Yesterday Wall St. saw it's fifth biggest day in the history of the US equities markets. Apparently traders are still caught by surprise with the volatility and sharp price swings... This is from my 1-March post that forecasted March's bear market rally, "I see these markets are perfectly set-up to make a sharp and vicious snap back up". That's exactly what we saw yesterday, a vicious snap back on the S&P 500 and Dow Jones.
This morning I was listening to the radio and the analysts, commentators and market gurus actually said US and Japanese equities markets went into a bull market as of yesterday. The basis for calling the bear market over and a new bull market was the fact indexes like Dow, S&P 500, and Nikkei have gained 20% or more this year.
So here we have another case of close-minded market participants who think the bear market and recession magically disappeared because the S&P 500 and Nikkei hit a random number of 20%. It makes no sense how people can pull a number out of thin air and then use it to call the end of the bear market. It's like all the trendlines and moving averages the Dow wasn't supposed to break when it dropped 8,000 points.
Overbought, oversold, price-in, bull market, it's all a bunch of crap, these markets are running on pure emotion right now; euphoria, greed, and fear and they will push things these markets as far as they can in either direction.
We're not even out of Q1 yet, so I 100% disagree this recession is over and equities are now in a bull run. I can't agree with an assessment made using a random number while disregarding what's going to happen to Wall St. when they get Q1 data and Q1 earnings and Q1 writedowns in the next few weeks.
The profit-takers have already hit the S&P 500 futures overnight and at this point both the Dow and S&P 500 are set to open lower by more than 1%. It should be another wild day on Wall St...
So far today the euro didn't even make it to the 1.3700 level, it failed 20-points shy before dropping back to the 1.3550 level. I closed my 1.3497 euro long at 1.3643 after the euro failed to stay above the 1.3650 level earlier this morning. I still have my 1.3721 euro short open and will keep it open for now.
Besides the strong EUR/Equities correlation, the EUR/USD will also have to contend with a Bernanke testimony at 1000 EST and an Obama speech at 2000 EST this evening. Those are the only geo-political fundamentals for today besides the ongoing information that comes out from the Fed and Treasury about their programs.
All traders should expect geo-politics to keep a strong hold on the markets. The central bankers are using rhetoric to sway the markets in whichever direction suits them best. Two weeks ago the ECB was using rhetoric to talk the euro up, last week and this week they have been using rhetoric to talk the euro down. Sure enough we've seen a lid on the euro this week despite market correlations that should have pushed it higher than where we sit now (1.3530).
Wall St. will keep center of attention today and as far as trading goes, I'm happy to be patient to wait for the market to show me a high-probability trade. If the risk conditions aren't to my liking I won't trade, very simple. If I see a trade that carries a higher probability I will call it in the chat. Any trader that does a repeat performance and suggests shorting a bottom or buying a top will be gone, fair warning.
The week ahead is bound to be filled with a heightened tide of geo-politics, anxiety, and uncertainty hitting the markets. That means we need to be at the top of our game and stay one step ahead of these markets and the central banks. No one can predict the future of these markets but being prepared for what may come is the next best thing.
I cover a lot of ground in this week's update but I feel these are the key issues we need to be mindful of as we draw towards the end of Q1 which always brings intensified volatility to the markets.
ECB to reduce rates:
Last Friday while most market participants were already in the pub, ECB Weber was commenting on interest rates and his rhetoric is worth noting. Weber said:
"The ECB has room to maneuver on rates which we will use"
According to Weber, we should expect an ECB rate cut of at least 25bps on 2-April. With the ECB's key lending rate at 1.50% I believe they have plenty of room to drop rates and Trichet will be forced to keep cutting rates lower to appease market participants. Even though the rate decision is over a week away and there's plenty that can happen between now and then, I'm already forecasting a 50bps rate cut at the next ECB meeting.
Weber is head of the German Bundesbank, which carries the most influence at the ECB, so I think we can count on his comments becoming reality. Here's the key thing we traders need to keep in mind -- Weber's comments were made after the market's were done for the week, and more importantly, up until now the general consensus was on the ECB holding rates at 1.50%, not cutting.
Weber's comments change the game a bit and now market participants will have to re-think their forecast for the ECB's next move on rates, and that means market participants will have to reposition themselves should their forecast change from no rate cut to rate cut.
Interest rate-based market positioning can cause a strong amount of market volatility and sharp price swings. And all it can take are a few comments like Weber's to turn a well supported euro into a free fall situation. I believe the ECB will attempt to use rate cuts to put a lid on the euro and keep it as undervalued as possible. Will ECB buy government debt?
The big debate is whether or not the ECB will follow the Fed, BOE, SNB, and BOJ. In my opinion, the ECB will not buy government debt like the Fed is doing with Treasuries. Based on what I know about the European Union and Maastricht Treaty, I do not see how it's even legal for the ECB to buy bunds.
New government and EU legislation would have to be written and passed in order for the ECB to have legal premise to buy bunds. I just don't see it happening right now and I think at this point it's more of a diminished risk, but a risk nonetheless.
Risks for euro:
The quantitative easing issue may not present much risk to the euro currently but the following issues present strong risk for the euro:
European banking system -- banking failures
European sovereign debt defaults
Further reduction in ECB key lending rate
High debt-to-GDP ratios among Eurozone member nations
The ECB may look like geniuses by not following the Fed and Swiss but they have plenty of other issues to deal with that put downside pressure on the euro. I still believe the ECB and EU leaders are a little overzealous about economic conditions in Europe. The European banking system hasn't magically been fixed and countries like Austria, Hungary, Italy, Belgium, Spain, and others are drowning in debt and on the brink.
But after we consider the many risks for the dollar the euro goes from looking like Rosie O'Donnell to Jessica Biel...
Risks for the dollar:
I could give a laundry list of reasons why the dollar is worthless but for this purpose I'm going to highlight a few of the dollar's biggest issues.
Those are just a few of the big issues facing the USD that I could come up with off the top of my head. As bad as the euro's condition is, the dollar's is terminal at this point. The dollar is also at risk because geo-political tensions are on the rise and will only intensify as the financial turmoil persists. I think we'll see a lot of cars getting flipped in the weeks to come as the global recession deepens, and if the civil unrest spreads to the US, the USD could take another hit.
Not since I've been alive have I really seen civil unrest in America. I was young when there were riots in LA over Rodney King but I don't remember much about that and I probably didn't care anyway. Riots and civil unrest in America would be shocking and there's really no telling how the markets will respond to it.
The USD Index's sharp decline and record breaking Treasury auctions also keep the USD at strong risk this week. Between 24-March and 26-March the Treasury will auction $98 billion worth of 2-year, 5-year, and 7-year notes. The more the supply of US debt continues to flood the market the more it makes US debt and the USD unattractive. Keep an eye on the USD Index this week to get a gauge for the dollar's overall health and this should help you make smart trading decisions. The Index dropped 4.1% last week and could be in for another round of selling.
For a refresher on what the Fed did last week, please read this. It's important all traders have a clear understanding of how the Fed is devaluing the USD.
Wal St. will have their hands full once again this week. The outrage over AIG bonuses is going to intensify on Monday as news emerged over the weekend that AIG allegedly covered up $55 million in additional bonuses paid out. To me this whole thing is just a smoke and mirrors game to divert attention away from the catastrophic problems in the economy and the idiotic decisions being made by Democrats and Republicans.
People are crying over $200 million but what about the $150 billion in taxpayer money AIG received to pay off foreign banks and government-linked institutions like Goldman Sachs and JP Morgan? I could care less about those bonuses, I want to know why taxpayers are keeping insolvent financial institutions funded and why the politicians don't realize they are the problem and not the solution.
Having the US government go after AIG over $200 million in bonuses is like Joseph Stalin going after Adolf Hitler for traffic violations. The bankers and politicians are all crooks, liars, and thieves, and as long as any government is involved in the process of fixing the global financial turmoil I think we can count on conditions remaining questionable at best.
Geithner bank bailout--
On Monday Geithner is supposedly going to reveal his newest incarnation of the Treasury's bank bailout plan. Geithner looks like he reads Harry Potter books, I think that's where he's getting his ideas from, but we'll see how the market reacts to the latest plan which expands the TALF program to $1 trillion in addition to several other programs that won't work.
The recent trend has been for Wall St. to drop anytime the Geithner opens his mouth but there's no way to predict how they will react to this. Wall St. will have an enormous amount of fundamental data to contend with along with another Bernanke testimony. When Geithner first revealed his bank bailout plan the S&P 500 dropped 11%...
After gaining over 500-points on the dollar last week the euro appears ready to surge again but I'm not at all bullish on the euro. The euro is not strong, we know why it made a big move against the dollar, which has zero to do with euro strength. If the ECB pulled the same move as the Fed we'd see the dollar do the exact same thing to the euro, it's no different.
Both the euro and dollar have a tremendous amount of fundamental data to contend with this week. These are the key fundamental events I'll be most focused on:
Trichet speech (Sunday, 1930 EST)
Existing Home Sales (Monday, 1000 EST)
Bernanke testimony (Tuesday, 1000 EST)
German IFO (Wednesday, 0500 EST)
New Home Sales (Wednesday, 1000 EST)
Initial Claims and Final GDP (Thursday, 0830 EST)
Geithner testimony, (Thursday, 1000 EST)
Eurozone Industrial New Orders, (Friday, 0600 EST)
Personal Spending (Friday, 0830 EST)
Michigan Sentiment (Friday, 0955 EST)
The past few weeks market participants have not been reacting to most fundamental data in the traditional sense, but that move the euro made against the dollar was purely fundamental and proves that markets still move based on the core underlying fundamentals like interest rates and central bank monetary policy. At some point the big money players will begin responding to the data like they used to in the past. There is no way to predict when that bit of normality will return, but we need to be ready for it.
