The Forex markets and Wall St. have two major events that bookend the week – first the Obama economic stimulus package and Geithner bank bailout plan take center stage Sunday through Tuesday while the G7 meeting in Rome dominates the end of the week and into early next week.
On Friday the markets got the worst NFP print in 34-years along with the highest unemployment rate in 17-years. The two bright spots in the employment sector were education/healthcare which added 54K jobs and government jobs which went up by 6K. In 2008 the US economy lost over 3.5M jobs and there’s currently 12M total unemployed in the US with 1-in-15 Americans are out of a job and looking for work. We are not in a Great Depression scenario in the employment sector because in 1933 the unemployment rate in America was 25%. The government says unemployment is 7.6%. In my opinion I don’t think the government will show an unemployment number that exceeds 9.7%.
Friday’s NFP was the biggest job loss since a -602K print in 1974. Next month we could exceed that number. I’m not ready to call a bottom in the employment sector. NFP probably doesn’t even count the quarter million or more jobs lost in the financial sector over the recent months of turbulence in the markets. I’m sure there’s a shadow statistician out there that knows the real unemployment rate in America and what it should rise to… my guess is the real unemployment rate is higher than 7.6%.
I read that 14% of small businesses report they will layoff employees over the next three months. I think that number will be higher. I see more layoffs in the future and further contraction in the employment sector. Before we put NFP to rest until next month, I want to post a question emailed to me from a trader from India:
“I wanna thank you for your timely advice about NFP risk, I closed my open shorts n saved huge DD. I have a question mod, when NFP was released so bad, I was thinking that risk aversion will take place and it will hammer the euro but after a brief period of falling euro made a strong recovery following S&P 500. I can’t understand why the equity and euro made such a big up move despite huge job losses. As I m training myself I need to know the reason behind this move which I m not able to comprehend the move.”
I can only give my opinion, so take it for what it’s worth. A few months ago I wrote in one of the updates that when companies go full steam ahead with mass layoffs it could start the turnaround for Wall St. If you run a publically-traded company and you’re in a recession, you lay off employees and your stock rises. It’s just one of those human behavior things that effects price action.
So we get an NFP print of almost -600K and all during last week and the week before we heard story after story of mass layoffs, and Wall St. rallies. It makes perfect sense to me because there are two issues at play here and the first has to do with psychology of the markets. While it’s a tragic situation so many people around the world have lost their jobs, this is what Wall St. wants to see and this is what makes investors bullish.
If you look at the price action of a stock that has been steadily moving to the downside and then the company makes a big announcement about job layoffs, you’ll see the price action of that stock turn higher almost instantly in many cases. With the economy shedding so many millions of jobs I suppose Wall St. has something to be bullish about for the future. It’s a sad reality knowing so many are out of work and that Wall St. somehow capitalizes on this but that’s the brutality of the markets we trade in.
I’ll give the NFP factor a 20% weighting in terms of it having the ability to get the markets moving to the upside on Friday. Logic would tell you a terrible NFP print sends fear and panic through Wall St. and we’d see a sell-off that brings down equities, commodities, and the euro while the dollar and yen gain.
As soon as I saw the number and thought through things for a moment I alerted that trader and others to cover on their euro shorts and not to add any new euro short positions. Through the rest of the day we saw the EUR/USD rise from the 1.2770 level to the 1.2970+ level.
The factor I’m giving an 80% weighting to is exactly what I talked about in Thursday and Friday’s updates… these markets had to break out one way or the other, they were due, they could no longer bounce up and down in the range they’ve traded in. As I mentioned I took some time last week to study the price action and price behavior of the S&P 500 and Dow. My conclusion, as I stated, was that the markets have been in a range too long, they repeatedly tested the bottom too many times the past few weeks, they’ve failed, and a bigger, extended move is now due.
My feeling is the natural order of price action and price behavior called for the move we saw on Friday. What I saw in my quick study of those markets showed they were ready to bust out but what I didn’t know was which way. I had a feeling they needed to go up because the Dow and S&P 500 were in a season of testing the bottom and failing, so the logical move would have to be up if it can’t go down, right? I think if I had a few years worth of historical 30-minute price opens for the S&P 500 I would have been able to know with some certainty which way the move had to go, but it’s all a learning process for me.
At this point I see more potential upside for equities in the weeks to come as long as Dow 8,000 holds, just my opinion. The S&P 500 is down 6% so far in 2009 and both the Dow and S&P 500 have made run after run at breaking support, failing each time and then bouncing back. There’s one last thing I’ll mention, I’m working through a deeper look Forex market price action and price behavior. Last month when the Bank of England dropped their interest rates to 1690’s levels it got me thinking about price action in a different way.
Last month when I saw the BOE drop rates to where they were in 1694, all I could think about was the common phrase “we’ve come full circle”. Right now it’s Sunday, February 8, 2009 and the BOE’s interest rate is where it was on February 8, 1695. I was struck with fascination and curiosity to discover how in the world almost 315-years later this central bank could come full circle on their interest rate. This doesn’t mean that interest rates have truly come full circle, but at least we have a measurable point of reference to work from, which is the first interest rate ever set by the BOE in 1694.
If we put the BOE’s interest rates from 1694 to 2009 on a chart and we used candlesticks to represent each change in rate, we’d have hundreds of vertical lines stacked up next to each other. Each vertical line would represent a change in interest rate which is really just the same as a change in price say if you were comparing it to the EUR/USD.
I’m taking things down a different route to better understand price action, so I’m looking at the change in rate or change in price with a circular view, not a vertical view. A candle chart gives a vertical view and crushes the price information into sticks that stack up next to each other. In reality this could be completely opposite to how price action works and how the rate of price change should be viewed.
I’m looking at price action that just goes round and round in a circle. There is no beginning or end to it, there’s no real top or bottom to any market because price has no stopping point in either direction. A market can take the price of anything as far in either direction as it wants to.
It’s February 2009 and the euro is in the 1.2900’s just like it was in the 1.2900’s a few years ago. Most traders would say it went up and came back down but I’m trying to look at price in a way that shows the EUR/USD just completed a roundtrip around a circle and that they all go in circles. What gives me confidence in this is the fact the same price patterns get repeated over and over again, giving the same exact results every time, 100% of the time.
People will say, “What time did the sun come up this morning?” Or, “What time does the sun go down this evening?” Does the sun really go up and down? Of course not, the earth spins around it at the perfect speed, repeating the same process every 24-hours and 365-days. But the fact the earth spins around the sun to a measurable degree, we can know when to expect to see the sun spin back into view and light the world we live in each day.
The euro’s 30-minute price opens are phenomenal for seeing patterns that develop in order to play retracements in price but I believe we can also take that same price action data to reveal when patterns are forming to show a direction/trend break, with or against whatever the real-time market direction is showing. As I learn more about how and why price changes I think I’m starting to see that even the real-time price action displayed on my trade platform is a snapshot of the past and the future change in price has already formed. Hopefully I’ll have more on this research in the future.
Bear market rally = euro rally?
The euro itself has no real reason to rally but its market correlated variables might and this means they could carry the euro with them. On Friday Wall St. rallied right into the close. The Dow closed up 216, the S&P by 22, and the yield on the 10-year was pushing near the 3.00% level. The Dow closed almost 300-points above the key 8,000 level. Those are all very “bullish” signs for equities, including the euro.
Do we have a 1-day rally or do we have something sustainable? Well in my opinion nothing fundamentally is fixed and the recession is set to deepen, so I’m calling this a bear market rally and not the turning point or end to the financial crisis. I think the market will take another leg down at some point during the summer of fall or both. Whatever billions are pumped into the economy with Obama’s stimulus plans may temporarily inflate things during the spring but from what I see of the plan, there’s nothing in it that provides for a long-term fix.
In my view Wall St.’s bear market rally can sustain over a multi-day period as long as Dow 8,000 holds and Congress gets the stimulus bill passed. Reports of job losses won’t stop Wall St., weak crude hasn’t been much of an issue for the S&P 500 lately, and the market couldn’t break the 7,800 downside level on the Dow or break downside support levels for the S&P 500 futures.
On Monday Geithner is expected to unveil the Treasury’s latest bail out plan to ensure the banking system doesn’t collapse. Nobody really has any idea what’s in Geithner’s plan, it’s all speculation. Geithner’s plan better be light on the government intervention/regulation stuff and it better offer some kind of solution to dealing with the hundreds of billions worth of mortgage-backed securities sitting on the balance sheets of the world’s banking and financial institutions.
