief that their rationale for the move is correct, which emboldens them to add to the trend, which leads to even more confidence…and so on…and so on…and is why currencies overshoot (why all markets overshoot in fact).

Nothing new here, it is the way markets are and have to be. It’s just that because currency analysis has more potential for getting it wrong, in that the potential drivers are so vast, we tend to see overshoot to a much greater degree in the currency arena.

It is the stuff at the end—the crystallized extremes based on confidence by the players often based on flimsy or outright silly underlying rationales—that gets people into trouble. Of course we only know that with hindsight. But we have seen a common thread over the last couple of years when the dollar has been pasted, it’s the idea the dollar will be losing its world reserve currency status. That seems to be a simple rationale that all dollar haters seem to have in common just before the beginning of a big dollar move the other way. Just a thought…stay tuned.

Have a great weekend.

EUR/JPY - Trade Closed

Trade Closed: 2009-06-05 09:05

US Jobs data just came out and the US economy only lost 345K jobs (much less than forecast) and the unemployment rate came it at 9.4%. The markets took this as a sign that the recession is abating. There was a mixed reaction in currencies, and EURJPY rocketed higher, invalidating my original trade thesis.

My reversal signals were proven wrong today and my trade was stopped out at 138.00

Total: -250 pips/ -1.0% loss

So, I took a hit for the week, but no biggie thanks to money and risk management. The rally in risk we've seen over the past couple of months will probably continue if job losses continue slow as this months report indicates. Are carry trades back for good? We'll just have to wait and see. Have a great weekend!


Trade Idea: 2009-06-03 15:18




What up! I've been looking at the daily charts and I found a nice candlestick pattern indicating a possible reversal on EURJPY. Is the Euro rally over?

On the daily chart, we can see an evening doji star pattern form. This is a strong bearish reversal pattern, and with stochastics in overbought territory we may see buyers run out of steam and get out of this trade. Also, we are seeing this pattern after the pair has tested recent resistance last seen at the end of March.

Fundamentally, we've see a rally in risk as "better-than-expected" economic data has been released over recent weeks. This has given the impression that the recession has hit rock bottom and traders are buying up assets on that sentiment. This week's job data may prove otherwise and this possible shift back to risk aversion may continue. For me, the more I see job losses, the more I think consumers won't spend, businesses won't thrive, and demand for goods and raw materials won't grow. I think we have a bit more recession to get through until job losses slow down significantly. Even then, consumers won't start spending right away. I am risk adverse for now.

So, I like the short trade for technical reasons and I think that job losses will bring investors back to reality. I will short at market, currently around 135.50, and set my stop a bit more than the daily pip range of about 220 pips. I will ultimately target 130.00, which we may not see until next week if price action goes my way. Here's what I am going to do:

Short EURJPY at market (135.50), stop at 138.00, pt1 at 133.00, pt2 at 130.00

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

There's still plenty of data left this week, include the ECB interest rate decision and US Non-Farm Payrolls report. Please be very cautious around these news events as markets may become fast and difficult to execute orders in. Stay tuned!

USDJPY - Close Open Orders

lose Open Orders: 2009-06-04 21:45

Good evening! It looks like USDJPY did not go my way as the pair broke out to the upside. I have decided to close my entry orders, especially as we head into US jobs data.

Close open orders. No trade.

US employment data often causes fast market action and spreads to widen, so please be very cautious executing trades around its release time. For newbies, it is often best to stay away until you gain more experience.

Market expectations are for another 500k+ jobs lost. While the headline number is important, the revisions can be just as market moving. Be aware and good luck!



Good morning! I've spotted a nice little chart pattern on USDJPY the may lead to a breakout opportunity. Will we see volatility once again before the end of the week?

That may be the case as price action in USDJPY has been consolidating over the past few days, forming a symmetrical triangle. This chart pattern often is a signal of a potential breakout as traders wait on the sidelines and will potentially re-enter the market after a significant event.

And what could that event be you ask? US employment data this Friday!

Yes, the big dog of economic events is out this Friday, and after seeing ADP Payrolls report 532k jobs in the private sector cut this morning, we may see another disappointing number and continued rise in unemployment rates in the US. This outcome could bring about a new round of risk aversion. Couple that with some profit taking after the monstrous runs we've seen in risk appetites, this could lead to a breakout lower in USDJPY.

If this does take place, I look to short below the rising trendline drawn on the chart and below that area of minor consolidation. We may see some minor support at the areas drawn with the blue line, around 94.50, but I am going to target 94.00 and beyond. Here's what I am going to do:

Short USDJPY at 95.25, stop at 96.50, pt1 at 94.00, pt2 at 92.50

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

If my orders have not been triggered by the time we do see NFP data on Friday, I may remove my orders to avoid slippage that fast market conditions can bring. Stay tuned!

Connection and the Funnel Mindset

Futures to Forex Funnels
by ez2tradesoftware

Euro Jitters

All this while, with the focus on recession in the US, Euro area troubles had not received much attention. However, Euro problems seem to have made a big bang appearance with Germany announcing an up to 6% negative growth in its GDP this year on the back of a 3.8% negative real GDP growth in the first quarter of this year. The 16 nation Euro economy itself contracted 2.5% in the first quarter as compared to the last quarter of 2008. The Euro zone is Germany’s largest export market and a contraction in the Euro zone seems to have triggered a German slowdown.