After the Fed announced their plan to begin buying Treasuries, I noticed an almost immediate shift in some market correlations. One that I'll be watching this week is the correlation between the EUR/USD and EUR/JPY. Prior to the FOMC announcement both of those pairs had a decent positive correlation and after the announcement I noticed times of a very strong inverse correlation.
I also observed a stronger EUR/Gold and EUR/Crude correlation whereas those were more loose just a few weeks ago. I do not see any inverse correlation happening with the euro and equities but that doesn't mean it cannot change in the near future.
As far as trading goes, I may look to close my euro longs when the market opens on Sunday and hang on to my 1.3721 euro short. As I said I'm not bullish on the euro and I'm actually expecting to see the EUR/USD continue to drift lower.
The EUR/USD failed several times at the 1.3700 level and on Friday market participants took a lot of euro profit off the table which led to it's sharp drop. It's possible we could see a continuation of the euro profit-taking during the Sunday/Monday Asian, London, or NY sessions. I'm prepared to see it.
That being said, I'm not opposed to buying or shorting the euro, I have no trading bias, I'll trade the direction I believe carries the highest probability of paying me on the trade, I'm not loyal to the euro or dollar, I'll capitalize on the demise of either one.
Should the S&P 500 take another move lower we should expect to see the EUR/USD drop with it. The S&P 500 futures failed a couple times at the 800 level and has done nothing but sell-off from there. I haven't heard much from the shot-callers who said equities put in a bottom and I believe Wall St. can test the bull's resolve this week which will put downside pressure on the euro.
At the start of the week my risk appetite will be low. There are a tremendous amount of politics at play right now and that has a specific effect on the markets, which is to confuse them and this allows the emotions of fear and greed to control trading decisions. Knowing this is the mindset of the markets, I lower my risk appetite and up my patience to wait for the market to show me what I determine is a high-probability trade based on my criteria.
I encourage all traders to use low margin entries until the markets show stability. My idea of a low margin entry is no more than half of one percent used margin per entry and to not allow usable margin to fall below the 96% level.
The reason why I encourage traders to keep high usable margin is because most are severely under capitalized and many will allow their accounts to get too far into drawdown without enough liquidity and capital to work their way out, and then it leads to heavy losses or a margin call. Retail FX traders need all the liquid they can get, so I think it's smarter to use smaller margin entries so you don't get held hostage by the market.
I don't have any travel plans, so I'll be here all week and doing plenty of personal trading as we get near the end of the month and quarter. I plan on calling more trades in the chat this week compared to last but no matter what, I will not call a trade if I think market conditions are too risky, unstable, and chaotic. If the risk conditions are right and the market shows a higher probability trade, I will call it in the chat and send out the SMS. All traders should recognize the risks of trading under current conditions which are at there extremes.
On Monday or Tuesday I may do a live audio Q and A session. Over the weekend we looked at some software and think we have a way to make it work. That was something I did last year and it was always well received by traders, so I'd like to begin doing those again. I'll post the details when I nail down a date and time. In the future I'm thinking of doing them weekly at 1000 EST. I'll post more info on this later. Plus we can use the audio to give updates, news, whatever.
Lastly, we'd like to welcome all the new traders who've joined us our community the past few days. If you are new please take some time to read About Us and Trade Log pages and follow us on Twitter.
After the market opens on Sunday keep your eye on the following EUR/USD levels:
In the first day of the new world we saw global market participants mostly exiting their positions in the equities markets while the USD saw another round of selling against the EUR, GBP, JPY, CHF, and AUD.
Spot gold gained about $30 on the day and spot crude managed to hold its ground above the $50 level. All of those correlated markets helped keep the euro well supported against the dollar despite a sharp sell-off with the S&P 500 futures.
Wall St. reconsidering?
As a trader, whenever a central bank like the Fed makes a monumental move with its monetary policy I watch the price action of the S&P 500 and S&P 500 futures. Those markets are a great gauge for the overall state of global market participants because they are denominated in the USD and are USD price-weighted indexes. They provide a tremendous amount of information I use to gauge money-flows, market sentiment, fear, panic, and greed... all the components that move markets.
What I observed today in the S&P 500 futures market was traders exiting their long positions while the bears used the price volatility momentum to add short positions at key levels. Price action behavior patterns with the S&P 500 futures show two solid rejections at the 800 level.
After failing twice at the 800 level the S&P 500 futures have been in sell-off mode which became intensified after the Fed's decision to devalue the dollar and buy Treasury debt. To me these are signs of potential issues with Wall St. and the global equity markets.
Tomorrow should be a real mess on Wall St. I will continue to watch the equities market for clues but right now the S&P 500 futures appear to look weak to the downside which may keep downside pressure on the EUR/USD. Inflation = Bearish Treasuries:
By now everybody knows the Fed is going to buy $300 billion worth of Treasuries but there are a few more things we need to consider...
The Fed's plan to buy $300 billion worth of debt created by the Treasury is bad for the USD because of the fact the Treasury has to print the money to cover the transaction. The printing of the money is the true essence of inflation, so we have the central bank creating a debt-inflationary environment. The increased money supply is inflationary and the debt expansion devalues the currency, so what this means is that over the long-term, bonds are a terrible investment.
Because of the Treasury printing money for the Fed to buy Treasuries, it's going to ultimately drive inflation higher, prices higher, rates higher, and equities higher. That is all bearish for Treasuries and for bond holders. And then it's bad for the US government because now it has a devalued currency that it has to use to pay debts back at higher rates and with less buying power. In my opinion this is a major issue and is potentially destructive to the US economy.
I really hope somebody on CNBC or Gloomberg makes people aware of this issue because it's going to get nasty in the next few years. The Fed and Treasury are doing the exact same things that got the markets in this mess the first place, they are just doing it at Star Trek hyperwarp speed. The bubble that's going to be created next is going to bring the entire world to its knees when it explodes.
But, there are good things happening in the world despite the financial turmoil. Wal-Mart is giving out over $2 billion in bonuses to their hourly workers. Say what you will about Wal-Mart, but while other retailers are laying off workers and filing for bankruptcy Wal-Mart is still hiring and paying bonuses to people that actually deserve them. I like hearing stories like that and knowing not everybody is getting screwed right now.
At this point I have no opinions on where the euro is going. Anybody that does is purely speculating because nobody knows. The direction of the EUR/USD will mostly depend on the direction of equities and commodities. Over the past 24-hours I've started noticing a change in the EUR/USD's correlations to other FX pairs, equities, commodities, and Treasuries. This is something I need to keep monitoring next week and will hopefully have more to report as things start to take shape.
At the end of February I wrote in an update that I believe a new season of change is about to enter the markets, I didn't know what it would be but that we'd get hit with something. Now I think this move by the Fed is that season of change and that means the correlations will change and the markets will go through yet another evolution. The good news is, human behavior never changes...
Once these markets get settled in starting next week we can get back to doing normal daily trade calls in the chat. I know the trade log is mostly empty this week and we've had monster moves with the EUR/USD. If I wanted to I could have put my 1.3200's and 1.3300's longs in the chat and hit the alarm but it's not about filling the trade log with pips and big numbers, it's about doing things the right way and using proper risk management.
I don't think it's the right thing to do to put traders in a high risk situation because not all of us have the same risk appetite and ability to maneuver in the markets when the price action gets crazy. But, if traders have followed our lead in the chat and the blog updates, nobody should be on the wrong side of these moves and they would have been shorting the USD and buying just about everything else against it.
Hopefully next week the markets will stabilize a bit and we can get back to normal trade calls, but no matter what, risk management will remain at the forefront. In the meantime we'll try to stay one step ahead of the markets and on the right side the market.
High risk trading conditions on Friday--
Trading conditions should be a mess tomorrow as it's the last day of the week and most global market participants will be taking profits, losses, and squaring up their books ahead of the weekend. Those actions will cause times of sharp price swings and chaotic price action.
Don't forget the EUR/USD has come a long way the past 72-hours and there will be many traders wanting to take their profits before they hit the pub Friday afternoon. Other traders will use the last day of the week to revenge trade on the market in an attempt to walk away with something, or at least break-even which usually ends in just being broke. Those poor souls will add volatility as well.
So if you trade tomorrow be aware those are the conditions you'll be faced with. The markets will be ill-liquid, volatile and risky. Be smart and use proper risk management. Take a manageable loss if you have to, small losses are easy to recover from. Don't get fooled by the euro, it's not really strong, this is just the result of the Fed telling the world to sell the USD.
Profit-takers, equities, and geo-politics can take the euro higher just as easily as it can take it lower, so be selective and methodical with your trading if you trade the EUR/USD or any other FX pair.
Lastly, we'd like to welcome the many new traders who joined the community the past few days. We're glad you found us and hope you enjoy your time here. Feel free to ask any questions in the chat. Follow us on Twitter, read the FAQs and About Us, and make yourself at home.