A Treasury plan that’s heavy on government regulation and one that gives the impression of nationalization is going to send panic waves through Wall St. and probably the rest of the world’s major equities markets and we’d likely see an end to equities rallies. A plan that provides a credible procedure to handle those securities would be a step in the right direction and could help sustain a bear market rally. If equities continue to rally I would expect the JPY to weaken, which would lead to a rally in the EUR/JPY, the S&P 500 futures, and this would likely carry the EUR/USD up as well.
Bad euro debt—
One issue that keeps the euro at risk is the debt issues facing EU nations like Italy, Greece, and Belgium. A few weeks ago some of the ratings agencies like S&P and Moody’s gave warnings on possible downgrades to sovereign debt in the Eurozone. I don’t see that issue going away even though it’s not being talked about much right now. According to the IMF, Italy’s debt-to-GDP ratio is 104.3%. Italy has the sixth worst debt-to-GDP ratio and the number is so staggering it puts Italian sovereign debt at risk for a downgrade, which puts the euro at risk of a sell-off. Believe it or not, both Germany and France have debt-to-GDP ratios that are in worse shape than America’s.
On its own two feet, I don’t see the euro possessing the ability to move strongly against the dollar. I see too many problems with the Eurozone economy, European sovereign debt, and with their banking system to have a bullish view on the euro. I think if the markets take on more risk, which means pushing the S&P 500 up, then its possible for the euro to sustain an upside move against the dollar. The euro will need the help of equities and commodities to move against the dollar. Rising yields on Treasuries would also help support the euro this week.
I’m expecting the markets to normalize a bit this week now that we’ve got ourselves past the ECB interest rate and NFP events. Trading conditions in the Forex market during ECB/NFP weeks are usually the most difficult, so I’m always glad to see the second week of the month as it’s much easier to trade.
Fundamentally we have several key events on the calendar. The two biggest events here at the start of the week are the economic stimulus package and the Geithner bank bailout plan, sponsored by the US taxpayer. I believe the economic stimulus plan will get approved by Congress this week and sent to Obama for his signature. It will be far from a bipartisan plan. Obama will be fortunate to get four or more Republican votes. On Monday Geithner speaks about the bank bailout plan at 1230 EST/1730 GMT.
On Tuesday at 1300 EST/1800 GMT Bernanke will be on Capitol Hill to testify before a congressional committee on how the Fed is doing in the current state of the economic crisis. All global market participants will be watching. It’s been weeks since we last heard from Bernanke and the world markets are anxious to know what’s on his mind. Conditions in the markets have continued to deteriorate since Bernanke last spoke so we can be sure whatever he says is sure to cause a reaction on Wall St. which will cause a reaction with the EUR/USD and other pairs in the currency market.
On Thursday Trichet speaks and of course we have the G7 meetings in Rome starting on Friday and going through the weekend. I’ll cover the G7 later in the week. As far as actual data is concerned, we get trade, retail, GDP, manufacturing, jobs, and growth data for the US and Eurozone throughout the week.
The EUR/USD is vulnerable because there truly are bailout skeptics in all the markets and they have access to liquidity. These market participants are the true bears, they are the ones that hammer the euro, gold, and crude when they rally. They are the ones that time the liquidity in the market to accomplish their goals and they’ll all pile onto the bandwagon that forms when equities, commodities, and currencies all go down together. We see this happen several times a month, so if we go through a bear market rally time, the resulting sell-off should be just as fun.
The market will be tested when we get Retail Sales later this week. I’m anticipating worse than expected numbers. Sales at luxury retailers are now down almost 25%... I could fill a mini novel with staggering news and numbers out of the retail sector. It’s ugly as sin and if the numbers are worse than expected, Wall St. will be tested.
As far as trading goes, I’m not adding new EUR/USD short positions as the market opens. My risk appetite will be more receptive to risk this week now that we’re past the ECB/NFP stuff. My overall trade plan will be to buy the euro on the dips/retracements. Should the EUR/USD make another 300+ point up-move or make a string of consecutive higher opens that form a pattern, I will certainly take a euro short but my trade bias right now at the start of the week is to buy the euro.
The 1.3024 to 1.3068 levels are important testing zones to the upside. Should the euro fail to sustain a break above the 1.3024 level it should easily slide back under the 1.3000 level as that area has been proven to be near-term resistance. A sustained break of resistance zones sitting throughout the 1.3000 level could open the doors to test the 1.3218 to 1.3258 levels on the upside. On the downside the 1.2852 and 1.2764 levels remain key in my view.
All traders should practice smart risk and money management this week as any of the big fundamental and geo-political events carry the strong potential to send the markets on an extended move.
We’ll start with today’s biggest EUR/USD event and the one that caused a few 100-point price swings… as expected the ECB held their key lending rate to 2.00% but the real story, in my opinion, is what happened towards the end of Trichet’s press conference.
At the beginning of the press conference Trichet said, “2.00% is not the lowest level we’ve decided and 0.00% is not a level we would consider appropriate, we will see what to do at the next meeting, we’ll have new data and new projections, and we will do whatever we feel necessary”. “There are a number of drawbacks related to zero interest rates and we trust at the moment I'm speaking that we should avoid them”.
The most critical moment came when a reporter asked Trichet whether he’s leaning towards a 50bps or 25bps cut in March. Trichet’s response: “It would be the former and not the latter”.
Great, so just halfway reading between the lines we see Trichet’s favoring a 50bps cut in March. But then a few minutes later another reporter asked Trichet to clarify his response to the previous reporter’s question about him leaning towards a 50bps cut. The reporter said, “There is a lot of confusion in the media over your earlier comments on rates”
Trichet’s response to her, “I said NOTHING” and then the next reporter asks him to clarify his statements on March’s rate decision and Trichet gave her a very sharp-tongued response saying he made no comments on rates and the discussion was over.
Is this pure manipulation through double-speak or did Trichet realize he screwed up by revealing his bias? Or could it be both? I’m not sure what that was all about. I’ve never seen anything like it during a Trichet press conference. Trichet’s behavior is growing increasingly odd these past few weeks and situations like this will do zero to give the markets any clue what to do with the EUR/USD.
Euro rates coming lower—
Thanks to Trichet, the situation we’re in now for the short-term is purely speculative on how the ECB will handle rates in a month’s time. My feeling is Trichet will lower rates by 50bps in March. I don’t see how in the world this can even be avoided.
The BOE cut their rates by 50bps on Thursday, dropping to 1.00%. To my knowledge BOE interest rates are now the lowest ever in the bank’s 300+ year history. I’m no expert on the economic issues facing the UK but from what I know about their type of economic and political structure, it doesn’t seem like a very good idea to keep rates in the UK of the 21st century below where they were in the 17th century.
I think the ECB has to follow their European counterpart in further reducing rates. I am not expecting to see the ECB key lending rate below 1.00% but I would expect Trichet to take rates to at least 1.50% in 2009. At his press conference Trichet told the world that inflation expectations are in line, economic activity has weakened substantially, tight credit conditions remain, negative q/q GDP growth can be expected, and there is a high level of uncertainty for the European economic outlook. Sounds like a recipe for a rate reduction to me.
But what Trichet does not want is Eurozone or German CPI to fall much below the 2.00% level. If CPI goes too far below 2.00% it’s going to make Trichet very uncomfortable and concerned about a potential deflation situation. I’m not too worried about a deflation situation right now. Commodities have upside potential and so do food prices.
In terms of real, true inflation, all we need to do is look at the trillions in fresh USD printed by the Treasury to know that we’ll soon see a return of inflation… prices will rise, equities will rise, commodities will rise, and the dollar should fall over the longer-term view. The Treasury is creating too much debt out of thin air and the Fed is asking for too much cheap USD to pump into the credit and money markets to keep inflation away for too long.
For now the markets will continue to run on pure fear and greed while central bankers like Trichet keep using verbal manipulation to keep market participants from taking the euro too far in either direction.
Yesterday’s commentary sparked a few requests via email for me to possibly expand on what I was saying about price action and equities. A fellow trader gave me a link to a website for Charles Nenner. I’ve never heard of Nenner but what I could gather from his site, he’s calling for a strong upside rally in the S&P 500, somewhere around a 20% gain between now and mid-March I believe.