Leading the slowdown, industrial orders in the Euro zone dropped 26.9% on a year on year basis, with March orders falling 0.8%. Led by a slowing demand, German exports fell 9.7% in the first quarter of this year and company investment slowed by 7.9%. Orders of Airbus slumped 97% in the first quarter of this year and BMW’s sales fell 23% in April 2009, compared to the same period in the previous year. The steep fall in demand is forcing companies to slash output and jobs. BMW proposes to cut labor costs by 250 million Euros on the back of falling demand. The rapid decline in the European economy is the fastest in the last 13 years and the 3.8% drop in the German GDP is the steepest since 1970. Not only have German exports suffered, but as a part of the negative spiral, German imports contracted by 5.4% in the first quarter of 2009 as compared to the last quarter of 2008. It may be noted that the German economy grew by 1.8% in 2008, though only half the pace achieved in 2007.

However, a closer look at the data suggests that the recession may be bottoming out in the Euro zone as the March fall in industrial orders is limited to 0.8% compared to a 26.9% annual drop, which translates to over 2% a month. This suggests that the pace of decline may be slowing and the recession may be at its inflexion point. Another indicator supporting this is a 0.5% rise in consumer spending in the first quarter of this year. Consumer surveys also suggest that German consumer sentiment is steady. The GfK research group put its German consumer climate index at 2.5 points for June, unchanged for the levels for April and May. Another index also suggested that German companies were more confident about the economic scenario than they were in the last six months. The Ifo index that gauges business confidence of 7000 companies, was up at 84.2 in May from 83.7 in April, suggesting that the worst may be over.

The announcement of a marked slowdown in the German GDP as well reports that toxic assets held by German banks could blow up, led the Euro to pare its value against both the dollar and the yen. As per estimates of the German regulator, toxic assets held by the nation’s bank are to the tune of 200 billion Euros. The decline in the Euro was also triggered by Japanese investors turning their focus from the US economy to the Euro economy and booking some profits on their Euro holdings.

Remaining open...not always easy

I always liked this quote attributed to John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.” We know it’s true. The problem is that practical application of this is not always easy unless one has a very long investment time frame—and very deep pockets. In other words, without that elusive gift of hindsight how can we correctly judge whether a market is being irrational?

If you’ve been reading this morning missive for a while you likely realize that John Ross and I have been very much leaning toward the idea of an irrational move in markets, as we haven’t yet been convinced the underlying evidence for such a move is in place. But deep down we know markets discount a lot of stuff we don’t see as there are a lot of smart people making bets on better information than is available to others. So despite what we may believe or want to believe, too much belief pushes one deeply into the territory of falling in love with your own story; and for a trader that is a very dangerous place to reside.

Technicians, or chartists, will exclaim they don’t fall in love with their story because they don’t consider fundamentals; they let the charts play out the script. There is much truth to that, but we’ve known chartists who not only fall in love with their story, but seem 100% certain they know exactly when and where the story will end; that is even more frightening to us—crystal ball land!

So is there a point to this ramble? If there is, it goes back to what Jesse Livermore is credited saying: “There is nothing new on Wall Street.” That says it all. There are a lot of great sages and adages out there that have told us how to do this, problem is we ignore their wise advice (guilty as charged I am).

Having missed the British pound move entirely…



… having been stuck on my fundamental story on the UK economy, I thought it might be a good time to review some wise advice from some proven brilliant traders as introduced to us in Jack Schwagers great book, “Trading Wizards”:

Bruce Kovner

Do not overtrade and use proper position size.
The market usually leads because there are people who know more than you do.
I assume that the price for a market on any given day is the correct price.
Do not personalize the markets.
Michael Marcus

Patience…stay with a position until the trend changes…be patient enough to wait for a clearly defined situation
Always use stops
Always pick a point you will get out before you get in
The best trades have three things going for them
First – the fundamentals suggest that there is an imbalance of supply and demand
Second – the chart must show that the market is moving in the direction that the fundamentals suggest
Third – when the news comes out, the market should act in a way that reflects the right psychological tone.
Ed Seykota

Longevity is the key to success.
In order of importance to me are: 1) the long-term trend, 2) the current chart pattern, and 3) picking a good spot to buy or sell.
Common patterns transcend individual market behavior
Trading rules:
Cut losses
Ride winners
Keep bets small
Follow the rules without question
Know when to break the rules
Everybody gets what they want out of the market
That is about the best you can do…I think.

A lot of talk about the US bonds and dollar lately:


..and if I remembered what Mr. Marcus had say a while back, my trading account would like me a lot more than it does today:

Three things going for them…

Fundamentals suggest supply and demand imbalance: At least for bonds we see the massive supply on the market; and if we think of the initial fear move into bonds, it was part and parcel to an unusual demand imbalance for the dollar i.e. one has to buy dollars in order to own bonds.
Chart pattern: Both are moving in the direction of the current fundamental view—global healing and risk taking on a perceived bottom in the recession.
News reaction: Both seem to clearly be showing the right tone relative to the news; “green shoots” sparked by Chinese stimulus and zooming emerging stock markets define the risk trade, and the continued fear of monetization of debt by the Fed has led to a surge down in the price of both.
Harry Truman once said: “The only thing new in the world is the history we don’t know.”

