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Keeping a weather eye on the EUR/USD trade over the next few days as its forming a triangle which [on a Daily view] is showing Bearish divergence in MACD and RSI. Shown here on the 60min. but you get the picture. As Ashraf Laidi has been quick to point out, crude has been unable to trade and stay above $80/brl as he believes demand [or lack of] is finally catching up with pricing. Cautious comments from retailers regarding their 4Q expectations is lending the USD some slight strength and the markets overall parabolic rise is [in my mind] unsustainable here. I shorted ES_F Sunday evening @ 1098 and again @ 1112 yesterday; covering all this morning ahead of the PPI release. I have now re-shorted @ 1104.50 and will sell further @ $1112, 1118 and 1123. Will cash it in @ 1135 or under a 4% loss if that were to come to pass.
Whether one trades in Forex or not, we as traders need to keep an eye on the almighty buck because as we’ve all learned, commodities have been rising because of weakness in the greenback vs. its other higher-yielding counterparts [AUD and CAD]. Some theorize that the USD will be a little stronger after this week as the Fed wraps up buying its own debt via Treasuries. Others say that USD will continue to weaken amid continued MBS purchases and a poor economy. This from a long-time observer the Federal Reserve gives us his insights as to where the USD is headed; and thereby conversely commodities. I personally am listening. [HT to acrossthecurve]
“Place your seat backs and tray tables in their original upright position”. Anyone who’s flown knows that phrase implies we should anticipate a slightly bumpier ride, whether its due to turbulence or a decent for a landing. Either way, a shift in direction.
Pundits have been preaching that the market’s extended/overbought and that equities overvalued; at levels unjustified based on current economic conditions. They may be true but *that* comment doesn’t make me want to exit my longs and get short. Not yet.
End of quarter window dressing is now over. The market has been slowing drifting. Even the US Dollar Index [right] is at an important inflection point vs. its October ‘08 low.
The longer term charts, both weekly and monthly indicate we are remain in an up trend so but based on the huge run we’ve seen si
nce the March lows and all the foreboding from the pundits, I now turn into the shorter timeframes [Daily and hourly] for signs of a shift in near term direction. Over the last week the market sold off somewhat and has formed a triangle with other indicators such as CCI indicating an apex or shift in direction is near.
I believe this is leading up to tomorrows economic releases AND treasury auction announcements as a guide or confirmation if the economy truly is improving [or not] and the level of debt quantitative easing to expect in the near term. Not all triangles break in the direction of the previous trend. Bad news tomorrow and an obvious lessening of QE could take us down – and quick. I continue to hold my longs with a ES_F short and long in DRV. Make certain your seatbelt is fastened; it’s going to be a bumpy ride.
Well if that wasn’t fun today, I don’t know what was. Just kidding actually. It’s wide-ranging days like this that can make you jubilant for your longs as you throw your shorts overboard. Then sometime later, massive sell orders flood the market and longs scramble to sell, sell, sell. If you were at your screen this afternoon, you can only imagine the panic that must’ve ensued in the crash of ‘29. It surely can give you grey hair; or in my case *more* grey hair. LOL
Before I go into where I feel the market may head, I felt it only appropriate to review how the market has behaved in past recoveries. This chart from dshort.com I’m certain looks familiar. Almost inspires hope that we’re coming out of this and there’s happy days ahead. Well I certainly don’t believe everything I hear; so I dig deeper.