As far as I can tell Nenner is not basing his call on industry-standard techs but on some kind of proprietary price action/human behavior based system. Well that sounds good to me. I’d never make a call saying the S&P’s going up 1,000 or so points in the next couple of weeks. That’s not something I have any ability to predict and if I could, I’d go all in. Where I find myself agreeing with Nenner, as I pointed out last night, price action and price patterns are signaling these markets are quickly nearing a point of decision and a larger extended move is now coming due.
In one email a trader asked me to explain why I put more focus and attention on the S&P 500 even though I frequently mention the Dow Jones Industrial Average. If you’re a trader like us, the S&P 500 is the one to watch. It’s all about the S&P 500 as it’s the “real” gauge of the market. The average American or more casual market observer will watch the Dow and not the S&P 500. So, I pay attention to what the real money-movers are watching and what the casual, ignorant investor is watching as they both make decisions that affect market direction.
At one point on Thursday the S&P 500 futures went on a straight shot from 817 to 845 and that’s a perfect example of why I was saying that price action is indicating strong moves ahead because of the way the markets have been tightly ranging since the end of last November. I cautioned a few traders not to short the euro below the 1.2800 level this morning right after Trichet’s press conference and the reason was because the S&P 500 futures were winding up to make a run after failing repeatedly to break support in addition to the euro repeatedly failing to break the 1.2760 level.
These sharp price moves should be expected – sharp rises and steep falls. This is exactly what the price action patterns are indicating in addition to the growing probability of a trend-break type move between now and the next 4-week trading weeks. The Dow went down to test 7,850 today and bounced back by over 100-points by the 1100 EST timeframe on Thursday. Then it dropped, then back up, blah blah blah… I believe it’s all leading to a bigger move in the near future.
In my view, the S&P 500, S&P 500 futures, and EUR/JPY can be used as three of the best market indicators right now. The Dow Jones is just a price weighted index and is a terrible gauge on overall bullishness or bearishness in Wall St. But 1 in 6 Americans are holding equities in one of the major financial institutions including Bank of America which is down 66%. So the average American investor is watching the Dow while we should be watching the S&P 500 as it’s a dollar weighted index and not a typical price weighted index. Speaking of the S&P 500’s dollar-weighting, we can clearly see why that market is so tightly correlated to the USD and JPY.
The minimum it would take to be included in the S&P 500 was a market cap of at least $5 billion. The minimum has dropped to $3 billion and now there are several corporations on the S&P 500 currently under the $3 billion market cap level. That’s evidence right there that the S&P 500 has been dying and as it’s been dying the JPY has been coming back to life. It has to be that way, it can’t work any other way and won’t work any other way under current market conditions.
The USD should be dying but it can’t quite happen because the markets are far from being fixed. Even if the S&P 500 breaks out to the topside and it brings crude, gold, and the euro with it, all making trend breaks, I won’t be convinced the move is sustainable through all of 2009. The markets have not had a strong bear market rally the past few weeks and once again I see the price action is signaling a move, so the bulls may get a temporary reprieve if people like Nenner are proven correct.
The inflation created by the over abundance of cheap USD will get stocks moving higher at some point. The timeframe for that is nothing I can predict and won’t speculate on. But as you see inflation numbers creeping up you may see an increasingly bullish Wall St. One of the biggest threats to the entire global economic system is Treasuries. If the fake bull-run in Treasuries is over and the foreign demand from China, Japan, and OPEC nations dries up, what will happen next?
Nobody should really want to buy Treasuries. The Fed will buy them only if they have to. If Treasury yields start to spiral out of control, and in this case that would mean rise rapidly, it could cause panic on Wall St. and on the global markets. It could be a nasty situation and hopefully Treasury yields will rise as orderly as possible.
NFP will give Wall St. a run for its money tomorrow. A surprise in either direction should be a good catalyst to see a chaotic day in the markets.
NFP and EUR/USD:
Just a day before another crucial Non-Farm Payrolls we see Initial Claims surge to 626K vs. an expected print of 583K. Initial Claims are at 26-year highs currently while Continuing Claims went higher, clocking in around 4.8M, shattering all records since the data was first recorded in 1967. In yesterday’s ISM Services report I saw the employment component was the weakest and printed at recessionary-lows. I could go on and on about how bad the US jobs market is. I’ve been saying it will get worse since last September and I still believe worse is forthcoming. We should see the evidence Friday morning.
Here’s what bank traders are expecting:
-750K to -450K
7.2 % to 7.6 %
Average Hourly Earnings:
0.0 % to 0.3 %
33.0 hrs to 33.4 hrs
As you can see, the bank traders have a very wide consensus band with NFP and the Unemployment Rate and therefore there’s no easy “go short” or “go long” call on the EUR/USD. Sorry but it just doesn’t work that way anymore and will not likely work that way any time in the near future.
NFP: -523K to -589K
Unemployment rate: 7.3% to 7.5%
Trichet has put downside risk on the euro. Weak equities and downside on the S&P 500 futures keeps the euro at downside risk. A surprise downside print on NFP could easily send equities lower, taking crude and the euro with it. A surprise upside print would likely have the reverse effect. That’s the view I’m approaching NFP with today. As far as trading goes, the EUR/USD may see some times of ranging during Asia as we lead-in to NFP. During Frankfurt and London be warned that certain market participants may want to square their books or position ahead of NFP and this could cause volatility.
Expect sharp price swings on Friday, keep your risk low or even better, don’t trade NFP.
I was having trouble writing today’s update so I started watching the Kudlow Report on CNBC. Kudlow usually gives me something to talk about and he didn’t fail to deliver tonight. I only made it through the first 13-minutes and within that brief period of time I heard Kudlow repeatedly try to get his guests to say the market was bottoming and now is the time to buy stocks.
Kudlow also wanted his guests to tell the TV audience that equities are due for a big move… obviously Kudlow is thinking a move north. I find myself agreeing with Kudlow in one respect – I’m also expecting a bigger, extended move happening in the short-term. Now if I knew the direction I’d put every last penny I had into the trade but where I differ from Kudlow is that I can make just as strong a case for this move happening to the downside as he can make for the Dow and S&P 500 to go up.
I’m not going to waste the time debating the bullish or bearish side of equities but I’d like to use this scenario to illustrate how we can use price action patterns and price behavior as a tool to gauge future changes in price within major financial instruments like currencies, equities, and commodities.
I had a fellow trader pull 30-minute price action data for spot crude, spot gold, S&P 500 futures, Dow Jones, S&P 500, and the EUR/USD. Keep in mind this is a rudimentary analysis and comparison but I’m not looking for any “gems” or a trade, I’m looking for signs and I’m using the price action of those financial instruments to gauge potential large fluctuations in price and when these changes are likely to occur.
I don’t need to read the euro’s price action to know if a bigger move is coming. If one of the euro’s market correlated variables has price action patterns that paint a better picture I’m happy to use that knowing how the correlation will affect the moves of the EUR/USD. It works either way.
I’m going back to about mid-November 2008 as that’s when the markets supposedly “bottomed”. Well, that’s when the Dow hit the 7,500 level and subsequently bounced without touching the lowest low again thus far. After hitting 7,552 on November 20th, the Dow has tested the 9,000 upside level four times and has failed all four times. Based on the numbers I have, I’m only seeing the Dow’s made three solid tests of sustaining a break below the 8,000 level on the downside between 20-November and today.
Now, the Dow’s failed once more to the upside than it has to the downside but its recent attempts at sustaining a break have been to the downside, not the upside. That’s can be a clear sign within the price action sign that says the market is quickly nearing a point of decision and will have to make a bigger, extended move in the short-term. As I said, the Dow’s most recent attempted price breaks have been to the downside with three failures. Price action patterns and normal price behavior says the Dow’s next attempt at sustaining a level break should be to the upside.
Price action also shows a pattern that would allow the Dow to make a fourth attempt at busting through support as its 30-minute price opens show downside price momentum. Today it closed under 8,000 again and is only 400-points away from its November lows.
Here’s the point to all this:
Between 20-November and today, the Dow Jones has been stuck in a range of 9,000 on the topside and 7,900 on the bottomside. We’re talking about 1,100-points for over eight straight weeks of trading. What price action patterns and price action behavior tells me is simply that the market is quickly nearing a point of decision.