I think we can apply that to trading: “The only thing new in the world is re-learning the key market adages shared with us by the truly great traders that have gone before us.”

Take care and have a great weekend.

Cowabunga System Daily Update

Main Trend



Current Trend

The trend remained up the entire day.

Today I only looked for long trades.
News events to watch for today :

* 10:00am EST- US Existing Home Sales

Today's Surf

12:30am EST- There was a moving average crossover for a long trade. RSI was greater than 50, MACD was negative and gaining value, but stochastics were not trending up. This cancelled out the signal and I did not enter.

2:45am EST- There was a moving average crossover for a long trade. RSI was greater than 50, stochastics were trending up and MACD was negative and gaining value. This was a valid entry.

The entry was at the close of the candle at 1.5980 with a stop at the most recent low at 1.5924. Since I was 20 pips away from the nearest 50 or 00 level, I decided to put my initial target at 1.6000.

Entry: Long at 1.5980 Stop: 1.5924 Target: 1.6000

3:30am EST- My target was hit. Price did not make a clean break so I took my final profit. I managed to exit at 1.5995.

8:45am EST- There was a moving average crossover for a long trade. RSI was greater than 50, stochastics were trending up and MACD was negative and gaining value. This was a valid entry.

The entry was at the close of the candle at 1.6017 with a stop at the most recent low at 1.5947. Since I was 33 pips away from the nearest 50 or 00 level, I decided to put my initial target at 1.6050.

Entry: Long at 1.6017 Stop: 1.5947 Target: 1.6050

9:45am EST- My target wasn't hit by this time. News was coming out at 10:00am EST, so I went ahead and closed my trade at 1.6024.

10:45am EST- There was a moving average crossover for a long trade. RSI was greater than 50, stochastics were trending up and MACD went from negative to positive. This was a valid entry.

The entry was at the close of the candle at 1.6032 with a stop at the most recent low at 1.5983. Since I was 18 pips away from the nearest 50 or 00 level, I decided to put my initial target at 1.6050.

Entry: Long at 1.6032 Stop: 1.5983 Target: 1.6050

11:30am EST- My target was hit! Price made a clean break so I moved my stop to 1.6050 and set my next target for 1.6100.

11:45am EST- Unfortunately I got stopped out at 1.6050.



Trade Result: +15 +7 +18= +40 pips (NOT INCLUDING SPREAD) R-Multiple: 0.26; 0.10; 0.36
News events to watch for tomorrow:

* 6:00am EST- UK CBI Realized Sales
* 8:30am EST- US Core Durable Goods Orders m/m; Unemployment Claims
* 10:00am EST- US New Home Sales

USD/CAD - Close Open Orders

It looks like I missed out on move lower as USDCAD made its way down lower without a pullback to my entry orders. With the pair currently consolidating around 1.1100 - 1.1150, I have decided to close my open orders and look for another opportunity to short lower.

Close open orders to short at 1.1365. No trade.

I will continue to watch USDCAD for further shorting opportunities as it looks like weak US Dollar sentiment will continue in the short term. Stay tuned!



Good morning Forex friends! I've been away for quite some time, but now I'm back, refreshed, and ready to trade! Last week was all about US Dollar selling. Will we see a retracement and return to that sentiment?

It was all about US Dollar selling last week on rumors of a US credit rating downgrade. Money was pouring out of the Greenback and into stocks, commodities, and commodity currencies. This week has started out with a bit of pull back from that trend, and using the one hour chart, I have pinpoint areas where I like to short if that retracement continues.

There is an area of previous support that was broken around 1.1365, which happens to line up with the 61% Fibonacci area drawn on the chart. If the pair retraces to this area, I'd like to short as this may be an area of resistance. Also, it lines up with my bias that money will continue to flow out of the US Dollar and into currencies with no quantitative easing policies in place like the Canadian Dollar. Also, the "Loonie" moves in correlation with oil as much of Canada's exports is based on raw materials. Here's what I am going to do:

Short USD/CAD at 1.1365, stop at 1.1415, pt1 at 1.1315, pt2 at 1.1265

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

Stay tuned!

Is the US's Credit Rating in Jeopardy?

Credit is the life blood of the American economy. For those who previously could not afford fast cars, big houses, and some bling-bling, credit gives them a chance at the American dream. This credit is made possible through consumer loans, mortgages, and credit cards.

On a larger scale, credit and debt takes the form of treasury bonds and bills. Since US is the largest economy in the world, its bonds are considered "risk-free". This perception is quantified through the use of a credit rating system. The US sovereign credit rating currently stands at the highest possible level at Aaa and AAA. This credit rating has been given by Moody's Investors and Standard & Poor, respectively.

The current economic crisis faced by the US has pushed economists to question this long standing belief. Should the US's credit rating be downgraded?

Last week, the S&P downgraded the outlook on the UK economy, changing it from "stable" to "negative". This downgrade resulted from the UK government's rising debt level, which is reportedly inching closer to 100% of its GDP. A high debt burden naturally corresponds to a higher risk of default or inability to pay off debt. Also last week, Moody's lowered Japan's credit rating two notches to AA, after a prior downgrade from S&P and Fitch's. Japan's poor financial condition and economic outlook rendered it unlikely to pay off its debt, which has reached 170% of its GDP.