Today should forever be known as the day Ben Bernanke and the Fed sent a clear message to the global financial markets: "devalue the dollar". Anybody that follows our updates knew there was a risk of the Fed announcing a plan to buy Treasuries and what would happen should they move forward with that plan -- short the USD, buy the EUR instantly right on the spot.
This afternoon the Fed announced it's printing an additional $1 trillion in fresh USD to buy Treasuries, MBS's and corporate debt. I'm going to use this update to break it all down on a level a child in grammar school should be able to understand. There will be long-lasting implications to this shocking Fed action and any trader of any market needs to understand the core fundamentals of this move and what it means for FX, commodities, equities, and Treasuries.
Fed buying Treasuries:
Starting next week and over the next 6-months the Fed will spend $300 billion buying 10-year and 30-year Treasuries through open market operations. The Fed will also buy an additional $750 billion in Mortgage-backed Securities. The objective for these moves are as follows:
Drive down mortgage rates to extremely low levels
Drive down consumer borrowing costs
Stimulate the growth of credit and cause rapid credit expansion
Forcefully devalue the USD
Jump start inflation -- consumer price inflation
Drive equities prices higher
Those are the six key areas I believe the Fed is using this form of quantitative easing monetary policy to correct. The Fed is hoping this new direction will stimulate Wall St. and re-inflate the economy while causing a new round of rapid home buying and credit expansion. Correct me if I'm wrong but didn't these types of actions get us in this mess in the first place?
It's really that simple. That's why the Fed did what they did in my opinion. There's no reason to over-think any of this, the moves and objectives are obvious and the market is receiving Bernanke's message loud and clear. Forced USD devaluation:
The Fed's decision to buy Treasuries is the equivalent of using monetary policy to force the value of the dollar lower. The reason why this move is terrible for the dollar is very simple... here's the formula for how this works:
Treasury prints $300 billion in USD that is not backed by a hard asset like gold
The $300 billion in fresh USD is "collateralized" as new debt and made available for purchase on the open market
The Fed borrows the $300 billion in USD from the Treasury to buy its own debt
The US government creates $300 billion worth of liabilities, expands its balance sheet by the same amount, is now liable for $300 billion worth of debt to itself and the entire transaction is not backed by any hard asset
It's doesn't take a Princeton economics genius to see there's a big problem with this scenario and why it instantly began destroying the value of the US dollar. It's all a big sham. Basically a bunch of central bankers sat in a room for two days and decided to create $1 trillion out of thin air to buy $1 trillion worth of debt with. Common people like you and I have to actually work to make money to buy things with...
Only a central bank can create debt and use debt to buy debt -- in any other world this act would be impossible to accomplish and this is why we will never beat the central banks at this game, when you can beat them, you join them.
I stated very clearly many times the past 24-hours that if the Fed announces a plan to buy Treasuries I will immediately short the USD and buy the EUR and that's exactly what I did today. I got in several euro longs in the 1.3200's and plan to hold those open for the time being. I was 100% serious when I said I will mash the buy button if the Fed says they are buying Treasuries because that's a surefire signal the dollar is going to get brutalized in the near-term.
ECB next in line?
I did not go super heavy on my new euro longs and my highest long currently is a 1.3337. The risk is that the ECB will follow in the Fed's footsteps... the risk for Trichet to take the ECB's key lending rate to 0.50% or lower and to announce plans to begin buying German Bunds or other European sovereign debt. That move would have just as much a negative impact on the EUR as the Fed's move will have on the USD.
In fact, if the ECB announces a plan to buy European sovereign debt it's possible for the euro to recieve an even bigger punishment because European debt not rated as strongly as US debt. So, the ECB would be taking on riskier debt liabilities than the Fed is and that should hurt the EUR. This is a genuine risk that presents itself on the EUR/USD and why trading it should be done with caution and good risk management.
The ECB could come out with an announcement at any given moment saying they are following the Fed with their own currency devaluation plan. Should this occur we'd likely see the euro take a sharp dive.
If the ECB does not follow the Fed and refuses to buy debt, there is no telling how far the market will take the EUR/USD. We could easily be back around the bend on our way to test 1.4700 again. In the meantime, lets see if we can get to the 1.3650 level and then go from there. Correlated markets:
The move made by the Fed today is positive for the following markets:
We already know how terrible this is for the USD... as soon as the announcement hit the wires the 10-year yield dropped about 50bps and was the sharpest drop since the 1960's. Money-flows poured into Treasuries sending them on a strong bull run.
Equities surged and ended the day in the green. The Fed's announcement worked magic on spot gold as it soared from the $885 level to just under $950 before retracing. And already the market has taken out stops at the 1.3530 level on the EUR/USD. Everything is moving accordingly and just as it should. Unless the ECB drops a bomb on the markets with a crazy shock, I would expect the EUR/USD and all correlated markets to continue their respective bear market rallies.
Market landscape altered--
In my opinion this move by the Fed has added a completely new twist to the seemingly endless drama of the global financial turmoil. It's potentially set up the USD Index to take a violent fall, sending the EUR, AUD, NZD, CHF, and GBP higher. If the USD Index starts breaking down quickly and burns through stronger support levels it could get very ugly very fast.
The USD is in serious trouble right now thanks Bernanke and the Fed. If their comrades in Europe shine as the only G7 central bank with "tight" monetary policy I would expect the euro to keep rising from the ashes like a phoenix. It can't really go any other way.
I may have more to say later, but those are the basics and all I think a trader needs to know to be able to understand everything in their mind. Be advised that this Fed will cause an enormous amount of speculation and geo-politics. The volatility will be chaotic at times, the price swings will be sharp and violent... you've been warned, there are no excuses for not knowing what is ahead of us now.
If any traders have questions on what the Fed did and what this could mean for the markets, feel free to post your question in the blog or in the chat, we're glad to help make sense of it all the best we can.
I'm calling this make or break week for the markets... two weeks ago we forecasted a March bear market rally for Wall St. which took shape last week and now I'm looking at other markets using Wall St.'s rally as their catalyst to move through key support/resistance levels.
I don't watch all the currency pairs but the EUR/USD is one of those markets that is due for a make or break week. I also believe gold, crude, USD Index, and the JPY and GBP pairs may be in the same position.
Wall St. showed follow-through right into the close on Friday, but the challenge they will face this week is an enormous amount of inflation, growth, manufacturing, housing, and consumer data. In addition, an FOMC event, speeches by Bernanke, Trichet, Geithner, and potential fallout from the G20 meeting.
I want to start this week's outlook with something I consider to be one of the biggest events during the financial turmoil and an issue all traders should take note of.
Just when you think you've seen it all during this financial turmoil something even crazier comes along. That's what happened last week as the SNB dropped their interest rate to 0.5% and then moved to sell the CHF and buy the EUR through direct open-market operations. In under 10-minutes the USD/CHF jumped 350-points while the EUR/CHF surged 700-points.
The SNB is one of the last central banks on earth I would have suspected to devalue their currency and move to a loose monetary policy. This is the first SNB intervention since 1992 and I think the move sets a new tone in the markets, plus it opens the door for other central banks to follow the Swiss lead.
A few weeks ago we talked about how no country can have a strong currency. I think the Swiss finally made that clear to the world. Currency devaluation interventions are rarely effective over the near-term. A few years ago the Japanese used open-market operations to devalue the Yen and it worked for a few weeks but ultimately the yen strengthened post-intervention the same year. This is a new financial world we live in, anything can happen but somehow I think history will repeat itself yet again.
A central bank that uses forced currency devaluation is one that's more concerned with growth, trade, and import/export issues than they are with debt. A strong dollar is great for America when they want to pay back debt but terrible for global trade. With the SNB and BOE fully on course to devalue their currency and buy debt, that leaves the euro as the European currency with the highest interest rate and tightest monetary policy.
With two out of the three European currencies being devalued by their respective central banks, this could potentially set-up the euro to continue gaining strength, especially the EUR/CHF, EUR/GBP, and EUR/JPY pairs. The risk for the euro would be the ECB taking the SNB's lead to go on their own course of currency devaluation.
The EUR/USD is very close to a key resistance level and it's happening right as the BOE and SNB have moved to devalue their currencies, the USD Index is declining, equities are in a bear market rally, and crude is rising. Sounds like a perfect world to me for the EUR/USD to keep moving up.
Were the Swiss telling the world to get ready for deflation? I think that's the most alarming part of the Swiss move, more so than the currency devaluation. Even though the bear rally on Wall St. is bringing some relief and euphoria, these markets still have plenty to contend with in 2009 and I don't believe any government or market is able to handle a deflation situation.
As much as I love how the chaos brings the volatility, I personally do not want to trade in a deflationary environment. That would make the FX market and probably all markets a bigger mess than we've seen to date. I'd rather have inflation than deflation. It's much easier to make money during inflation.
For this week I think it's important traders keep an eye on the central banks and the CHF. There's no telling what was discussed in secret behind closed doors at the G20, the stuff we never hear about in the media... surely the Swiss actions were discussed and it's possible some new "unwritten" rules were established by the world's central banks.
The Swiss actions could potentially change some of the market correlated variables and the way the correlated markets behave. For example, if the USD/CHF continues to go up, the way the old correlation works is that the EUR/USD would go down. But if the franc is weakening against the dollar while the euro is gaining across the board, where does that leave the EUR/USD?