The way human behavior and price action work hand-in-hand make it a high probability the Dow Jones breaks out of its 1,100-point range sometime between now and the next 4-weeks from today. This is purely my opinion. But that move we see in the Dow and S&P 500 will likely dictate where we see the EUR/USD, crude, and Treasuries go.
Maybe the stimulus package will get the markets moving up or maybe some disastrous geo-political event will get them moving down, this I cannot predict and will not speculate on. But what I’ve learned from watching price action and human behavior patterns is that the longer things stay the same, the higher the probability they need to change.
Spot crude has been in a range of $54 on the topside and $32 on the bottomside, the S&P 500 futures have been stuck in roughly a 130-point range, and gold has hit a brick wall at $920 all during this mid-November until now timeframe. They are all due for a range-break sooner rather than later in my opinion.
Markets are not random—
I love looking at price action and price behavior patterns; to me it’s very interesting and reveals what could be considered “secret” knowledge. Of course there are no secrets to trading but in my view, price action is the only real honesty a trader will ever get out of the markets. Looking for that knowledge within price action patterns doesn’t always give you a trade or tell you to be bullish or bearish but the beauty of it all is that you can prepare ahead of time and stay one step ahead of the herd.
Those 30-minute EUR/USD price opens are the evidence left by the entire collection of humans that make up the euro’s “market”. For the past two years traders have told me it’s a waste of time looking for price action patterns because each move is a totally random event. No disrespect to any trader that believes this to be true out of naïveté or ignorance but this mindset towards the markets is idiotic.
I can easily prove that there’s nothing random about price action – according to the EUR/USD’s historical 30-minute price opens, the EUR/USD’s made a specific price action pattern that’s occurred a total of 85 times. This exact same pattern that occurred 85 times first occurred on 6-June 2002 at 0900 EST and last occurred on 15-January 2009 at 1330 EST.
The pattern: the EUR/USD opened higher by at least 10-points consecutively over four 30-minute timeframes. What this price action pattern that’s been repeated 85 times the past 6+ years shows is that 77 out of the 85 times the euro’s repeated this pattern it’s dropped at least 20-points and it’s only failed 8 times which is a 90.59% probability factor for success. Talk about “secret” knowledge that put the odds in your favor and the market in the palm of your hand…
Those numbers in that paragraph above are no BS, the data is real and out there on any EUR/USD chart for those who want to verify it. But that real example is proof enough there’s nothing random about price action, markets, or price behavior.
The price action of any tradable commodity or future is the window that shows the imprint left by humans. The price action captures that imprint and thanks to charting programs or computer programs, now we have a way to collect the human imprints to create an image revealing the probabilities humans are about to repeat their actions yet again.
Take the EUR/USD for example… while a candle chart, moving average, Fibonacci line, or oscillator may use price as its feed for information, those lagging indicators lack the component to know how many times a particular pattern that’s forming within the 30-minute price opens has occurred and if so, how many times it’s successfully been repeated or failed.
Fibonacci’s numbers are inferior to a price pattern-based system because no matter how “prophetic” Fibonacci is supposed to be, Fibonacci couldn’t tell me the EUR/USD has a 90.59% probability of dropping 20-points after opening higher 10-points over four consecutive 30-minute time frames based on it reoccurring 85 times.
In my opinion a trader that uses a price action based system that uses real-time and historical 30-minute price openings will consistently trade circles around those using industry-standard techs or some scatterbrained variation of thirteen different systems they read about on Forex Factory.
It’s not about who’s right and who’s wrong and who’s got the best system. But I wanted to use today’s update to make this commentary in the hopes it will shed some better light on why I choose to trade the market the way I do. If you have any questions feel free to send me an email.
As far as the market goes, obviously we have monumental event today – ECB rate decision. My call is that the ECB holds rates at 2.00%. The real event will be Trichet’s press conference. Most of the Eurozone’s fundamentals have worsened since Trichet’s last press conference. The Eurozone’s economy has worsened and there are new fears on sovereign debt in Europe, civil unrest, and more losses in the European banking sector. Trichet can say very little good and I would expect he hints at rates potentially coming lower in March.
Other than that, I have no other market comment right now. The ECB rate event is all that matters to me anyway. The risks of trading today will be tremendously high as all global market participants will be looking for any sign and clue from Trichet on the ECB’s next move for interest rates. Traders should expect high volatility and sharp price swings as liquidity levels fluctuate between 0830 EST and 1900 EST on Thursday. It could be a wild NY session…
As noted in the updated the 1.3030 level proved profitable for euro shorts as the EUR/USD has lost 220+ points to the dollar. Three 30-minute openings ago gold, crude, and the S&P 500 futures all reached resistance and the whole bunch came down together.
As thedownside momentum has slowed I caution against adding new euro shorts above 1.2852 as some upside retrace to at least the 1.2880 level is possible. Overall risk remains on the euro.
On Tuesday Wall St. once again took center stage as participants from the commodities and currencies markets were largely taking their cue based on Wall St.’s risk appetite and confidence level in the government’s ability to fix the global economic system.
The good sign for currencies like the euro and cable in addition to crude is gold is when Treasury yields drop and the Dow is able to recover itself back above the 8,000 level to close today at +148 on the day. In my view the S&P 500 futures were one of the EUR/USD’s strongest leading indicators.
I’m not a chart person but for those that are, I think if you would stack a EUR/USD chart on top of an S&P 500 chart from 2-Feb to 3-Feb you’d see why I’ve been telling traders to use the price action of the S&P 500 futures to give indication of the euro’s strength and probable market direction. I will continue to closely monitor the S&P 500 futures the rest of the trade week.
As we forecasted in yesterday’s update German Retail data printed worse than expected and Pending Home Sales printed better than expected. Wall St. enjoyed the 6.3% increase in Pending Home Sales for the month of December. I’m sure there are calls that a bottom in housing is in. I’m not even close to being ready to call a bottom in housing. I would be shocked to see this type of increase next month… I don’t believe we’ve started a trend of great housing data for the next couple of months. Home ownership remains at recessionary levels after peaking during the height of the housing boom in 2005.
Jobs continue evaporating—
PNC Financial Services said it will cut almost 6,000 jobs after reporting another loss of $248 million. PNC is cutting almost 10% of its workforce. PNC reported they will be cutting jobs through 2011.
Motorola took a colossal Q4 loss of $3.6 billion. For 2008 Motorola lost $4.16 billion compared to a 2007 loss of just $49 million. In a bizarre move Motorola suspended its dividend and announced their CEO was fired on Tuesday, initially sending their stock down 11%. Heavy layoffs are rumored at Motorola in the coming months.
They can add another job loss to the NFP numbers on Friday because Nancy Killefer is also out of a job. Who is Nancy Killefer? Nancy is the latest in a string of Obama nominees who lost their position because they can’t remember to pay their taxes. Nancy is another tax-evader and it’s too bad the Republicans can’t use this as firepower because they are all chronic tax-evaders too.
Killefer was an executive with a big consulting firm named McKinsey & Co. She sent Obama a letter saying, "I had come to realize in the current environment that my personal tax issue of D.C. unemployment tax could be used to create exactly the kind of distraction and delay that must be avoided in responding to urgent economic problems.”
You think, Nancy?
General Motors is getting creative in their attempts to dramatically reduce their workforce as they realize nobody is going to buy their vehicles the next couple of months. GM is offering buyouts to every single one of its hourly employees. The buyouts will mainly target GM's 22,000 employees who are eligible for retirement but any union employee is welcomed to take the offer. GM’s offer is $20,000 in cash and a $25,000 car voucher for those who retire early or quit the company. Employees have until 24-March to decide and employees who accept the buyout will leave the company by 1-April. I would expect more automaker layoffs to continue the rest of Q1. This won’t be the last.
Here are the latest sales figures from the top automakers:
Subaru: +8% (go to Colorado and you’ll see why this is possible)
On Wednesday I believe the Dow and S&P 500 will once again lead the way, whether we go up or down. All markets will have some fundamental data to contend with. First we get Eurozone Retail Sales which I am forecasting a lower than expected print. Although not reacted to strongly by the markets, I’ll be anxious to see the Challenger Job Cuts data.
At 0815 EST we get the worthless ADP Non-Farm Payrolls report. The only reason I’ll pay any attention to it is because Wall St. will pay attention to it as they think it’s some kind of useful indicator for Friday’s NFP. It’s not. The way the ADP data is collected compared to the way the BLS fabricates the NFP report is not even close. Comparing the two is idiotic. Wall St. will freak out about it one way or the other.