One reason why some focus has been shifted to the US is because, like the UK, the US has been incurring large debt. The US government's $787 billion economic stimulus package and $700 billion bank bailout fund pushed the estimate for this year's deficit to a record $1.8 trillion, equal to about 13% of the nation's GDP. Estimates of the deficit continue to skyrocket to more than $2 trillion for 2010, which is a nearly 30% increase in just a few months.

The Obama administration dismissed the possibility of a credit downgrade, saying that the government will continue to do whatever it takes to boost the economy. This belief is shared by many investors, analysts and economists from prestigious firms like JP Morgan Asset Management and Deutsche Bank. Many believe that a credit downgrade will not happen until 2011 at the earliest. In fact, Moody's has said that they are okay with the US's AAA rating.

But what if the US credit rating is downgraded?

A credit downgrade implies that the debt issuer (US government) would be more likely to default on their loans. Therefore, there will be pressure for the US to increase their interest rates in order for investors to be compensated for "extra" risk that they are bearing. In addition, yields on US debt would also rise and existing securities would devalue to match the new higher yields. An increase in the interest rates would undermine the government's stimulus package and the Fed's monetary and quantitative easing measures. Cost of credit will rise for both the government and the private sector, making it harder and more costly for businesses and consumers to borrow money. One of the effects of such event would be slower economic activity.

Furthermore, a credit downgrade will have a large impact on the US's biggest creditors - foreign investors. With large investments in US debts, foreign investors may want to diversify their portfolio and sell off "junk" assets. Investors like China, who have over $1 trillion in US treasuries, may sell part of their holdings and proceed to move their funds to other "safer" assets. Recall that China's officials have already grumbled over the safety of their US investments.

What does this mean for the currency markets?

The effects of a US credit rating downgrade could be pretty big for the currency markets. The perceived value of the US Dollar is already on the decline as the Fed prints money day and night through its quantitative easing measures. If we do see a credit rating downgrade, this will spark less demand for US debt, and as a result, less demand for US Dollars as foreign investors need to buy Greenbacks to get into US assets. Also, investors with large holdings in US assets could sell out of their position, which of course will likely lead to more selling of the Greenback. This could lead to a huge outflow of money from the US Dollar and into other currencies as we are seeing in recent price action. Money has been flowing into gold, oil, and commodity currencies (Australian Dollar and Canadian Dollars), and that flow could get stronger with this event.

While the likelihood of a US credit rating downgrade may be far off as some "experts and analysts" say, the possibility of such a significant event is something to watch out and be ready for. Whether you are a short term or long term trader, the market reaction after a US credit rating downgrade could have a huge positive, or negative, affect in your bottom line. Stay frosty my friends!

Pick of the Day: USD/JPY

USDJPY has been on a down trend as money flows out of the Greenback against the majors over the past few weeks. The Greenback has bounced back this week, but is this another opportunity to jump in the downtrend?

Technically, the pair is retracing higher in a downtrend, giving me an opportunity to short at a better price. Stochastics are indicating that the pair is overbought and I have used the Fibonacci tool to find possible points of resistance to enter.

Fundamentally, the major themes weighing down on the Greenback include speculation of US credit rating downgrade, huge deficit, and quantitative easing policies. Also, US housing data may continue to weigh down on the US Dollar as today's S&P/Case-Shiller continued to show a fall in housing prices. Tomorrow's US housing data may continue to look weak and bring a round of risk aversion....we'll just have to wait and see.

For today, here's how I'd like to play USDJPY on my short bias views:

Short USDJPY at 95.60, stop at 96.20, pt1 at 95.00, pt2 at 94.40

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

Market Pulse & The Funnel Mindset

One of the things I have always relied on in my forex trading is my background in futures trading. I started trading futures loooong before I even know about forex pairs. I traded currencies for years on the CME and eventually -- at the prodding of a few good friends -- decided to try my hand on this "new" market call the foreign exchange.

Along with me came my knowledge of the importance of time and price action and charting analysis...and what I call my "market pulse" which is defined as the markets that move the markets. I think there are a few key commodities markets that make the world go round:

U.S. Dollar Index
crude oil
Dow Jones
gold
Continuous Commodity Index
Fed Funds

Does this mean that along with your forex trading you must now be a futures trader too? You can ofcouse choose to be if you want to...but what I am recommending you do is actually learn to see how those six markets I've listed effect your forex trading.

Think of it this way: If forex trading reflects the currencies of two countries and if a nation's currency is reflective of their economy...we must at very least have an idea of what can effect the economy of each country. I believe most traders already know this and that's because I see the way the markets react to
News and data is but one aspect of what can effect a nation's economy.

Consider the "market pulse" to be another part of that puzzle. The U.S. Dollar is the most important and the easiest to define. Each major pair trades against the dollar so it's part of our job to understand where it's heading because that's going to effect the pair's movement.

Think about it: What do the... EUR/USD ... USD/JPY ... GBP/USD ... USD/CHF ... USD/CAD ... AUD/USD ... NZD/USD all have in common?

The U.S. Dollar!

In the next update I will share a video of the "funnel mindset or approach" that I discussed in my first book back in 2004. I explain how and which markets to focus on.