Now this inflation-adjusted chart of the same recoveries paints an entirely different picture. Were the Bulls being a little too hopeful? Was it too irrational to think we’d continue going higher and higher? Well………irrational, I don’t know. Hopeful? Maybe but that doesn’t mean we’re going straight to the bottom now either. Oh hell no 
Today felt like a classic Bull trap. We knew that short interest was at its lowest levels since January ‘09. This meant they could launch an attack at their leisure with guns fully loaded. They knew the entire market was nervous over the FOMC minutes as well as the G20 meeting. Then there was that *leak* of reverse repos the day before the FOMC announcement. It actually wasn’t a leak though. As I pointed out in last nights post, the Fed had begun discussions on reverse repos at their August meeting [Click here for FOMC minutes] so this *leak* shouldn’t have come to a surprise but apparently to many it was. As a matter of fact, Financial Times this evening reported that the Fed is in discussions with Mutual Funds to purchase these Reverse Repos as primary dealers (banks) balance sheets are insufficient to handle the enormity of the transactions. *Yippee* Mutual Funds took a beating last year. The banks have ripped us off enough. Oh,errr, sorry. Got off the beaten path. [clearing throat] Where was I? Oh, yes. How convenient and how much more distracted can one person get? So the market held its breath today and once the FOMC news was released, smidiots jumped for joy and hit their *buy* buttons. Sad, sad smidiots. It’s a difficult lesson to learn but after an inventory release, FOMC or any potentially market-moving announcement, the direction of the initial move is usually the wrong direction. Write it down, paste it over your monitor. Withstand the temptation. I would rather miss part of a move and get in a little late than lose capital because I jumped and was plowed under such as happened to so many today. It’s basically a fakeout. The higher *push* after the release triggers MACD, Stochastics and other indicators on a short term timeframe, say 15 or 30min, and buy orders are hit. Inexperienced traders become giddy and buy but the trend is quickly reversed and its their panicked sell orders that give fuel to the Bears to bring the market down.
I apologize for not writing earlier but I was very interested not only in monitoring the after-market sentiment, but seeing how Asia and now even London traded. Asia hit a brick wall in ES_F at $1061 and now London is showing a little unease in [understandably] protecting their capital and taking some profits [currently @ $1056]. In full disclosure I was never so happy that I had been scaling into an ES_F short this afternoon. I covered it, taking my profits, but did buy FXP as an overnight hedge. It’s so cheap that even if the market goes higher, I believe I’ll hold it until the market does pullback – and it will pullback at some time – that is one thing the above charts show. We can’t go straight up forever.
What I’d like to see would be the market to gap down at the open, bounce off 1st or 2nd support no lower than $1052 then the Bulls come in, fill the gap and squeeze the over-confident shorts. Do I have much confidence that’ll happen? *sigh* No.
John from Across The Curve, a Bond trader, said that oil producing and other commodity producing countries were buying US Treasuries yesterday. What that’ll do is give the buck some strength and put pressure on oil, copper & gold. How long it’ll last is anyone’s guess but I believe if traders see further weakness in crude & copper, there’ll be more profit taking ahead and with that further weakness.
I’m not going to worry about it. I’m hedged. I’m looking for buyers to come in SPX between $1040-1030 but if that does not hold for some reason over the coming days, then I’m drawing my line in the sand at $991. If that is taken out, a Head & Shoulders top becomes a strong threat and with that, a much larger reversal comes into play.
fwiw Crude has support at $67 and $65, gold at $978 and $935. Add notes and support lines to your charts, hedge, take profits at the high, best of luck and remember…………….we’re NOT going to zero.
Just a random note. This is how I’m viewing SPX right now as I wait for tomorrows release of the FOMC minutes.
An article in today’s Financial Times calls for coordinated intervention if the $USD continues to fall. The case for intervention seems weak though and the odds of success seem small when, as the FOMC informed us last time, the Fed funds rate will likely remain low for an “extended period”.
One idea being bandied about is the banks buying securities from the Fed which would be redeemable later but give the Fed a cash injection they desperately need as they near their spending limit. [Click to view article] Interesting concept I must say and it’s clearly just another shell game – move money from one place to another but clearly this would send the message they are not prepared to exit their quantitative easing measures at this time. How would the market like the idea and what about the stockholders and publc in general? The thought of banks [that we just bailed out] would be in essense be bailing out our government? Doesn’t give me the warm & fuzzies; I don’t know about you.