ISM Services will be key as we get a fresher gauge on how the services and entertainment sectors finished the first month of 2009. ISM could very well print under 42 again and potentially under the 40 level.
As far as the EUR/USD is concerned, I don’t like either the euro or the dollar. I can make a case for both currencies to be slaughtered in the short-term. The fake bullish run in Treasuries should be enough to crash the USD Index right now. The billions of losses coming in the European banking system, the threat to sovereign debt in the EMU, and the potential for civil unrest is enough to implode the euro right now.
It’s all a big mess.
As I mentioned to some traders today, my trade plan is to short the euro on the rises after I see that the price action indicates it’s run out of steam to keep moving up. I would caution against adding new euro shorts below the 1.2950 level for the next few hours but shorts above the 1.3030 level have paid out well so far. As of the writing of this the euro is trading at 1.2960. If a price pattern shows a good trade to buy the euro for 20 or more points, I will certainly take that as well.
The S&P 500 futures will remain a key market correlated indicator in order to find market direction. The EUR/USD 30-minute price opening patterns will be the other key factor as those patterns will provide more probability for a trade. Gold remains correlated to the EUR/USD but it’s acting very weird. I guess there have been quite a few stops run in the gold market this week. I would expect some of those sharp price swings with gold to continue today.
If trading and market conditions allow I may be able to post EUR/USD key levels for tomorrow’s NY session. If the right level of overall market liquidity is there and the market correlated variables aren’t acting crazy this should be possible.
I would expect to see an increase of volatility around the time we get each data release in addition to when Frankfurt, London, and NY closes as market participants will be closing out positions, squaring up, and getting ready for Thursday’s ECB interest rate event.
Be careful with your risk and money management tomorrow as sharp price swings can be expected today.
In my view, politics will dominate the global financial markets the rest of this week as current government programs and bailouts continue proving mostly ineffective, leading politicians and central bankers to come up with even bigger and more expensive programs to fix the worldwide recession. As politics have taken a leading role in the markets, we’re going to first look at some important political issues to be mindful of as we navigate our way through the markets…
Economic stimulus package—
On Monday Obama said there are "very modest differences" between the Democrat’s and Republican’s stimulus package and those differences should not delay its passage. The package that passed the House was $819 billion and earned zero Republican votes. The stimulus package the Senate has is now up to $900 billion. I don’t expect to see anything passed by Congress this week. Obama also promised to install a review board to manage the $700 billion TARP program at the same time signaling its probable his administration will need more than the $700 billion already earmarked for TARP.
Iowa Senator Chuck Grassley sent a letter to Microsoft telling them they better layoff foreign workers first or else... this type of protectionist, xenophobic rhetoric is not a place any global economic superpower needs to go right now. Washed-up dinosaurs like Grassley must understand a global economic recession is the type of event that should cause sovereign nations to open their borders and minds to new trade opportunities.
Entrepreneurs and business-minded individuals should have the support of their respective governments to set-up new trading alliances with other businesses in South America, Europe, Asia, and Africa. When we look at the dynamic technological advances that came out of the Great Depression era and dark recession of the early 1980’s it makes no sense why government leaders will make laws that held back technological advancement and international commerce.
During my recent travels I’ve had the great pleasure of meeting individuals from various ethnic and religious backgrounds. There’s a common theme I’ve discovered – people of the world don’t want the government’s help to fix anything. They have ideas and the passion to figure it out on their own and they want the politicians and central bankers to get out of the way and let progress begin.
I remember about two years ago a trader from South Africa asked me if I believed G20 economies de-coupled from the US economy. My response two years ago was that I did not believe G20 countries de-coupled from the US economy. In fact, quite a few G20 nations will depend on the Fed and Obama administration to fix their economies. What this reality is leading to is a move towards protectionism and urgent calls made by politicians to close the doors to trade and commerce with other sovereign nations. This is all the wrong plan of action.
Politics are complicating trading and money-flows in and out of the markets. As in any recession/depression/credit-crisis it’s common for these stories of corruption and dishonesty to emerge. Why do you think scam artists like Bernie Madoff and others get caught during a recession? It’s because their access to credit evaporates. If you want to put Ponzi-scheme scam artists out of business, take away their access to credit and Pandora’s Box will magically open…
More political corruption—
Obama’s pick for Health and Human Services secretary, Tom Daschle, also admitted cheating on his taxes just like his comrade at the Treasury, Tim Geithner. For all aspiring tax-evaders, you may have a good opportunity to secure a spot in a future Obama administration. Daschle said he was, “embarrassed and disappointed about forgetting to pay $120,000 in taxes”. Actually, Daschle owed $128,000 in taxes and $12,000 in penalties and interest. How do you forget you owe the IRS over $120K?
Connecticut Senator Chris Dodd revealed he's refinancing at least two mortgages written by one of the worst subprime offenders, Countrywide Mortgage. Dodd along with other politicians received special home loans through a VIP program at Countrywide, giving them preferential treatment. As the chairman of the Senate Banking Committee and a friend of Countrywide CEO Angelo Mozilo, I have to think taxpayers would find this an outrage but very little media coverage is even given to this latest revelation of government corruption.
Banks mismanage taxpayer money—
Bank of America reportedly spent $10 million on Super Bowl parties and sponsorships. BOA has currently been given $45 billion in US taxpayer money to keep the lights on and we can see how some of that money is being mismanaged. Morgan Stanley, after cutting 5,000 jobs and taking $10 billion in taxpayer money, had a multi-million dollar party where they spent $400 per night per hotel room and hundreds of thousands on food alone.
Are these financial institutions and Wall St. giants really in “survival mode”? No way, not even close. Did BOA have to drop $10 million entertaining at the Super Bowl? Couldn’t that $10 million have been given back to the US taxpayer? Stories like this just prove to me neither Wall St. nor the US government is capable of fixing anything and this whole recession is just another game to play and another open door for banks and politicians to gain more power and money.
Consumer and retail data point to horrific NFP
On Monday Personal Consumption Spending printed at -1.00% for the month of December. That marks six consecutive months of spending declines which is a new record for the economic history books. Personal Income fell for a third straight month after printing at -0.2%. Y/Y consumer spending only rose 3.6% which is the worst annualized increase since 1961. Personal income rose by 3.7% marking the weakest gain in the past six years.
When mass layoffs hit, personal income and spending drops and this translates into an increase in national savings rates. In December American savers pumped up the savings rate to 3.7% of their after-tax incomes. In 2005 the national savings rate hit a low of just 0.3%. Guess which year was the height of the US housing boom? 2005. In 2005 national savings rates were at 70-year lows.
In 2003 I opened up a bank account with ING because they offered a more attractive savings rate than any other bank at the time. I still have that same account today and now I’ve shifted most of my personal funds there. The modest annualized interest rate ING pays me to keep my money with them has beaten the annualized rate of return from the S&P 500 five times out of the last eight years. In 2008 the S&P 500s annualized rate of return was -38.24%.
In more good news, Construction Spending printed at -1.4% showing continued weakness in consumer and commercial real estate. Y/Y construction activity is now at -5.1% as home building has tanked 27.2% and is the lowest decline since construction activity recordkeeping began in 1993.
I’m expecting Friday’s NFP to print at least -523K and to see a further tick up in the Unemployment Rate. This means Americans will increasingly turn to the government for a job. How bad is it and how much are people going to look to the US government for a job? So far 350,000 people have applied for the 4,000 or so job openings made available within the new Obama administration which roughly works out to each person competing against 87 others for the same job. It’s estimated only 10% of the jobs Obama is promising to create or save will be US government jobs.
According to the Office of Personnel Management, roughly 58% of management and 42% of non-management workers on the federal payroll as of October 2004 are eligible to retire in 2010. With the financial turmoil and dependence on the federal government for jobs I would expect those potential retirees hang on to their jobs.
Top retailer Macy’s reported they are cutting 7,000 jobs, a 4% workforce slash plus they reduced their dividend forecast to just a nickel from the $0.13 cents originally expected. Macy’s CEO explained how he went to each department in the company like marketing and finance to slash jobs. That will be a common move seen in the months to come. Dozens of other top US corporations have reported mass layoffs last week and we’ll get even more layoff reports as Q1 drags on.