In the meanwhile, here's where the dollar is today:

Dollar Up on Consumer Retraction

Retail sales fell 0.4% in April after their 1.3% dip in March, dashing hopes of any foreseeable economic recovery. This sent the stock markets plunging, led by a fall in retail stocks and investors turned risk averse again and ran to the safety of the dollar. The result was an appreciation in the US dollar and the Yen also seems to have made some gains from the unexpected risk aversion.

Retail sales had increased in January and February this year after a continuous fall between July and December 2008. While, the month of March experienced negative growth in retail sales, April was expected to be better. US retail sales are a key indicator of US economic health as 70% of the nation’s gross domestic product (GDP) is comprised of consumer spending. While, retail sales fell in April, the pace of decline was lower than that of the previous month and this could be interpreted to be an indicator of recovery. However, this may be a premature assumption to make and only time will tell if these were indeed signs of recovery. What was also disturbing was the trend of inventories. As per the Commerce Department, inventories fell 1% in March. This was a fall for seven consecutive months. What is expected to hurt this trend further is dampened consumer spending. With consumer spending refusing to grow, and continuing to shrink, inventories would need to be pared further. This would imply that production orders would be postponed and lack of production activity would dent GDP growth. With the recession having put nearly 5.7 million Americans out of work, this trend does not bode well, as increase in consumption is highly dependent upon an increase in employment.

The stock markets pared earlier gains on this news, with the Dow Jones shedding 2.2% and the S&P 500 stock index falling 2.7%. Surprisingly, the technology dominated NASDAQ lost the most and was down 3%. Stocks of major retailers tumbled, with that of Liz Claiborne falling 20% and that of Macy’s 6.6%. The S&P Retail Index fell 2.1%.

The unexpected fall in retail sales that resulted in stock markets moving down, seems to have led investors to rethink if stocks had moved up too fast. An exit from stocks also seems to be pushing up the dollar, with the onset of risk aversion. While, the dollar gained against the Euro, it was down against the Yen. This seems to indicate that the Yen may be making a comeback as a hedge currency in times of uncertainty. If the Yen were to continue the trend of rising against the US dollar due to risk aversion, this may be indicative of a disturbing trend. The continuation of this trend effectively indicates that the currency markets are saying that in bad times, they now prefer the Yen a safer haven than the US dollar, as the future of the US economy is looking grim and they are not willing to bet on it for the long term safety of their money.

Cowabunga System Daily Update

Main Trend



Current Trend= The trend remained down the entire day.

Today I only looked for short trades.

News events to watch for today :


* 8:30am EST- US PPI m/m


Today's Surf

3:15am EST- There was a moving average crossover for a short trade. RSI was less than 50, stochastics were trending down and MACD was positive and losing value. This was a valid entry. The entry was at the close of the candle at 1.5124 with a stop at the most recent high at 1.5170. Since I was 24 pips away from the nearest 50 or 00 level, I decided to put my initial target at 1.5100.

Entry: Short at 1.5124

Stop: 1.5170

Target: 1.5100

6:15am EST- My target was hit. Price didn't make a clean break so I took my final profit. I exited at 1.5105.



Trade Result: +19 pips (NOT INCLUDING SPREAD) R-Multiple: 0.41

News events to watch for tomorrow :


* 8:30am EST- US Core CPI m/m; Empire State Manufacturing Index

* 9:00am EST- US TIC Long-Term Purchases

Poking at a little thing

Key Reports (WSJ):
8:30 a.m. Initial Jobless Claims For May 9 Week: Expected: +10K. Previous: -34K.
8:30 a.m. Mar Producer Price Index: Expected: +0.3%. Previous: -1.2%.
8:30 a.m. Mar Producer Price Index,ex-food & energy: Expected: +0.2%. Previous: 0%.
10:00 a.m. DJ-BTMU Business Barometer For May 2: Previous: -0.8%.
10:30 a.m. May 8 EIA Natl Gas Inventories, in billion cubic feet

Quotable

"Very little of the great cruelty shown by men can really be attributed to cruel instinct. Most of it comes from thoughtlessness or inherited habit. The roots of cruelty, therefore, are not so much strong as widespread. But the time must come when inhumanity protected by custom and thoughtlessness will succumb before humanity championed by thought. Let us work that this time may come."

Albert Schweitzer

FX Trading - Poking at a little thing called demand, again.
Let me quick say that stocks and the US dollar have turned this week. Sure, I may have been a few days early in expecting the move; but in watching the reaction to the news so far this week, risk-appetite has a few extra days (at least) to go hungry. As it pangs, we'll find out whether a resumption of investor confidence and growing risk-appetite is in order ... or whether potential renewed economic and/or financial concern surfaces to significantly pressure risk-bound investments.

Ever since the beginning of bailout and stimulus efforts, the goal became: resurrect demand. It was almost an obvious plan of attack, since that's what bolstered emerging markets, powered cheap-goods China, empowered consumption-happy Americans, emboldened risk-blind investors and virtually pumped the global economy along.

It was when demand hit the brakes that this whole system came unwound. [See Richard Bookstaber's A Demon of Our Own Design where he discusses 'tight coupling' if you want a more academic account of how and why most everything came unraveled at once.]