The EUR/USD and USD/CHF had a decent inverse correlation but this could potentially change. What could also potentially change is the EUR/Gold correlation which went haywire a few weeks ago. If the global equity markets get the idea the central banks are throwing a big party with free money and cheap interest rates, they will run wild with it, leading the markets to become artificially valued (overvalued) yet again.
EUR/JPY & GBP/JPY Trading:
Last Friday, Conal, our head yen trader called a GBP/JPY trade that triggered a number of questions from our members. The call was a short at 138.20, which was about 20-pips from the high, and the trade was closed for 50-pips profit. He also indicated a potential for the GJ to fall even further below the 137.00 level for those who wanted to hang on for more potential profit. It broke below 137.00, falling to the 136.50 level.
Most of the questions were the same -- how does he pick EJ and GJ trades off the top and bottom? Anybody that's traded those volatile yen pairs knows they can be a challenge and extremely difficult to short the top or buy the bottom of a move. That's a great question I'm sure any yen trader would love to know the answer to.
We'll get to that part in a moment, but I think it would be to the benefit of the community to give some background on why Conal's here calling yen trades. When I was at the paid-subscription site part of my game plan was to have three head traders. Between the three of us we would offer calls on the EUR/USD, USD/JPY, EUR/JPY, and GBP/JPY. I thought that product offering would be a good value to traders.
Retail Forex traders love trading those four pairs. It's no wonder why, they are fun to trade and extremely profitable when you're on the right side of the market. With the yen crosses being so ill-liquid in the retail FX market, it gives them intense volatility seen almost every trade day. That same ill-liquidity that gives the yen crosses volatility also gives a higher level of unpredictability.
If you're trading the GJ you can forget the fundamentals. Some techs work to find a few good trades but they are inconsistent. I know traders who use techs on the GJ and they are constantly tweaking their system and trying different "set-ups" with the best winning about 70% of the time on average.
I think a trading method or system that requires constant retuning cannot allow a trader to reach their full potential because they never become in tune with the market they trade. When I was kid I loved fishing and I wanted to be great at it. I noticed the guys on the river that had the least amount of gear always caught the biggest fish. It was usually the old guys with the rusted out little tackle box and a few jigs and spinners that were catching the best fish.
So, when I was thinking of bringing on a new GJ trader to the paid site, Conal was the trader I had in mind and then we know how the rest of that story goes... when I shared my idea for VeriteFX he was the one that stepped up to build our community and agree to call trades on the EJ and GJ.
Several traders asked me if we will add an educational element for the EJ and GJ. The answer is yes and no. There will not be education on the intricacies and nuances of those pairs like I've done with the EUR/USD. The education will come directly from the trades, that's the best way for traders to learn the "how" and "why".
There is no need for any in-depth education on the EJ and GJ because the trades called on those pairs are based strictly on the exact principles I've taught on the EUR/USD for the past two years -- price action and repeated price patterns.
Conal's taken that information and used it to design his own methodology to trade the yen crosses in a way that produces consistent profit, that picks tops and bottoms, and outperforms any other yen trader I've ever met or heard about.
Let me give you a real example from last Friday... had I been looking for a short on the GBP/JPY, based on what I know about price action and price behavior patterns, my short would have been at least 100-pips lower than where Conal called his short. I would have shorted in the low 137's whereas his call was above the 138 level which is much better. Both of our shorts would have paid at least 50-pips but the difference was he's added his own touch and refined his system down to a science.
It's that little twist that a trader gives to a foundation of solid trading principles that is nearly impossible to explain or teach. Every human is wired differently therefore every trader is different by nature. Conal's way is methodical, scientific, and exacting. We trade based on similar principles but my trading style wouldn't be considered scientific when you compare the two.
There's the answer for how it's done.
If a person calls great trades I don't think there needs to be much more explanation because all of the information for how we trade is out there. Conal's a full-time trader and has other pursuits and isn't here to educate the way I try to do, he's here to call high probability trades on the yen crosses. Educational material for how we trade is on FXI Guidebook and here in the blog within the updates. Sometimes it helps to read between the lines...
This isn't a promise but we're looking at potentially adding the AUD/JPY pair to the product mix here. That's another extremely volatile and chaotic yen cross but it has profit potential. Right now we have that pair in the "lab" and we're looking for a very specific nuance and pattern to its price action behavior. If we're fortunate to find what we're looking for and our data gives us high probable results you may see AUD/JPY calls in the future.
I've noticed a trend within the markets as this financial turmoil drags on... all currencies, commodities, equities, and futures markets are extremely disjointed and dis-correlated. The trading conditions have been choppy and sloppy. Noticing this trend I feel like we need to have multiple ways to produce.
Going back to the fishing thing... a good fisherman should be able to catch all kinds of different fish, right? There are times when the price action of the EUR/USD does not show me any high-probability trades but now I can turn to the EUR/JPY to produce for me when the EUR/USD cannot produce. That's made a positive difference to my trading and the net bottomline results. I want to see all traders see the same benefit and prosper from it.
The thing I love about our community is we actually enjoy seeing people succeed. We love seeing traders make money, beating the market, and making good profit. We love hearing success stories and knowing people are prospering. There's nothing wrong with somebody putting in honest work and being rewarded for their work and receiving genuine congratulations for their accomplishments.
People in this world hate seeing their peers do well and make money. I think that's a pathetic way to live life and that's not the attitude we have here. As much as we like to share in each others success, we also share in the not so great times. We don't win every trade, we take our hits here and there, but the objective is to end each month flat and in profit.
Some of our members shared they are having tight financial times due to the global recession. Knowing that just means our trades need to be as good as possible and we need to be smart in the way we manage our profit and drawdown.
For now we'll keep doing things as we've been doing them and hopefully in the future we'll have a few more ways we can profit from the markets.
The way I see it, the EUR/USD is ready to test and likely break the 1.3000 level early this week, possibly Sunday/Monday. Of course there's no fundamental basis for the euro to gain. There's plenty of fundamental basis for both the euro and dollar to be sold but who cares about the fundamentals when we have printing presses pumping out dollars like they're Krispy Kreme donuts while Europe's building a monetary version of Noah's Ark to survive the flood of debt in the Eurozone.
Trying to predict what the euro will actually do this week is not worth the brain power, so I will look to take my queue from the EUR/USD's market correlated variables and what the price behavior is showing me. Last week the market used the euro's pullbacks as buying opportunities. Unless something crazy happens in the next few hours I do not expect the market to open at the 1.3000 level but I would expect another pullback to be seen as a buying opportunity.
I have the same overall key levels as last week -- I need to see the EUR/USD sustain a break of 1.2930, then 1.2980, and then 1.3010. The 1.3010 level is what I might consider to be the "magic number". I believe if the market can sustain a break there, the euro will move on to take out some juicy stops between 1.3020-1.3050. Should the upside momentum blow through the 1.3050 level we could be well on our way to 1.3200 or better. I have an upside level of 1.3280 in mind but the euro has a lot of ground to cover between here and there.
In order for the downside momentum to emerge I believe the euro will need to sustain a break of the 1.2780 level and then attempt to find a way to move to and break 1.2650. Towards the end of last week it was apparent the market wanted to take the euro higher regardless of what was going on. I'm starting the week expecting to the see the same price behavior.
Euro or dollar?
When I think about the EUR/USD, the best I can do is apply hillbilly economics to the situation... Europe's sinking in debt and the US consumer is pulling a Jim Jones Kool-Aid move. Europe's debt and the death of the US consumer are two of the biggest issues facing the global financial markets. The best way to solve Europe's debt issue would be with the help of a strong euro. The best way to re-inflate growth is to devalue the dollar.
Nobody will start buying until America starts buying. Americans are saving, not buying, but they will start buying when the government puts cash in their bank accounts and they see their 401k's go back up, their job becomes secure and their home value stops plummeting.
According to the St. Louis Fed, the Fed is pumping billions of USD into the money-supply. Look at this chart and you can see the surge in monetary base. Any analyst that claims inflation is not coming in the future needs to get their head examined, that chart clearly shows inflation is on the horizon because inflation is nothing more than printing money and that's exactly what that chart shows the Fed is doing with the help of their comrades at the Treasury.
The intended result for a surge in the monetary base is to get Americans buying and spending and it signals the Fed's agenda is geared towards inflation, consumerism, growth, trade, stimulus, and loose monetary policy. The ECB is taking a different stance as their focus is on keeping the key lending rate as high as possible while limiting the amount of stimulus and maximizing the amount of new regulation.
It's in America's and the world's best interest for the dollar to die again but then we have a complicated situation with China because America needs the Chinese to continue to act as creditor but how attractive will US debt be if the USD Index goes on another free fall? The Swiss seem to be thinking the way the Americans are thinking whereas the Europeans are more stuck on debt and fixing their financial system.
In a better world it would be better for each sovereign nation to focus on its own issues while collectively agreeing not to use legislation to restrict free trade. A country like Austria is basically insolvent and has a completely different set of circumstances to deal with compared to a country like Germany who has growth issues and not gigantic debt/default issues. Countries like Belgium, Italy, Greece, Ireland, and Austria have debt issues that would prevent them from even providing any government stimulus, so it would be up to the IMF, World Bank, or UN to step-in with fiscal aid.