Of course this is all heresay and conjecture at this point as the minutes tomorrow. Any mention of changing that stance could send SPX into a spiral; something the Fed is trying their best to avoid. At some time, they’ll have to bite the bullet but right now I believe they’ll dodge it once more and the market will head North again, albeit slightly less overbought. Make sure to wear a seatbelt.
(edited - See addition below) God only knows I’m no Warren Buffet with my investments, nor a Carl Swenlin or Ashraf Laidi when it comes to charts and currency pair projections, but USD/JPY sure does look like a shift over to USD strength is occurring. 
Of course only time will tell and Japan’s GDP numbers were released tonight. While lower than anticipated, they do clearly indicate that Japan is out of their recession so anything is possible at this juncture. So many pundits and *anal*ysts have been waiting for the US to lead out of the global recession **and** we have had a helluva rally; but we must remember that the Fed has been buying our economy time to heal.
While new unemployment claims have been slowing, we have yet to generate new jobs to put anyone to work. With that, foreclosures continue to rise and consumer spending continues to fall. All three of which will need to be remedied before the toxic loans sitting on bank balance sheets can be tended to. Yep, there’s a long road ahead and once we get there, don’t be surprised if Japan’s holding the door open for us.
(edited to add @ 8:30 pm) Just for the record, after I posted the chart above I went out and solicited an opinion from Ashraf Laidi, Chief Foreign Exchange Strategist at CMC Markets. A man who dreams more about the market than I will ever know or understand in my lifetime; and I was promptly told……..I was wrong. *Ah! Rip out my heart Ashraf* LOL but it’s ok. He is basing his opinion on Cyclical Analysis, that a past pattern will repeat here. Obviously I don’t have his vast knowledge and experience. I trade the chart/not the news. Huge difference, but does one *have* to have a deep knowledge of economics and currencies to trade Forex? Again, this was my original point in posting this entry. To answer that question for myself. 
Now I figure I have about a snowballs chance in hell of calling it right, but it would do boatloads for my confidence if the Forex Gods were in my corner. To the left is his Cyclical Chart and to the right, an update of todays action. Come on Forex Gods!
CAD appears to have weakened against USD in the near term so I thought I’d throw out the idea of a short in crude for tomorrow. In the best of circumstances, I’d like to see USD/CAD come down and re-test the near term support, giving us the best possible entry but I’d give it a long leash because of overnight news and foreign market swings. Ultimately I see crude going to $60 here. One could short an individual company, short USO or DIG or merely get in once of the inverse crude ETFs such as DUG DDG DTO. I personally like the ETF DUG but as with any inverse ETF – I do not recommend holding overnight unless you’ve got the stomach for it. Next I’ll take a look at my *fav* Copper & Gold. Best of luck-
Everyone’s been so jubuliant lately; it seems many have forgotten we trade in shark-fested waters and those bad boys are always hungry for our money in the market. There’s a reason stocks move in waves. It’s a psychological thing; to reap the most rewa
rds from reversals and traps which is why market tops and bottoms come at the highest points of exhilaration and despair/capitulation. That’s probably my alltime favorite saying “The market will do everything it possibly can within it’s power to do exactly what you don’t expect“. Today will be a rorschak test in trading with many economic reports and FOMC minutes being released. Big money has a plan, I hope you have one as well. What’s my plan? Well, here’s my morning plan. I want to be out of the market b4 the FOMC minutes come out:
- USD is still strong over AUD CAD so there’ll still be pressure on metals and oil. I’m staying away from volatility with crude but will trade in/out of SMN and short GDX (miners) but I am only going to daytrade these inbetween their pivot/support points. In and out - not hold.
- LIZ posted a wider-than-expected loss and since XRT lead the rally, this should encourage further profit taking in the sector so I’ll short that retail ETF if I can get shares. If not – pick a weak retailer below a 50d MA to short.