The demand for natural resources - a very popularized topic during the inflationary boom time - was among the first indications that the global economy was shifting. Metals, energy and other materials used in manufacturing and construction took the hit. Specifically, when crude oil plummeted from record highs at nearly $150/barrel to roughly $45/barrel in less than six months, well ... let's call it an 'oil price shock.'

Crude would eventually push a few bucks lower. Since then it rallied to just over $60/barrel as of this week. But $60/barrel is a critical level, alone offering resistance to climbing oil prices.

The thing is, though, a chart of crude oil and a chart of the S&P 500 look a lot alike:





Crude oil has followed the S&P 500 on the same dominant risk-appetite theme that had its grip around the markets for many, many months now. The potential for recovery drove stocks higher; rising stocks drove confidence higher; rising confidence garnered further risk-taking in the form of rising commodity prices. In other words, potential recovery implied potential demand. Demand (along with supply) drives commodity prices.

I saw a headline yesterday, I think it was, talking about OPEC and their decision to increase the supply of crude oil ... thinking they've now done enough to stem falling oil prices.

Then this morning: IEA predicts sharp fall in oil demand. For 2009, the International Energy Agency expects the sharpest decline in oil demand since 1981.

It's news like this, absent less-bad-than-expected optimism that's dominated the last two months, and softening prices that are going to have investors reconsidering the potential for recovery. Whether you think the answer to the economic crisis lies in demand stimulation or not, it seems obvious that prosperity won't ensue until something major happens.

That may mean substantial demand growth. Or it may mean something more, structural rather than cyclical, if you will. Maybe China holds the key to door number one; or maybe they're trying their hardest to pick the lock. But it's going to take more than China to unlock door number two, in case door number one is welded shut. [I also noticed Chinese exports fell 23% in April, compared to only 17% in March. That's not exactly zoom-zoom to me.]

What's bad for crude is good for dollars:



Crude is an inflation hedge of sorts. And the degree to which deflation will shock the crowd, we think it will be seen in oil prices quickly. And of course, creeping deflation despite its insidious impact on the overleveraged, tends to be good for the world reserve currency at the moment.

Trading - Seems Obvious

GBPUSD hourly: also testing yesterday's highs as UK data out today exceeded expectations.


Focus will turn to US trade data out later this morning to see if euro and pound can keep trucking higher. Rising oil prices are seen as the primary driver of a larger deficit than seen in the prior month. While the import side of the equation makes a difference, little is expected from the export side. Should the US trade data lack any surprises, we could see the European currencies drag the others higher on a confirmed breakout of yesterday's highs.

But of course, you've got to keep your eye on stocks ...

As the market starts weighing the nine-week rally, precisely whether the fundamentals can justify the price action (which I find hard to believe they can), currencies will hang in the balance.

What happens in the nearer-term, I think, will be at least a consolidation of the S&P's 30%-plus gains since March. Whether that consolidation process began yesterday ... or whether it doesn't begin till investors stop expecting it ... remains to be seen. But considering key technical levels are coming into play, now would seem a logical stopping point.

[P.S. Yesterday, our members of Currency Strategist were able to close out and profit nicely on an options recommendation we made to play for Australian dollar strength. This is one of the ways to invest in the nearer-term price action while waiting for the longer-term trends to play out. You can read more about Currency Strategist if you're interested in our clear-cut trading recommendations.]

Over the longer-term, we believe unemployment and its impact on income and spending will be an inconvenience in the hopeful path toward full recovery. It could be this realization that really changes the perspective of global market players ... at which case the dependence on the US will again take center stage.

The overall definition and understanding of "recovery" will be crucial going forward. So far less-dramatic contraction constitutes signs of recovery. But what happens when investors start expecting more than "less-bad"? What happens when they start expecting circa-2006 type growth? Based on the overall appetite for spending and the renewed necessity of paying down debt, recovery isn't going to bring back the bubblicious trends we came to [irresponsibly] believe characterized economic prosperity.

Cross-Eyeing: EUR/JPY

Good afternoon Forex peeps! After touching 130.00 and rallying higher on continued rising risk tolerance last week, EUR/JPY started this week on a pull back of profit taking. This may be a chance to jump in the trend high on a nice and easy technical setup. Check it!

Usually, I have the 4 hour chart up, but I zoomed down to the 1 hour timeframe to give a clearer picture on what's going on. The pair has been on a fast rally since hitting 125.00 a few weeks ago, and testing 130.00 last week. We can clearly see a retracement down into the Fibonacci retracement area drawn on the chart. Stochastics are indicating oversold conditions on the 1 hour chart, and are indicating near oversold conditions on the 4 hour chart. I'd like to wait to see if the pair hits the 61% Fibonacci level before jumping back in long.

Fundamentally, the ECB cut interest rates last week and introduced quantitative easing actions for the first time. This week German and Eurozone CPI could push the markets one way or another. Inflation is forecasted to be much weaker than the targeted 2.0% and could spark further stimulus actions from the ECB. We will also see Q1 GDP on Friday. No major news expected on the calendar for Japan, so look for global risk tolerance to continue to influence price action in the Japanese Yen.