The EUR/USD and its market correlated variables were mostly dead on Monday as market participants await bigger economic data and news of government bailouts later in the week. Gold, however, did take another beating closing down over $23 on the day. Even though gold continues to sell-off as it rises, it’s one asset class I can be slightly bullish on over the long-term.
The yield on the 10-year came down over 10bps the past 24-hours as we see money flows going back into Treasuries and out of equities. The Dow closed well below the 8,000 level Monday and is certainly poised for more downside testing especially if the fundamentals continue to support this view. The politicians are doing plenty to scare the crap out of Wall St. and should we get more downside shocks this week I can see Wall St. testing support levels and the November lows.
One of our favorite shot-callers, T. Boone Pickens, gave the markets a fresh new crude call today saying the commodity would move up to $65 in just two months time. Unfortunately, T. Boone did not give any update on his oil fund that’s down USD$2 billion. At this point I’m pretty much convinced that I need to lose at least a billion dollars to get some airtime on CNBC and Bloomberg…
I am not very bullish on crude in the short-term. The decrease in demand, the contraction in growth and manufacturing combined with the continued rise in unemployed coupled with a dramatic decrease in consumer spending keeps crude at risk through all of Q2 in my opinion. I would be shocked to see crude near the $70 level by the first week of Q2 2009. Keep betting against T. Boone.
I saw a great commercial during the Super Bowl that featured one of the boldest and most outlandish marketing stunts I’ve ever seen… the Denny’s restaurant is offering a free Grand Slam Breakfast for 8-hours on Tuesday. If you want to get a free breakfast along with a complimentary case of the runs, you can get it all for free at Denny’s today. Speaking of Super Bowl commercials, I thought this one was the best:
The owner of Nashville’s local Kia dealership is running a bold new sales promotion. This weirdo usually puts his kids and surgically-enhanced wife next to farm animals in his commercials but now he’s running a commercial with 40% off the sticker price on a new Kia and all you need is a job and $149 for the down payment.
These bizarre sales promotions can be a good and bad sign. It’s a good sign that business owners are willing to get creative to sell product, that I like and respect. The bad part is how scary some of the sales are becoming. Businesses are discounting themselves to unsustainable levels. The sales are ridiculously high and the margins are too thin. I mention this to illustrate why I maintain an overall bearish view on US equities as the US economy is still directly tied in to the global economic system. Wall St. = Babylon.
On Tuesday the markets will get their test as German Retail Sales and Pending Home Sales data is released. In addition we’ll get vehicle sales figures from the likes of Chrysler, Ford, and GM. Fundamentally I believe we may see a scenario with weaker than expected euro data and Pending Home Sales that prints above the 0.00% level.
For trading the EUR/USD on Tuesday, my trade plan requires I focus on the S&P 500 futures, Dow, S&P 500, and the EUR/JPY as those markets should give better indication of the euro’s direction, especially during the NY session.
For the next 12-hours especially I’ll be watching the following levels:
Downside: 1.2802 / 1.2776 / 1.2748 / 1.2703
Upside: 1.2832 / 1.2862 / 1.2899 / 1.2918
The EUR/JPY is nearing some important downside levels. The market has shown a bearish appetite towards the yen when the EUR/JPY dips below the 113.00 level. If you trade that volatile pair keep an eye on its price action between the 115 and 112 levels as we may see quite a bit of volatility and sharp price swings within that zone.
Be smart with your risk and money management today as volatility is expected to pick up after the 0530 EST/1030 GMT time frame straight through the NY session.
This week’s market environment will present additional challenges for traders, namely an ECB rate decision and Trichet press conference on Thursday and of course the beloved Non-Farm Payrolls and Unemployment Rate event on Friday. It’s not likely the markets will hear much if anything from Trichet prior to Thursday’s ECB event and this will lead to the usual speculation and positioning that goes on prior to major interest rate announcements where there is room for doubt. Expect chaos.
Over the weekend I saw a lawn sign for a company called Tour of Nashville Foreclosed Homes and I thought that was a really brilliant idea for a company. That’s one thing I can appreciate about America is that spirit to make something out of nothing. In this case we have a real estate agent capitalizing on the fresh crop of foreclosed homes in order to keep his business rolling. God bless him, I hope he does well. I look at the mess in the financial markets the same way as this guy is looking at the mess in the real estate market – there are plenty of money-making opportunities out there when we go about it the smart way.
We’re going to get grim fundamental data this week but let’s keep in mind it’s not the end of the world. For example, Chick-Fil-A (www.chick-fil-a.com), which probably my favorite fast food restaurant, just reported their sales are up 12% and they plan on opening 83 new Chick-Fil-A’s in 2009. A fast food restaurant like Chick-Fil-A does well during a recession because the quality of their food far exceeds that of McDonald’s and Taco Bell for just a little more money.
Chick-Fil-A also offers benefits like putting their employees through 4-years of college. In these dark times of recession a young person may do well choosing a career path with a growing fast food chain like Chick-Fil-A. Other job opportunities that are not recession-proof will continue to evaporate at an alarming right I’m afraid. At any given Chick-Fil-A, especially here in the South, it’s common to see a 72-year old retired homemaker working next a 16-year old high school kid making money to go on a class trip to Europe. It’s an interesting culture.
Yesterday I was at AutoZone and I asked the dude helping me which team he had for the Super Bowl. He said he didn’t care because his boss was making him work Sunday night and he’d miss the game. My response back to him was, “dude you should be thankful you even have a job right now”. He said nothing back.
Times are tough and will only get worse in my opinion. More job losses are coming, the recession is ready to take the next leg down and global equities markets are on the brink, but as traders in this market we need to stay balanced and focused on the good and the bad to gain a better overall view.
Politics and the markets:
Based on current poling data only 45% of Americans actually think the newest stimulus plan offered by the Obama administration will improve the economy. Obama promised the markets a stimulus package this week. In my opinion there will be no new stimulus package that passes Congress this week. The Republicans have declared war on the Democrats and the fight is on. The political grandstanding will be nasty in the short-term. The political fight over this stimulus package will likely cause more fear and speculation on Wall St.
The Republican’s stimulus plan provides government-backed home loans fixed at a rate of 4.00% for those deemed “credit worthy”. What the Republicans haven’t said are who would qualify for these loans and which type of credit scoring would be considered. If the government uses FICO scoring they can forget about the majority of current homeowners, who are struggling to stay out of foreclosure, from being worthy enough to qualify for these loans.
As much as I can’t stand the Republicans and the Democrats, I can see the Republicans are making fast and strategic moves. They took a beating last November but they are learning quickly and making provisions to battle the Democrats during this next round of the US recession and global economic crisis.
Last week the Republicans appointed Michael Steele as their leader. Steele is the first black man to lead the party and is known as a centrist with the ability to bridge the gap between conservative and liberal. In my view this was a good move.
Steele is a fiery character and a smarter choice then the female version of Georg Bush i.e. Sarah Palin. Steele’s already taken the opportunity to tell Republican leaders on Capitol Hill to “stick to their guns” and vote down Obama’s stimulus plan.
Any plan that involves a balance of tax cuts, reductions in government programs that will not directly impact the US economy, and direct consumer and housing sector stimulus may have the potential to make a positive impact. Any plan that does not make strong provisions against government-backed intervention to bailout publically-traded or privately-held banking/financial institutions is a plan that is destined to ultimately fail. We have thrown over USD$2 trillion at Wall St. in the attempts to supposedly save Main St. and safely guide the world’s economic system through the global recession.
The only thing the $2 trillion worth of freshly printed USD has accomplished is prolonging the global recession and keeping Wall St. from a total implosion. The central banks and governments of the world keep coming up with new plans knowing none of them will work. They realize any government-backed handout gives US and Asian equities markets and the European bourses something to be hopeful for and a reason to throw liquidity into stocks.
Maybe they are buying time or maybe they really believe they can print their way out of this mess. If the central banks and politicians actually believe they can stop the global markets from further destruction by continuing to create debt out of thin air and by flooding the money markets with cheap USD, they are flat wrong.
What does all this have to do with the EUR/USD? Everything… if the global markets remain in a state of fear and panic it means currencies like the USD and JPY will likely continue to beat up majors like the EUR and GBP. I won’t take the time going through the laundry list of all the possible implications heavy government intervention will have on the EUR/USD but most of the reasons should be fairly obvious.