It's just a big huge mess, but if the euro gains against the dollar this week, I think those are the reasons why it would happen. And should the bear market rally on Wall St. continue this week it would only further support the euro.
Keep an eye 1.2810, 1.2860, 1.2930, 1.2980, and 1.3010 should the market move to any of those key levels. Be smart with your risk and money management, use good discipline this week because the trading conditions will remain challenging. That being said, I'm hopeful and optimistic for a strong week and one that ends in profit by Friday.
I really don't have much to say this morning... it's been a crazy week with everything from Wall St.'s bear rally, the euro's upside breakout, and the Swiss National Bank reverting to intervention to price fix and devalue their currency. All things considered I'll be happy to close the week with some decent profits, not every trader can say the same after the violent moves we've seen this week in Forex and it's correlated markets.
It's not going to get any easier next week... we have a G20 meeting starting today, an OPEC meeting where more production cuts are expected, plus an FOMC meeting, FOMC statement and a few speeches by Trichet and Bernanke.
I'm going to say this now -- it's not wise for any trader to trade today if they have a lower risk appetite or inability to monitor their positions. It's the last day of the week and that means profit-taking, loss-taking. and book squaring ahead of the week and G20 event. Be warned when the markets open on Sunday prices will be in a totally different place than where they are at close on today. Be smart with your trades if you're trading today.
The risk that will make the price action and price behavior erratic today is if Wall St. decides to keep driving the S&P 500 and Dow up or if they decide enough is enough and they take profit before hitting the pubs this afternoon. EUR/USD:
The euro appears to be headed for the 1.3000 level and when it gets there, it's anyone's guess if it will stop and reverse or slice right through. I believe our last two attempts at 1.3000 failed miserably but there is good momentum behind the euro, and now that both the BOE and SNB have devolved to so-called quantitative easing it's possible the euro emerges as the most sought-after European currency.
In Sunday's update I'll cover what the Swiss did yesterday. All I'll say now is, that move was shocking and the rhetoric coming out of the SNB is puzzling in light of the Swiss being some of the most conservative and intelligent money managers. It really makes no sense and could signal a serious debt/default issue within Switzerland. SNB's Roth basically said he's going to price-fix and devalue the Franc.
As we spoke about the other day, if the 1.2850 level sustained a break then I am targeting a move to 1.2930. We've now hit that target, so the next level I'm still looking at is 1.2980, then 1.3010. Should we sustain a break of the 1.3010 level it could then move to test 1.3030-50 where prime stops will be sitting just ready to get taken out.
The big data today is the Trade Balance, which should be USD+ and the Michigan Sentiment which should print at or below expected. A higher than expected print would be great for Wall St.
That's all for now. Do not trade today if these extreme conditions don't suit your risk appetite or you can't handle taking a loss. Any traders following our lead should be in good profit for the week plus not stuck in any bad trades, don't give it back today...
Before we get into today's market update, I want to take care of something I promised a few traders I would do.
This morning in the chat we got into some discussions about trading styles. I made a comment that this was probably the last time I'm going to explain in detail how I trade the market and why I do what I do. That caused a few pm's and emails asking if I would do a post to re-cap what I was saying, so I'm happy to oblige.
When I sit down in front of my trade station in the morning I take a quick look at the news for the day and evaluate where the market is at and where it had come from since I last looked at it. I look at spot gold, spot crude, S&P 500 futures, Treasuries, and the USD Index. I do the same type of evaluation process with those correlated markets as I do with the EUR/USD. This whole process at most takes about 30-minutes. I don't over think any of it, it's more to get a quick view on how those markets have been behaving
Once I get a feel for the market and get in tune with things, I'll usually pick a side that I want to fight with when I take my first trade of the day. For today I picked the euro bear side to fight with. Because I was going to fight with the bears I needed to wait for the EUR/USD to show a pattern of a certain number of higher opens and specific pip differentials between each 30-minute open in order to determine when and where to trade.
My first two trades of the day were two EUR/USD shorts right near each other. I waited for the 5th higher 30-minute open and it was at that point that price action and the euro's historical price action patterns indicated I would have an over 90% probability of making at least 10 pips on a EUR/USD short anywhere between 1.2786-1.2789. My first short was at 1.2784 which was closed at 1.2764 and then a 1.2772 short that was closed at 1.2759.
No I didn't make a killing in terms of pips, but I was happy to be patient and wait for the euro to exhaust itself to the upside because I had a 9-in-10 chance of beating the market, and it was the EUR/USD's 30-minute price open patterns that gave me that information and confidence to take the trades.
The other factor was, due to the extremely high probability of the trade and because I was looking for a conservative number of pips, the correlating probability of the trade going into DD of more than 20 pips was almost 0%. The only factor that would have altered that probability would be an unforeseen geo-political event like a terrorist attack, assassination, or surprise news from a central banker or high ranking politician.
So unless any of those unforeseen circumstances get in the way, I have a trade that shows under a 2% chance of 20+ pips of drawdown plus a better than 90% probability of hitting my profit target.
There's no tech indicator on earth that could tell me when the EUR/USD dropped to 1.2772 that it would have a 98% probability of further dropping to at least 1.2762 and that I had only had a 2% chance of not making at least 10 pips if I shorted at 1.2772. When I saw that 98% probability trade form in real-time I immediately called it in the chat.
I prefer to use a system and style of trading based on probabilities and price action, not on Italian scientists who played with sunflowers or old Wall St. dinosaurs who created charting programs to confuse market participants and take their money. I just use the probabilities that are shown when a price pattern becomes repeated, I take the profit when my probability and target are met, exit the trade, and get out of the market. On a day like Wednesday, that trading plan avoided any drawdown that I could have been in when the EUR/USD when on a run to 1.2860.
The only reason I would ever change my style and system is if the key factor behind why it works changes -- human behavior. Any market that's traded on price is controlled by humans. Humans are the ones that determine price in markets and they use their money and emotions to determine price and value. Unless these markets start getting traded by robots or aliens, I'm sticking to my system because it's rooted purely in human behavior.
Humans never change. Humans always do the same things over and over again. My style spots within the price action when humans are about to repeat something they did in the past. And while I'm writing a mini novel here, I should add that my main problem with using charts is that I believe all markets go around in circles, not up and down. A chart doesn't make sense to how I view the markets because in my mind I only see that they go in circles, not up and down as is portrayed on a chart.
There is no beginning or end to price of any currency pair under the current system for how currency pairs are priced. In the Forex market no single currency can be given an absolute value because it's paired with another. So price can only ever travel around in a circle that either expands or contracts with money-flows and supply and demand from market participants. There is no ceiling on how "high up" or how "low down" any currency pair can get. It's just a revolving circle of price because no currency pair can ever reach the zero level.
The last thing I'll add to this is that my philosophy for why I trade the way I do is because I believe all of the people are wrong most of the time and most are never prepared for the element of surprise.
Trading the Forex market is all about the element of surprise and reverse mentality thinking. I can credit Jesse Livermore for teaching me the most about price action and for teaching me exactly how not to trade the Forex market. Livermore's trading style was to wait for price action to confirm a move, and then to buy or short into it.
For example, if Livermore saw on the ticker tape that Coke was about to drop a few points, he'd wait for the drop to begin and then short into the drop or he'd buy into an upmove. Ultimately this didn't work for him, he went broke three times so my philosophy is, I'm not going to chase the market up or chase it down, I'll wait for it to exhaust and overshoot, I'll get in going the opposite way while the market gives all those traders who buy tops and short bottoms enough time to get in, and the trade will play on the element of surprise when it stops and reverses on everybody and price goes round the circle again.
I don't have to be a bear or a bull, all I do is pick a side to fight with and wait until that side pulls the element of surprise and attacks the other side to take their money. In the end, I also rely on my gut to tell me what to do. I've been in many trades that carried a 98% probability and I see something happen in the price action in real-time and then my gut tells me to get out and wait for the market to make sense again. I'll take a manageable loss on that trade to mitigate risk, knowing it can be easily made back the next day.
I think the main reason it works best for me is that it never needs to be altered or tweaked out. There are no lines that need to be redrawn or multiple timeframes to analyze. If the EUR/USD was at 1.2000, 1.3000, 1.4000, 1.5000, 1.6000 or higher, the same exact price action patterns would exist and be repeated. For example if the EUR/USD made three higher opens of at least 10-pips per open and that pattern shows an 88% probability of dropping at least 10-pips from the price of the third higher open, that 88% probability is valid no matter if the EUR/USD was trading at the 1.2700 level or the 1.4700 level.
Lastly, I'm not interested in any debate or discussion on what works best or who has the best system. What I do and how I do it works for me and me only. That being said, this style has also helped many traders become consistently profitable but they do things in a way that works for them. If traders get tired of constantly losing and want to see if this stuff works, we're here to help. My education philosophy is that the best education will be done by calling live trades where traders are required to risk their own money and pull the trigger on the trade.
When I make a call I don't take credit for anybody's wins and I'm not responsible for their losses but I look at each trade call as an educational opportunity plus a profit opportunity. Every move I make in the market is made for a specific reason, so if traders use our community to follow our trades, this should also present an opportunity for traders to ask why I made the move I did and then to learn.