So, my trade idea is based mostly on technicals as the trend has been higher on this pair. Also, sentiment has been focused on that the economy may be getting "less worse." Regardless of how bad it is out there, as long as it is no longer falling off a cliff, investors seem to want to buy in on that alone.

I will go long at the 61% Fibonacci area and target previous highs. Here's what I am going to do:

Long EUR/JPY at 131.80, stop at 130.80, pt1 at 132.80, pt2 at 135.00

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

Stay tuned!

EUR/USD - Close Trade

Close Trade: 2009-05-08 14:55

Good afternoon! After waiting a few days of waiting, my short position was triggered as EUR/USD rallied after today's US employment data. Unfortunately, 1.35 did not hold for very long as the US Dollar continued higher to above 1.36. As the trading week closes, I have decided to close out this trade and take the small hit going into the weekend.

Close trade at market (1.3624).

Total: -124 pips/ -0.62% loss

For a bit, my trade was looking good as there was a brief sell off after 1.35 was hit. I should have taken profit then given the weak jobs data, but I thought I could squeeze out a bit more pips. Unfortunately, given the fact that it was a better number than last month, risk tolerance grew fast as money flowed out of the safety of the US Dollar and into higher yielding currencies.

So, that's it for the week. It looks like risk tolerance is here to stay as the worst seems to be behind us....at least for now. I'll look to jump in the trend next week, until then - have a great weekend!



Greetings everyone and welcome back to another wonderful week of Forex trading! As I stated in my last post, I am going to revisit my short bias on EUR/USD this week, especially as we are see a bit of divergence on the charts.

I have the four hour chart up, and I have highlighted where the pair is showing regular bearish divergence as price action creates higher "highs", while stochastics is giving us lower "highs". Divergence tends to be a very early indicator, and with stochastics not quite back into overbought territory, I'll wait to see if the pair hit 1.35 before jumping in. I like that level as it seems it has been an area of interest in the recent past. In the most recent visit to that area, sellers won out the battle and the pair dropped back to 1.30 and lower.

Fundamentally, there's a lot going on this week in the economic calendar. Most notable includes the ECB interest rate decision, US stress bank test results, and US employment data. Swine flu concerns are also still on the table of potential market movers.

Again, I am still in the camp that we haven't seen the worst parts of the economic recession, but apparently the markets are moving on "things are getting less worse" type data. This may or not continue to be the case as we continue to get new data this week. Also, my friend Jack Crooks gives some startling data and thoughts on the Eurozone over at Currency Currents which supports my bearish euro stance. Check it out!

So, I look to short EUR/USD on divergence and potential resistance at the psychological area around 1.35. My stop will be 200 pips, just a bit more than the average daily range of around 170 pips. My targets will be 1.33, 1.31, and beyond. Here's what I am going to do:

Short EUR/USD at 1.3500, stop at 1.3700, pt1 at 1.3300, pt2 at 1.3000

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

My GBP/USD Swing Entry

I was hoping to have a nice article explaining the difference between reversals and corrections posted here before I left on my mini-vacation to Dallas. Alas, fun came first but better late than never.

The idea of knowing how to measure a correction versus a reversal sounds easy in theory but without some understanding of the underlying trend of the time frame you are watching and without tool to measure this with it can be very difficult and thus has been relegated to trendlines (lagging) and guess-work (ineffective).

If you don't already know it, I use the Wave which is the 34EMA on the high, low, and close. I shared the plug in I use on MT4 to create this on your own charts, I call it "GRaB" which stands for "green red and blue".

So that brings me to yesterday's trade. I updated my Twitter yesterday which I believe is called "tweeting". My tweet was:

"Cable bouncing off 34EMA high (top line of Wave) for swing trade. Psych level support at 1.5000 - low was 1.4995."

There was also a chart that accompanied that update. You can check it all out here.

I received a lot of emails which actually caught me by surprise since my swing trades are discussed with some regularity but then I thought, well why not share the process for this type of set up. I am going to share my MT4 chart set up here. I actually use the IBFX-MT4 version and I love the trading tools they make available for free on their site as opposed to having to search the MQL codebase.

The tools I use are the Daily Pivots, CPR, and the PRS. You can read about them at their site.

So here's a short of what I call the "quad view". Go ahead and click on the link to see the full size since it's larger than will fit here.

View image

These are all 240 minute charts since that was the time frame that I set the swing up on. I also have my GRaB plug in action on the lower left chart and the OsMA and CCI on the lower right chart.

The 240 time frame was perfect for the swing because the Wave clock angle was what I call "12 to 2" which means it was in an uptrending market cycle. In an uptrend it's my job to identify pullbacks that I could look to set up buys from in order to follow the trend...which is up. The entry may be contrarian because I am buying into short term weakness but it's a trend following trade. The only time I was buy the dips is in a uptrend. (Conversely, I look to sell the rips in an downtrend.)



This chart was the heart of the set up: A pullback to the support of the top line of my Wave. This is a conservative entry as compared to Fibonacci or other psychologicla levels that could have triggered a buy higher than this correction.

Another terrific cue was the candlestick pattern alert I got from teh IBFX-CPR. Now, let me mention that candlesticks are rarely going to be the sole reason I enter a trade. I think they are excellent confirmation and most candlestick patterns are best used in a trending market.