We’re already seeing civil unrest in Europe and I know it stems from the growing tide of negative sentiment towards every day life and living. The French and Russians are rioting over economic and political issues. In what I consider to be one of the most civilized nations on the globe, Switzerland, there are riots in response to the leaders attending the World Economic Forum. Riots in Europe are not likely going to do much to help support the euro…
This is purely my own speculation but I think one place this could eventually go is toward the formation of a centralized or globalized type of world government system. If the government bailouts continue being ineffective it will open the door towards nationalization in the major world banking systems. When banks become nationalized a shift in wealth control occurs giving politicians more power and leverage.
For example, last Friday UK Prime Minister Gordon Brown said: “The world must unite to confront the financial crisis; urgent solutions are needed”. Thanks but no thanks, I don’t want the goons running the Fed and Treasury taking orders from the equally brain-dead idiots at the ECB, BOE, BOJ, SNB, and whatever other central bank you care to throw in there.
It might not happen during my lifetime but I think Kissinger will likely get his New World Order or One World Government. In the meantime you can expect the politicians and bankers to keep the markets exactly where they want them in order to keep the manipulation going. Fear is a powerful way to control people…
Especially during this week where we have back-to-back ECB and NFP events, I need to remind traders you’re trading a “market” created by your broker. Your broker, who makes your market, accomplishes this through buying/selling currency contracts on the interbank system, so no matter how you slice it, your tiny retail FX account goes up against:
·Central banks like the Fed, ECB, BOJ, and BOE
·The top 450+ global financial and brokerage institutions who bypass the bucket shop retail FX brokers to more directly access the FX market. In addition, they have the combined liquidity of $1 trillion+ to move in and out of the FX markets on a daily basis
·Some of the most brilliant and sought-after fundamental and technical traders on the planet who have way more liquidity at their disposal than you do (brilliant doesn’t necessarily mean consistently profitable)
·Fellow retail FX traders who are clueless, chronic over-leveragers that get chased around by the brokers all day long
Those are a few ways we can explain the fact over 90% of all retail FX traders consistently lose money in this game even though they are all using indicators claimed to be “self-fulfilling prophecies”. Trading a price-action based system is about finding repeated patterns that will show you a high probability opportunity to capitalize on fluctuations in price.
On Sunday evening take a few minutes to develop your risk plan for the week based on the overall risk of the market, the fundamental events on the economic calendar, and what your personal risk appetite is knowing this week will bring more volatility and sharp price swings.
In just a few weeks we’ll be ready to officially launch our new trading community called VeriteFX – www.veritefx.com.
After two years I’ll finally have a world of my own to trade the way I want to and put out the kind of information I believe will best help traders. I don’t want to use this forum to promote anything but I want to take a few lines to explain the point of starting a new community and what our goals are.
All the features are 100% free from any subscription fees. My vision for the community is to make it a place where traders from all walks of life, ethnic and social backgrounds, and levels of experience can come together with the common mindset of wanting to learn how to use the market to make consistent profit.
Our primary focus is on trading. It’s nice that people enjoy reading my market commentary but at the end of the day commentaries don’t put money in our pockets. Our ability to make money is all that matters. It’s not going to make any difference to me if I get 30-seconds on Bloomberg or CNBC; all I want is ROI that beat’s the best Wall St. has to offer. If you decide to join our community, go in knowing we are serious about trading and developing our skills to make consistent profit.
Right now we’re about 90% completed and we’ll begin testing the full functionality of the site this week. One of our Admins is responsible for hitting social networking sites like Facebook and Twitter with our message. If you participate on those sites be sure to find us and help spread the word.
A considerable amount of energy and money have gone into making this community possible and all those that are helping me wouldn’t be involved if they didn’t share the same vision. You can come back here to check for updates on how the site is coming along. If you have any questions you can send me an email or you can call VeriteFX.com at (615) 589-6663.
ECB rate decision:
February is an exciting month for me as I’ll finally get a much-needed vacation from America, so I’m happy to go to the Netherlands in a few weeks… maybe while I’m in Europe I can join a good riot in France, flip some Peugeots or something.
Seriously though, it will be good spending time in the Europe to see firsthand what kind of economic struggles are facing the EMU. It’ll be especially good talking with Europeans to listen to their views and opinions on economic issues in Europe. I should be back in America by the ECBs next rate decision in March and I’ll have a much better gauge for how the ECB is going to handle rates.
As far as the February decision is concerned, my forecast is for no change in rates. I believe Trichet will hold the ECBs key interest rate at 2.00% and he’ll tell the markets the ECB will take new data released in February into consideration for a possible reduction of rates in March.
If Trichet pulls a surprise move and cuts rates even 25bps on Thursday this will come as such a shock to the global markets I believe the euro could sell-off violently. A surprise rate cut at the last minute would signal some potential new information the ECB is looking at that will negatively impact the Eurozone economy in the short-term. A surprise rate cut would likely cause panic, fear, and speculation with market participants and I think confidence in the euro would erode and market participants would pile into the dollar.
In Thursday’s EUR/USD update we will cover the ECB rate decision in more detail and look at the possible implications for the euro.
I’m entering this week with no bias. I don’t have to be a euro bull or dollar bear as my trading plan calls for finding higher-probability trades based on price action in order to capitalize on fluctuations in price. There are a few key areas I’m focusing on this week in order to help my view on general market direction. Specifically, I’m watching the following closely:
·Yields and prices on US Treasuries
At the end of last week we had a situation where gold and the USD both gained simultaneously, a completely disjointed move. That is a rare occurrence and something I will be closely monitoring as we get the new week started. If this trend continues it shows market participants are still stuck in a state of fear and panic as they send money flows into “safe havens”.
Overall the 1.4700 and 1.2800 levels that I’ve been talking about for the past three months are still my most important topside and bottomside levels. For most of the afternoon last Friday the market made repeated runs at 1.2800, briefly breaking, but managing to close right on that level.
As far as more real-time levels are concerned, on Sunday/Monday we need to keep a close eye on the 1.2764 / 1.2752 / 1.2722 levels on the downside in the event the market wants to test lower. A break below the 1.2700 level would likely open the door to then test: 1.2684 / 1.2658 / 1.2624. The euro remains at risk at the start of the week but I would caution taking any new euro shorts right as the market is opening as that too could present risk.
The economic data on the books for the EUR/USD this week is heavy on manufacturing, consumer, growth, and jobs. Traders also need to beware of surprise comments and rhetoric from central bankers, especially ECB officials. If the S&P 500 and Dow struggle this week and break through support levels we could have a simultaneous situation where the USD Index is breaking through resistance levels if the euro and pound take a beating and the dollar is able to hammer the Swiss franc. Risk aversion based on an equities sell-off would almost likely lead to strong gains by the USD and JPY.
I see the EUR/USD maintaining a rather strong correlation to the S&P 500 futures and gold this week, so I’ll pay close attention to how those correlations are responding and how their price action is affecting moves in the EUR/USD. That’s all I’ve got for now. Check back for more updates as market conditions warrant.
Even though it’s probably not going to happen, I would love to see the Arizona Cardinals brutalize the Pittsburg Steelers in the Super Bowl. No matter what, it should be an interesting game.
Some markets came back to earth Thursday while others went to Mars… Obama scared the crap out the world which sent US equities plummeting, the euro freefalling, and gold and the dollar soaring.
The EUR/Gold correlation was completely disjointed on Thursday. Never before in my brief trading career have I witnessed gold make a strong upside gain while the euro simultaneously sold-off against the dollar. To see gold and the USD rising rapidly at the same time is a rare occurrence and something that is almost an impossibility under almost any other market conditions.
If this type of trend continues it’s a seriously ominous sign for the euro and any trader bullish on the EUR/USD. When you have a situation where market participants are piling into gold and the USD at the same time this is a clear sign of risk aversion and downright panic as the old “safe-havens” of gold and the USD become highly sought after.
This rhetoric from Obama spooked the markets pretty good:
“We need to begin the process of regulating Wall St.” and “Now is not the time for Wall St. to get bonuses, and that’s the message I want to send to them”
I’m not sure there’s ever been another president in history that’s come straight out with such strong rhetoric against the somewhat free market capitalist set-up otherwise known as Wall St. This is pretty shocking rhetoric to me and not what I expected from a man who claims he wants to restore confidence to the markets.
Obama might already be campaigning for 2012 by taking up an offense for Main St. against Wall St. but those tones combined with the coming battle in Congress over the $900 billion economic stimulus bill is going to keep US equities on a rollercoaster ride in the short-term.