- China home sales are skyrocketing but here in the US mortgage applications dropped amid higher rates so I’m I’m thinking some volatility there; going to trade in/out of SRS. This one, again, I’ll daytrade inbetween pivot/support/resistance points. Won’t let it ride because of its volatility.
- My *scary play of the day* is to short BIDU and its descending triangle with a $15 stop. I know, painful, but it’ll keep my heart pumping.
Again, when the FOMC minutes are released, I want to be out/flat and will not jump into anything for at least 30min or an hour as I monitor the currency pairs for a hint of direction. Remember the sharks are circling and they’re hungry.
Call it profit taking. Call it apprehension over tomorrows FOMC minutes. Call it the end of the rally. Who cares; it’s all conjecture. We, as traders, just need to put emotion aside and trade the chart. So what do we know?
1. USD/CAD broke above what everyone thought was a Bearish flag, putting pressure on crude (now $68.90) That $70 level was tough resistance and now becomes solid support with more next support at $66 and $63. (click the tickers above for chart)
2. AUD/USD did the exact opposite, falling out of bed and its channel. Again, that prior support is now resistance. Bad for copper & gold **unless** some fear comes into the market and gold stocks themselves catch a bid. As long as these two currency pairs hold their breakout/down levels, I believe we will begin to retrace (not reverse) the rally.
3. The pundits on TV are doing their best to reassure everyone it’s only profit taking. They need to keep markets calm b/c we’re only now seeing new $ coming in from the sidelines and any market panic will cause them to pull out.
4. Productivity costs were up and the Redbook #s didn’t surprise but no one paid any attention. The market had already turned.
5. Tomorrow – FOMC minutes. The treasury market seems to be moving USD higher anticipating that Bernanke will announce a lessening or ending of buying US treasuries as scheduled in Sept. – but that selling of Bonds would continue as usual. **If** this is the case, I don’t expect a huge plummet in the market b/c a lot of this is being baked in right here with the sell off.
What I think we need to watch for going forward is #1 where *could* we bounce, are we going to bounce, is the rally truly over and are commodities dead. fwiw commodities are not dead. Don’t even worry about that. The strength in commodities was, to a great extend, b/c of the weakened dollar but what we’ll eventually see (hopefully sooner and not later) is a shift from trading on a maco-economic level to a fundamental level based on true supply and demand. Remember that? Supply & demand? What a concept. With this, we would return to a stronger USD trading in tandem with a stronger USD – not opposite as it has been lately. At least that’s my hope but the 800lb Gorilla in the room that remains is unemployment. Toxic assets will fester further until *that* problem is rectified and I’ve heard zip on that lately.
Fwiw I’m pretty Bearish on SPX at this point but in all honesty anything can happen with FOMC minutes coming out on Wednesday. **That** March announcement from the FOMC announcing Quantitative Easing is what put a knife thru the heart of the USD, turned the market around and shot commodities higher. I remember that day; it was thing of beauty for the Bulls.
In June the Fed didn’t purchase as many Treasury issues and the USD got a little strength. What happened to the market in June? Commodities floundered and the market struggled. Then they resumed in July and you could tell. The buck fell further and commodities once again got a pulse. Well here we are again. USD higher, AUD CAD struggling; as are commodities and the overall market.
What will the Fed do? No one has any idea. They’re not going to want to scare the market, scare away investors just now tipping their toe in the water; but they can’t just keep buying their own debt. Printing and printing more money and guess who’ll ultimately pay for it? You and me in the form of higher taxes, bailouts, whatever. It’s a slippery slope and I wouldn’t want to be Bernanke or Geithner right now but that’s their job.
I shorted RIMM today on the analyst downgrade (seemed the right time with overbought conditions and market kind of shaky here) and I bought a little TZA as a hedge against my longs. Here’s one last long I bought a small position in today, MS. Even if Ben lessens QE, the yield curve will steepen further which is good for banks so they way I look at it, it’s not a bad hedge play. Take it fwiw