I'm sure I sound like an annoying preacher at this point, but this is my life's work and I've put my heart and soul into developing a simple and logical way to trade a complex market. I'm loyal to it, committed to it, and believe it's a viable alternative for traders that do not want to do what everybody else does. There's always a handful of people who take interest in going against the herd and our community certainly attracts those types. Bear rally continues:
The biggest question for Wednesday was whether or not Wall St. could follow through on Tuesday's rally. Everybody will have an opinion on this, mine opinion is that I wouldn't call Wednesday's move in equities a follow through or a failure.
The Dow only closed up 4-points and the S&P 500 only 2-points but those small gains at the close do not mean the market is done with the rally and cannot go higher. The shorts took a few choice opportunities to hit equities but by far buyers outpaced sellers on Wednesday.
The main reason I cannot call today a full confirmation is because the correlated markets are giving mixed messages... the sharp fall in crude helped put a cap on the S&P 500's upside potentials. Spot crude lost about 7% on Wednesday after failing to reach the $50 level. I can't say that's a great sign for equities and a sustainable rally. The other not-so-great sign for equities was gold's strong surge back off the $895 level in addition to the 10-year yield dropping back to 2.90% after moving beyond 3.00%.
Should crude recover and the market see the lower $40 level as a good buying opportunity that would certainly be supportive of equities. I think under the current market environment money-flows will need to stay out of gold and go into equities, especially financials, industrials and consumer staples.
I think the bear rally can sustain tomorrow as long as Wall St. can handle some potentially toxic retail sales and jobless claims data.
On Wednesday the EUR/USD continued it's bullish run, moving from the 1.2650 level to the 1.2860 level. As I write this euro has just moved under the 1.2820 level but may find some buyers should we retrace back to the 1.2750 level.
What's driving the euro higher? I think geo-politics and central bank rhetoric have something to do with it. Earlier this week Trichet came out with guns blazing, saying he can see a good turning point in Europe and clearly resisting the type of stimulus being pumped out in America. He also made it very clear the ECB would not follow the BOE down the route of quantitative easing. Those comments and strong hawkish rhetoric was enough to push the euro higher against the pound sterling and dollar.
Trichet speaks tomorrow and I think we need to expect him to remain vigilant and hawkish. Trichet's behavior has been erratic and unpredictable lately, but I'm going to guess he stays on the soap box tomorrow which would give the euro more support.
I'm not sure what data Trichet is looking at... on Wednesday morning we got a deflationary print on German PPI, coming in at -1.2% vs. -0.1% expected. Then we got a -8.0% print on German Factory Orders. The expected decline for that data was -1.9%. The Eurozone economy is clearly in deep recession, including Germany. I'm tired of talking about it and unless the EUR/Equities correlation breaks, the euro may not receive the beating it needs based on its terrible fundamentals.
For the dollar we have Retail Sales and Initial Claims plus a speech by Geithner. I would expect the retail data to print as bad or worse than expected along with the jobs data. The fundamentals really don't matter right now, these markets are just running on pure emotion, fear, and greed.
As far as trading goes, I'll stick to exactly what we've been doing all week. I trust nothing right now and I'm happy to take those quick hits on the market, take my profit and get out. I think the euro can retrace under the 1.2800 level but beware of buyers that will be ready to drive it back up. The euro has been making higher lows and is finding buyers at higher levels compared to the past few weeks.
I think a sustained break of the 1.2850 level could send the euro to the 1.2930 and then 1.2980-1.3000 level. The euro may need to make a run to 1.3000 where I'm 99.99% sure there would be large stops, buy contracts, sell contracts, and take-profit orders. Running to the 1.3000 level just might be one of those psychological magnet levels the market has to go to, we'll find out.
Key levels will be posted after London opens. Use smart risk and money management as trading conditions won't get any easier the rest of the week.
Finally after talking about it for the past two weeks we got our monster bear market rally on Wall St. Tuesday's rally was one of the biggest in history with both the Dow and S&P 500 gaining about 6%. From our 1-March blog post:
It's my opinion that the Dow, S&P 500, and S&P 500 futures have either overshot the downside or are nearing the overshoot point; the exhaustion point. As a Forex trader, the last thing I want to be is caught short on the EUR/USD or EUR/JPY when Wall St. decides enough is enough and we have a violent 320-point bear market rally on the Dow. I believe that moment is now due and could come when least expected.
When I woke up early this morning that paragraph above was the first thing I thought of and the only thing I could think of, so the next thing I did was walk over to my computer and post in the chat, "do not short the euro"... that's all my barely functioning brain could communicate at the moment. Within a few minutes the EUR/USD was on it's way from the 1.2600 level to 1.2800+. The EUR/JPY ran all the way up over the 126.00 level.
The price action and behavior in all correlated markets has been chaotic to say the least. In less than 24-hours the S&P 500 futures went from the 672 level to the 722 level, spot crude made a run over $48 before profit-taking and short-sellers pushed it back to the $45 level while gold has continued to be brutalized. Since the market opened on Sunday spot gold has gone from the $940 level to the $892 level, and the 10-year yield surged to the 3.00% level by late Tuesday.
Inevitably the Dow's 379-point gain has sparked talk of "the bottom". I'm not calling any bottom on anything based on today's move. I've been expecting this rally, it's come as no surprise, but nothing was actually fixed today.
I think all rallies like today are purely psychological in nature, and it didn't take a genius to see it coming... I figured by the beginning of this month those market's had overshot to the downside and within days market participants would get sick and tired of the beat downs, and all we'd need is a trigger to get the euphoria going again.
The story goes that early this morning Citi CEO Pandit made a comment that Citi was profitable for so far in 2009. Then later in the afternoon market participants were further bolstered by comments from Barney Frank about the uptick rule being reinstated for equities.
Citi better be profitable, all those banks better be profitable... they are borrowing taxpayer money from the Fed at 0.00% and then lending it back out to other institutions and consumers. You'd have to be a blithering idiot to borrow money at 0.00% and not make a profit on it. Citi is still charging some of their credit card clients 28% accruing interest. If I could borrow money for free and lend it out to somebody for 28% interest, I better be reporting a profit on my balance sheet, give me a break.
I'm not impressed with Citi being able to make money because if they can't make a profit after borrowing money for free and lending it back out not for free, they deserve to be taken to the field and shot.
And then we have Barney Frank who played queen for the day by telling the markets he thinks the uptick rule will be reinstated within a month. Message to Barney: you don't have any power to reinstating the uptick rule. In case you don't know what the uptick rule is, it says you can only short a stock on an uptick, not when it's tanking which is supposed to stop bear raids on stocks.
So, as I see it, we have two weak catalysts for today's bear market rally which was due anyway. For me I need to see follow through tomorrow... I need to see the short-sellers sit on the sidelines and let the bulls run wild. I need to see Asia and Europe go nuts and then for Wall St. to build on its gains... I need to see some of this so-called "money on the sidelines" we've been hearing about get off the sidelines and back into the game.
The other day I said gold's sell-off could be a great sign for equities bulls if gold's downside was due to profit-taking followed by those gold profits going into equities. I believe we saw that exact scenario play out on Tuesday because within the price action I could see profit-takers hitting spot gold and moving money-flows right into the S&P 500.
As long as this euphoria hangs in the air I'll caution all traders not to get stuck in a euro short at the moment. Should these markets run up again they should take the euro with them just like we saw this morning. I'm still bearish on the EUR and JPY, that has not changed, but I have to trade the short-side defensively, not offensively.
Wednesday will be another fun day on Wall St.
The euro's high was right on my 1.2823 key level and was clearly rejected at that level. One of our traders in the chat pm'd to tell me there was some big moving average around that level, so obviously we had tech traders factoring into the mix. The only reason I put a key level at 1.2823 was because I knew tech traders who were shorting the euro would have their stops set right on 1.2820, that was pretty easy to figure out and the banks and brokers would want to take out those stops this morning.
The run up failed after stops were hit and we dropped all the way to the 1.2630 level at the end of the NY level before recovering back towards the 1.2700 level as I write this commentary. For almost a week the market made attempt after attempt at breaking below the 1.2580 level. Each attempt was rejected and I believe for now we can call that level solid support.
There are some unknowns for the euro, dollar, and yen over the next 24-hours because we don't know if Wall St. will follow through today's rally. I think Wall St. holds the key to it all, at least that's how I see it in my mind.
On Tuesday we saw some abysmal fundamental data out of Germany and France, and on Wednesday we get key data like German PPI and German Factory Orders. I'm not sure the markets will be trading on any kind of fundamentals on Wednesday, but if they do and German PPI prints below the -0.1% level the euro could be in trouble. Reason being, a print too far into the negative on PPI could spark fears of deflation, and that's a beast these markets don't have the mental strength to contend with right now.
Deflation keeps the UK and Eurozone at risk in my opinion. The more levered up an economy is, the more they will deflate when everything unwinds like it's doing now. Massive asset liquidations and margin calls and loan calls continue to happen in the financial markets on a daily basis and that is all very deflationary I believe.
Loans that were made with cheap USD are being called and when loans made in USD are repaid, this will give the USD a boost. Remember the so-called "unwinding" of the yen carrytrade? All that was just a situation where loans made with cheap JPY were getting called and repaid back, giving the JPY massive strength. The endless supply of cheap JPY that flooded the money markets made the JPY repayment process extremely painful for people long on the yen crosses, same with people short on the USD.