The Bullish Engulfing pattern set up three candles back which (for me) is confirmation of my pullback that occurred six candles back. So the candlestick was simply a secondary (and nice!) confirmation.

Let's add some more depth here and remember these are all support and resistance tools. The Wave offered support, the Bullish Engulfing pattern is support and finally take a look at the next chart...



More support! This time with the daily pivot's S2 level which coincided with my Wave support. This is simple as good as uptrend corrections get.

To get more set ups like these follow me at Twitter. You can also get the same plugs ins and platform I used by downloading my GRaB plug in and the other custom trading tools.

Forget that Perfect Trade

When you're risking your own money, do you feel the need to find that secret information that nobody yet knows or find the perfect trade setup?

Some traders are so obsessed with trying to find the perfect trade that they end up not trading enough to come out profitable. Trading is not the line of work you want to be if you're a perfectionist. You can plan a trade systematically only to end up losing money because an unforeseen event invalidates the trade setup you so thought was sooo perfect and your trade slaps you in the face and goes against you.

While you don't want to become a careless and impulsive trader, you don't want to be an extreme perfectionist either. Remember there's no such thing as a guaranteed profit.

Instead of being perfect, try being average. For all the "A" students out there, I know this sounds blasphemous since I'm basically suggesting you strive for a "C" grade. But give it a try.

Rather than look for the "perfect" setup, just find a profitable setup. Yes, you might make less profit per trade, but you'll feel better. Compare how it feels to strive for perfect standards versus average standards. You may find that you prefer average standards since you're more relaxed. Since you'll be putting on more trades, your profits will improve.

Trading is all about probabilities. You must make many trades to get the law of averages to work in your favor. As long as the setups are solid, and you're using sound money management and risk control, you'll make enough trades to come out ahead. You'll be able to get the losing trades "off your back" and focus on winning trades.

If you're an uptight perfectionist, you'll always be on edge and will hardly be able to execute any trades. This will be your downfall because you won't be able to pull the trigger on trades that are "less than perfect" but are profitable.

Dare to be average and see what happens. A student who makes straight "A's" may be smarter but the "C" student sitting behind him just might be richer.

Keeping a Trading Journal

Hey everyone,

You've probably heard by now that it is absolutely essential to keep a trading journal. Without one, and without taking the time to review it, you could very well end up repeating the same mistakes over and over, rather than progressing. Contrary to the cliché, practice does not make perfect. You have to make sure you're practicing good habits, not bad ones. Keeping a journal will also tend to slow you down between trades (which is a good thing for most people).

But how do you start?

Nothing fancy is really needed... you can do this easily in a paper notebook, and often this is the quickest & easiest way to get started. But the important thing is that you start.

You want to keep track of your entry price, exit price, total profit or loss (in pips), timeframe, currency pair, long or short, the thoughts behind your entry, your reasons for exit, as well as jotting any emotions you experience during the trade, and how you feel about it afterwards looking back with the 20/20 clarity of hindsight. The reason for all of the above is eventually you will see patterns emerge, just like in trading. You want to do more of what consistently wins for you, and avoid the things which don't.

Get yourself a glue stick - you can right-click on a chart in MT4 and print it out (I suggest changing the background to white first). Stick the chart in there right with your notes, and go ahead and mark it up.

Then, in addition, measure the total move (start to finish), and take your total profit as a percentage of that move. If you captured 75-100%, you get an A. 50-75% is a B, 25-50% is a C, and 0-25% earns you a D. If the trade was a loss, you get an F. Have a column for both the percentage, and the letter grade. Averaging your grades over time will easily show you if you are making progress.

Two more columns and we're all done. Take a look at your entry. If you were 1 candle too early, you get a T-1. For 2 candles too early, T-2, and so forth. If you got in a candle too late, you get a T+1, and so forth. Same thing for your exits. Again, you will see clear patterns emerge over time. Some people tend to be too jumpy and early, others tend to be unsure and wait for too many confirmations, and therefore end up being late and chasing. Knowing which you are will help you know how to compensate.

Hope this helps!

Cowabunga System Daily

Tuesday, 04/21/09


Current Trend= The trend remained down the entire day.

Today I only looked for short trades.

News events to watch for today :


* 4:30am EST- UK CPI y/y


Today's Surf

2:30am EST- There was a moving average crossover for a short trade. RSI was less than 50, stochastics were trending down and MACD went from positive to negative. This was a valid entry. The entry was at the close of the candle at 1.4519 with a stop at the most recent high at 1.4573. Since I was 19 pips away from the nearest 50 or 00 level, I decided to put my initial target at 1.4500.

Entry: Short at 1.4519

Stop: 1.4573

Target: 1.4500

2:45am EST- My target was hit. Price made a clean break so I moved my stop to 1.4500 and set my next target for 1.4350.

3:00am EST- Unfortunately I was stopped out at 1.4500.

6:45am EST- There was a moving average crossover for a short trade. RSI was less than 50, stochastics were trending down and MACD went from positive to negative. This was a valid entry. The entry was at the close of the candle at 1.4537 with a stop at the most recent high at 1.4605. Since I was 19 pips away from the nearest 50 or 00 level, I decided to put my initial target at 1.4500.

Entry: Short at 1.4537

Stop: 1.4605

Target: 1.4500

9:30am EST- Unfortunately I was stopped out.

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