I think there are more USD loans and debts that need to be repaid which keeps the USD in a somewhat position of strength against the EUR and from potentially breaking new highs on the USD Index. When these loans are repaid and the margin calls stop, that's likely when the USD will turn into the next carrytrade because it's essentially worthless now thanks to current central bank monetary and government fiscal policy.
This is all part of the deleveraging process and I think Europe is not through unwinding their levered up positions, which puts the euro at risk in the near-term. All of the fundamental reasons are there for the euro to die but because of the strong EUR/Equities correlation, it's holding the euro back from the sell-off it deserves.
That's about it for now. As far as trading goes, if I get a decent euro long probability I will likely take it. I may also play the short side when this current up move exhausts but I caution against euro shorts for the next few hours, it could make a move up. Key levels will be posted after London opens tomorrow.
I'm much more enthusiastic about this week compared to last... the combination of an ECB rate decision and NFP always complicates trading. On Monday the markets will open having been heavily sold-off the prior 4-weeks. On Friday equities bears covered their short positions, sending theDow and S&P 500 on surge the last hour of trading. As soon as the profit-taking and short-covering hit, the S&P 500 futures ran up 20-points which pushed the EUR/USD just below the 1.2650 level at the close.
This current recession in the US, which is now global, is unlike anything the government or Fed has had to deal with. History is being written on a daily basis. They say history is destined to repeat itself and this is true, but history is in the making as well. This recession combines elements of recessionary years like 1929, 1933, 1980, 1982, and 1857.
One reason why I think this recession is a beast of its own centers around the financial health of Americans. The recessionary years of 1980-1982 resemble this recession in terms of the unemployment situation. By 1982 the US Unemployment Rate was 10.1% but the US Savings Rate was 12.2%.
10% unemployment in a consumer-driven economy is a dire situation but manageable when consumers have some disposable income in the bank and limited household debt. As soon as a bad economic situation looks better those consumers start spending again, they have the money in the bank to be consumers. According to the textbook definition, the current recession began in December 2007. When this recession began the US Savings Rate was under 1.0% which is far from the 12.2% average in 1982. This go around, there is no money in the bank.
The other problem lies within what's called the household debt service ratio. It's basically consumer debt. According to the Fed's statistics on this data, here's what the household debt to personal income ratio looks like from a few selected recession years:
There's a big difference between household consumer debt of 10.58% of personal income when the average savings rate is over 12% compared to debt to personal income of 14.08% with almost no savings at all.
That factor alone makes this recession different for consumers, retailers, and all those banks who are creditors to US debtors. The average US savings rate is going up, it's well over 1.0% currently but this is a new phenomenon forced on American consumers against their will. They have no other choice but to stop spending because there isn't much to spend, their credit cards are maxed out, and their personal ATM's (homes) are upside down.
I'm not listening to anybody that believes they can find a bottom to this recession, equities markets, unemployment, housing, you name it. Good luck trying to find a chart from a random prior recession to compare to what's happening in March 2009. Maybe when everybody stops talking about the bottom we'll finally get the bottom.
In my opinion what started in 1856 and erupted in 1857 is what's most comparable to the 2008-2009 recession. The Great Panic of 1857 which led to a steep recession had all the elements of this one... bank failures, extreme global currency price fluctuations, a real-estate boom and bust, devaluation of homes and land, geo-political events like the Mexican-American War and the Crimean War.
The 1857 recession that started in America first spread to Europe, then to South America and Africa, and then Asia caught it last. The global network of economic trade that existed back then collapsed, government debt defaulted, commodities collapsed, and general panic and fear reigned. Sound familiar?
Our recession has all of those elements from 1857 but on a much more intensified scale. The world is much smaller now than it was in 1857. The prior major recessions like those in the 1930's, 1970's, and 1980's didn't combine all the elements we see now and 152 years ago. The situation in 1857 developed into a "war with wealth" and ultimately led to the South succeeding and forming the Confederacy... then it was Civil War and you know the rest of the story...
The third week of March in 2007 I put out a forecast that the US housing market would collapse within 6-months. A current admin in our chat was one of the first to show me interesting information on sub-prime back then right after I started talking about the end of the US housing boom. He knew it was coming, several saw it coming but few wanted to listen.
I think the recovery will begin within a year. The only reason why I believe this is because I just saw something on CNN about how they are going to help Americans survive the recession. CNN aren't the only ones... I think it's safe to say when CNN, Fox, and MSNBC think they have any clue, we've probably hit bottom or we're close to it. Those people must be crazy if they think anybody is actually going to take financial advice from TV news entertainers.
Last Friday was chaos on Wall St. After the jobs data was released the bottom fell out of equities as the Dow pushed below the 6,500 level while the S&P 500 fell below the 670 level before recovering at the end of the day thanks to profit-taking.
A few days ago equities had a pathetic relief rally but every day the Dow and S&P 500 get further driven into the ground the closer we get to a violent bear market rally. There's no way to predict what triggers those bear rallies and it's impossible to see them coming ahead of time, but when they erupt out of nowhere you don't want to be caught on the wrong side.
Last Friday I took a loss on a euro short mostly because I'm guarding against being caught short on the euro when Wall St. decides to go mental and run up several hundred points. From a pure risk management view, I'd rather short the euro at the end of a bear rally compared to being short when it begins... we've seen a few bear market rallies towards the end of 2008 that send the EUR/USD up in excess of 320-points over a span of just 12-hours. Being caught in a situation like that is terrible on the mind for a trader.
I'll keep taking manageable losses to prevent my account from being caught in a painful situation. A loss like that is very easy to manage compared to being in several hundred points of drawdown and waiting for the market to crash once the bear rally fizzles. The bear market rally that's due may have started on Friday, we don't know. But what we need to now look for is either follow-through or failure on Monday.
The tight EUR/Equities correlation makes it hard for euro bears like myself to trade the euro as it should be traded because the euro can't do anything but go up when equities go up. It doesn't work any other way right now. That being said, I believe the the Dow and S&P 500 ultimately need to go lower, which will drag the euro down with them.
Back on Dec. 16, 1982, at the height of the last major recession, the Dow was at 990.25. When adjusted for inflation, that would put the price-weighted Dow index at 2,120 today. Right now the Dow is several thousand points above that equated level so I'm certainly not ruling out Dow 6,000 or lower before it's all said and done. When you factor inflation, the Dow is currently trading at 1966 levels.
Fear can become a bubble too. What typically follows fear is euphoria. Once perception changes, fear switches to euphoria and markets go on monster rallies. Perception is reality and as soon as a piece of news, data, or geo-political event triggers that mental switch, the fear bubble bursts and Wall St. goes on a violent rally, bringing all other correlated markets up with them. I don't want to look like an idiot being caught on the wrong side of that move so I'll continue to trade accordingly.
Treasuries will come into view as there are several major auctions, including a 10-year auction that will be watched closely. The 10-year went on a strong bull run last week as equities melted down. The 10-year yield dropped 14bps, the most since last December 19th.
This week $63 billion worth of new US debt will be auctioned. The Treasury auction's a record-breaking $34 billion in 3-year notes 10-March, $18 billion in 10-year notes 11-March and $11 billion in 30-year bonds 12-March. The Treasury is looking to sell at least $2 trillion in debt in a short period of time to fund the federal government's balance sheet and keep the Fed bailouts pumping.
Heavy money-flows back into Treasuries will hurt equities, the euro and should send the dollar higher. What would hurt the USD would be any irregularities during the auctions, a sharp unexpected rise in Treasury yields, or speculation that sovereign wealth and other market players show a growing distaste for Treasuries.
Treasuries are the next bubble that needs to go, but the problem is Geithner needs a strong USD so America can pay their debts back as cheaply as possible and Bernanke needs a weak USD so inflation jump starts equities. This is a very difficult situation for all parties concerned...
Hillary Clinton has been on a world-wide tour begging sovereign wealth to keep buying US debt. It should be no wonder Clinton's first trip last month was to China. The Chinese have Geithner and the Treasury bent over a barrel right now, so does Japan. But, there's a whole lot more room around that barrel... it's not in China's interest to cause panic in Treasuries because that would weaken the dollar, which would weaken their debt-holdings position against the US. I think the Chinese are too smart for that, there are other ways.
With the Secretary of State wrongly claiming America's democracy is older than Europe's and telling the Russians she hopes they don't "overcharge the US" after screwing-up a translation on a gift, I hope all sovereign wealth stops buying US debt. It's disrespectful to say such stupid things. I'm not sure how America will gain any respect that was lost during the Bush regime with comments like that.
Keep an eye on Treasuries this week.
First of all, don't forget that NY is now 4-hours behind London and 5-hours behind Frankfurt. I think Europe has their time change soon but between then and now remember that new time difference.
Last Friday's job data printed at their lowest levels in 35-years. We don't need to get into all the specifics, it was ugly and it will stay ugly. I believe unemployment will at least go to the 9% level.
One piece of data I like to watch is what's referred to as under utilization. It's a different way to look at and measure unemployment. Right now the under utilization rate is 14.8% compared to the unemployment rate of 8.1%. The under utilization rate factors in people that gave up looking for a job, have a part-time job but want to quit, discouraged workers, part-timers who want to be full-timers but can't find the work, etc. It's a wide-ranging piece of data and I believe it shows the unemployment rate has room to rise to possibly 9.8% in the near-term.
I read a story about a school in Ohio getting over 700 job applications for a janitorial job that paid $15 an hour. Unemployment will get worse...
My forecast for the euro this week -- it'll do whatever equities do unless the strong EUR/Equities correlation decides to become unhitched and change this week. Unless we have a change in the tight price action correlation between the EUR/USD and the S&P 500 futures, the euro will go up and down with that index.
I talked to one very smart trader who's been shorting the euro and the S&P 500 futures simultaneously, making a nice profit. It's pretty much that simple if you can catch the right direction of the market at the right time.
Every trade day last week saw heavy volume selling on the S&P 500 futures. Can it repeat this week? Of course, but as with the Forex market, the longer things stay the same, the more they have to change.
Gold made strong gains on Friday after failing to break below the $900 level earlier in the week. One great sign I've noticed here recently is gold and the dollar have stopped rising in tandem. That's a sign some of the general panic is going away. If the EUR/Gold correlation goes back to normal we should then expect to see the euro and equities rise as the dollar and yen falls.
Crude appears to have put in a bottom at the $32 level. The next round of GDP data could send crude lower but overall this commodity looks able to sustain some upside gains in the near-term. This is also a great sign for equities and the euro. With some upside momentum pushing crude now is a great time for OPEC to make further production cuts and for some of those pipeline attacks to flare up again. Surely OPEC needs crude above $50 for budget reasons.
Fundamentally there is an enormous amount of key Eurozone and German growth, manufacturing, trade, consumer, industrial, and jobs data. For the US we have Retail Sales, Initial Claims, Trade Balance, and Michigan Sentiment. The beginning of the week is dominated with euro data while the end of the week is for the dollar.
10-March at 0830 EST
12-March at 0730 EST
I'm nothing but bearish on the euro overall, that has not changed but as we've already discussed, until the strong EUR/Equities correlation breaks, I don't see how the EUR/USD can sustain the type of sell-off it deserves for fundamental reasons.
One of the interesting things about trading the EUR/USD is, I can make the case for both currencies to be sold-off but they are paired together like two brain-dead Siamese twins and currently under the spell of Wall St. Until that changes we're stuck with a EUR/USD that will continue making erratic price moves in the short-term.
I would expect the JPY continues to weaken in the short-term, especially if equities rally. A sustained crude rally should pressure bears on Wall St. to sell and may give the bulls a boost. A fundamental case for a weak JPY can easily be made.
I will be interested to see how the Trade Balance and Import Price Index prints. I don't ever see the Trade Balance turning net positive for the US and the USD. America doesn't really make anything any longer and according to China's latest import/export data, they are still outpacing America. Chinese imports in to the US are down but not nearly to the degree US exports to other nations are down, or German exports for that matter.
As far as trading goes I will continue to short the euro on the rises and rallies but I will be very cautious against getting caught short on the euro should a bear market rally break out this week. I don't trust the dollar, euro, Trichet, S&P 500, Bernanke, crude... I trust nothing at the moment.
One last thing... if I'm quieter than normal in the chat this week it just means I'm focusing on the markets and looking for trades or trading. The second week of the month is what I like best in terms of trading conditions, hopefully the volatility is there.
Finally, for all those wondering where some of AIG's $173 billion worth of taxpayer money is going, I have a partial list:
Bank of America
Royal Bank of Scotland
Lloyds Banking Group
That's if for now. EUR/USD key levels will be posted after London opens on Monday. Be smart with your risk and money management this week.
Wall St. finally got its rally Wednesday... not a bear market rally but a classic textbook relief rally. The media says the market's got excited after hearing a rumor the Chinese plan on creating a new economic stimulus package of their own. That might be the story but the fact is, sellers were non-existent yesterday causing the relief rally for the Dow, S&P 500, euro, cable, crude, etc. Nearly all global markets were lacking sellers.
There's a huge difference between a relief rally and a bear market rally because the missing component between the two is buying power. The reason why yesterday's upside gains on the Dow and S&P 500 was a relief rally was due to the fact the intense volume selling disappeared and the profit-takers were in abundance.
In a bear market rally not only does the volume selling disappear and the profit-taking come in, but the bulls recognize what's happening and use the opportunity to pile in on the long side to use their liquidity to drive prices higher, trigger stops, and cause short-covering. What happened was a definite lack of volume selling pressure but also a lack of volume buying pressure to that replicated the type of selling momentum we saw Monday and Tuesday.
While the bears were taking-profit and removing short-side liquidity from the market the bulls mostly sat there all day and watch prices drift higher. There's clearly no groundswell of even slightly bullish sentiment on Wall St. The Dow and S&P 500 were perfectly set-up to make substantial gains on Wednesday and the bulls let their opportunity pass them by.
Right before Wall St. closed yesterday I made a comment in the chat about seeing how who had the nerve to hold their S&P 500 and Dow longs into the close... sure enough the S&P 500 sold-off right into the close with the futures falling from 723 to 702 in a matter of just a few hours. Traders are starting to get too predictable these days.
But with a new day we get a whole new set of challenges we need to contend with...
As far as the EUR/USD is concerned the only thing that matters today is what happens at 0745 EST and 0830 EST. Trichet will take center stage as all global market participants watch and listen for any signs or clues for Trichet's bias on rates going forward.
My forecast is for a 50bps rate cut, dropping the ECB's key lending rate to 1.50% vs. the Fed's effective 0.00% Fed Funds Rate. Anything more or less than a 50bps cut is going to cause a considerable amount of speculation and panic in these markets and that would be a whole separate issue we need to contend with. I don't think Trichet is in the business of causing panic so we should expect that 50bps cut.
No matter what I think Trichet has to cut at least 50bps today. He has no choice because his precious Eurozone is crumbling under the weight of the global financial turmoil. His biggest producer, Germany, is in the midst of a sharp recession with no signs of letting up in the near future. All those forecasts I gave last year about the Eurozone falling into a terrible recession are finally starting to play out, it's just taken a little longer for Europe to catch up to the U.S.
I'm not sure how many traders realize this but the Eurozone economy is actually larger than the US economy when you break it down in terms of GDP valued in the US dollars. The Eurozone is (was) quite larger than the US in terms of GDP with Germany being Europe's biggest economy and the world's third largest.
Now they're screwed and Europe's in worse shape than many expect and some are admitting. Just this morning month-over-month German Retails Sales printed -0.6% vs. an expected 0.3%. I won't take the time to go through the laundry list of all the reasons why the recession in the Eurozone will get worse, there's plenty of that in past updates, but my point is I don't believe Trichet can say much to instill confidence in Europe. Trichet will need to really dig deep to find any bright spots in Europe. If he paints anything but a bleak picture he's lying.
Potentially there is one thing Trichet could say that would send the EUR/USD on a free-fall -- any mention of a threat to European sovereign debt or a default in any European economy. Even if he say's something about a small player like Latvia being at risk of a sovereign default I would expect to see the euro drop sharply.
I'm convinced a default in Europe is on the horizon. I can't predict who or when but I feel like it's coming sooner rather than later. Europe is holding at least $22 trillion in the same exact toxic assets that made US banks and financial institutions insolvent and in need of a government bailout. Anybody that thinks Europe's banks will magically escape the same fate is either crazy or knows something I don't know.
If you're a trader, watch that Trichet press conference, it's an absolute must for today. If anything else, during the Q and A session you'll get to see a few emotional outbursts from the guy and that's always entertaining.
Today I'm nothing but bearish on the euro, bottomline. That doesn't mean I'm loading up on euro shorts in anticipation of today's ECB rate event. I still have an open euro short from the call we made last night but it will be closed for +1 in case the EUR/USD turns back higher towards the 1.2650 level.
So far in early London trading the euro is mostly under pressure and remains towards the downside. It's been failing above the 1.2624 level so far this morning but obviously we have several hours between now and the Trichet press conference.
The S&P 500 futures have continued to sell-off right through the Asian session and hover back near the 700 level. Crude won't quit and gold bears failed to send that thing through the $900 level after spiraling down $100 the past few trading sessions.
Wall St. has to contend with Initial Claims, Factory Orders, and another boring speech by Geithner. Wall St. will not likely open with the Dow and S&P 500 too much to the upside. It's possible the bears and the bulls are going to sit there and wait for the other to make a move today. Yesterday's relief rally ended up being pathetic as both equities indexes fell apart at the end.
I will post some EUR/USD key levels later on in the London session. So far we've managed to make decent profit this week in the midst of the chaos and I plan on trading again today. These conditions are here to stay and I enjoy the challenge, so we'll see what we can do.
Just a quick note on VeriteFX... we're officially launched now. I wanted to get a quiet start, not make a big deal out of it. Just after the first day we had over 100 traders as members and we're represented on every continent on earth except Antarctica.
Spread the word and let other traders know we're here and trading. We've got a great group of traders already settled in and things are going well. Traders that are new to the community or new to our style of trading should take the time to read the following links:
The VeriteFX trading community is free and open to all traders. If you would like to join us you can sign up here.
The blog is now open for traders to post comments and questions. If you have a question about something you read in the blog, about trading, the markets, etc. feel free to post and I'll do my best to answer in a timely manner. Any offensive crap or childish stuff will be deleted, we're not going to play that game. This is a professional trading community for the serious-minded trader.
That's all for now. Be safe in the markets today and use good risk and money management.