As we forecasted all USD data printed worse than expected and at record low levels. Initial Claims printed at the worst levels in the 40-years the Labor Department has been keeping those records. Initial Claims are up by 159K from the prior week and the total number of unemployed job seekers is at the highest levels since 1983. I maintain my view that the US job sector will get even worse before the numbers start to turn around and get better.
New Home Sales have eroded by 14.7% in the month of December which is the worst decline since 1963. Housing has not seen a bottom and will decline further. Median home prices will fall below the $172,000 level and inventories will continue to pile up in my opinion.
The Durables data was abysmal, printing well worse than expected to the tune of -2.6% last month and Durables Orders are -5.7% y/y which is the second worst decline in history. The consumer’s not done contracting and the retail sector will remain hostage to the non-existent US consumer.
This morning we’ll deal with Advanced GDP and if we don’t get the worst GDP print in 26-years I will have to believe the numbers are fudged. All I have to do is look at the slaughter and mayhem in the US retail and consumer sectors and that’s enough to tell me GDP should have contracted at least -5.1% in Q4 2008.
I think Wall St. may struggle with tomorrow’s data if they are already panicked in addition to the fact it’s the last trade day of the week and the month. That means market participants will be squaring their books which will translate into sharp price swings and exaggerated price action especially between 0730 EST and 1500 EST today.
I’ll certainly be in front of the market on Friday looking for trades but my risk appetite will be extremely low and I will not add any new positions after noon EST. I do not want to go into this weekend with any new open positions, so I will be flat by market close today. The risks of a surprise geo-political event or central bank rhetoric that could come out over the weekend are high right now. All traders should practice smart risk and money management tomorrow.
I’ve been doing a ton of writing for the new site the past 48-hours and I’m all wrote out right now… if you plan on trading tomorrow realize the conditions will be choppy and potentially violent especially if money flows move out of Treasuries in a weird way on Friday.
These may be some of the last levels I post before we close out the week, they are important overall upside and downside levels to watch as there could be some testing around these price zones:
Hi. I wanted to give you an update on the progress we’re making with the new VeriteFX trading community.Right now we’re about 85% completed on the entire site which puts us significantly ahead of schedule. I had an original target launch date of March 1st but a few days ago Idecided to scale my trading back so I could knock out writing responsibilities I have for the new site and to spend time working with our site designer and programmer. I’d like to see the site launched at least a week ahead of schedule. That’s the goal we’re shooting for.
On Tuesday of next week we’ll have ten traders from different parts of the globe testing out the entire site. They will be testing our new chat room, SMS service, blog, and the other features of the community. After we complete the testing phase I should have another progress report and then we should be close to an official launch.
As far as my relationship with Forex Justice is concerned, I will continue posting market updates on the FJ blog even after we launch the VeriteFX community. I support what Forex Justice is doing and they are supporting us.
One new feature we’ll be doing is regular podcasts (mp3). That’s something totally new to me but I’m willing to giving it a shot to see how it goes. I haven’t decided how I’ll use the podcasts but I was thinking of using them to record Q and A’s and for market commentary. If you have any ideas on how we could best utilize that technology send me an email at firstname.lastname@example.org.
VeriteFX also has a page on Twitter. I have no clue what Twitter is or does but apparently people are using it and it’s popular so we’re on it. The link is: https://twitter.com/VeriteFX
One last thing, I still plan on being in the Netherlands on February 22nd to the 24th to meet with traders. So far there are a dozen traders planning on meeting up with us. If you’re interested on getting the details you can send me an email.
I’m not going to bother wasting any time recapping what the markets did on Wednesday because the only thing that matters is the garbage we got from the Fed and FOMC today. As expected the Fed made no move on interest rates and as we forecasted they used the FOMC statement to talk up the Fed’s programs being used to save the US financial system. The most “wondered” aspect was whether or not the Fed was going to start buying US Treasuries.
Well we still don’t know if the Fed plans on buying long-term Treasuries because Bernanke used double-speak and talked in circles about that issue in the FOMC statement:
The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.
Reading between the lines it’s clear the Fed is open to the idea of spending taxpayer money on buying debt from its dumb brother at the Treasury. But under what conditions would the Fed find itself forced to make such a drastic move? That we do not know because Bernanke was unclear on that part. Richmond Fed Lacker actually voted to start buying Treasuries ASAP.
It was that confusing rhetoric on how the Fed is going to handle the buying of Treasuries that sent the currency market into a tailspin. Confusion usually translates into dollar and yen strength and that’s exactly what played out. I’ve mentioned this many times in the chat and I’ll keep repeating it here – but when something nasty goes down in the US Treasury market we will see violence in the FX market. Treasuries and FX are so closely linked and should we see some weird moves or panic in the US Treasuries market you can be sure we will see chaos erupt in FX.
On economic matters, the statement said:
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly.
Nothing shocking there… at least Bernanke isn’t painting a prettier picture than what reality is. One of the best lines in the FOMC statement:
Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
That’s basically Bernanke’s way of saying he hopes the economy doesn’t go into a period of deflation and that all the money the Treasury is printing will bring on inflation which will prop up the stock market just long enough to make him look like a hero.
The Fed also told the markets its keeping interest rates low for the foreseeable future and that they would basically throw the kitchen sink at Wall St. in order to protect it from collapsing. All the big US banks felt safe today after the FOMC statement came out. Their stocks rose on Bernanke’s strong rhetoric to ensure they don’t fail.
Overall I’d have to say this FOMC statement was one of the most pathetic things I’ve ever read from a central bank. I think Zimbabwe’s interest rate committee’s statement probably makes more sense and is more interesting than what we got today from the Fed.
While we’re on the topic of unconstitutional banking organizations linked to the US government, new Treasury Secretary Geithner revealed the Treasury and Obama administration will soon be unveiling a new plan to help struggling homeowners and prevent foreclosures. This news also gave the markets a boost today into the close. We need to get an eye out for this next week.
On Wednesday ECB Trichet had this to say:
“The March meeting to be the next substantive one due to increase in new data available” He also said that low rates are ‘inconvenient'. Once again we have Trichet signaling a pause in rate cuts at the February meeting. Pretty cut and dry stuff there. Unless he contradicts himself or something nasty goes down in the Eurozone the next few weeks I think we can expect rates to stay at 2.00% in February.
The other big news is the newest economic stimulus plan… not a single Republican in the US House of Representatives voted for Obama’s economic stimulus plan on Wednesday night. As I mentioned earlier in the chat, the Republican Party declared war today on the Democrats when their leader stepped up and said they were not going along with the Obama plan and that they had a better plan of their own.
The Republicans will force more tax cuts into the bailout bill, they will cry “no big government” but their plan is just as loaded up with pork projects and money for social programs as the Democrats plan. The Republicans are claiming their plan will create over 6 million jobs compared to Obama’s plan which will either create or save 4 million jobs.
This is political grandstanding at its finest and it will only serve to cause more fear, panic, and confusion on Wall St. and in the global financial markets. It’s going to play out just like the TARP debate played out. Not only will the politics of the plan do zero to solve the problems facing the US economy, the plan itself is just another band-aid that will be peeled back when the blood gushes again.
Today we get another reminder of how bad the US consumer and jobs sectors are. I’m forecasting the Durables data to at least print as bad as the economists are forecasting but no matter what, the data will be ugly. Initial Claims could keep pushing towards the 600K level which is an ominous sign for the US employment sector of course. I also expect New Home Sales to print lower than last month’s reading and continuing to remain at recessionary levels.
The S&P 500 futures have been on a relentless run this week helping keep the yen mostly weaker against the majors while lending the euro some topside support against the dollar.
We’ve already seen gold take the euro down late Tuesday evening and should the S&P 500 futures get hit by the bears, there is some room for it to fall which could put pressure on the euro and give the yen a boost. Keep an eye on that scenario the next 24-hours.
Both crude and gold took a whipping on Tuesday and that was the main reason I repeated several times that the smart trade would be a euro short above the 1.3252 level. Both commodities had room to drop and that’s what put the euro at risk of a correction in addition to whatever the FOMC said.
As far as trading goes, my risk appetite is extremely low right now and I have all the patience in the world to sit and wait for the market to show me a trade that will keep us out of drawdown or cause us to get stuck going the wrong way. On Wednesday we need to be prepared for the markets to react to the fundamental data in addition to whatever surprise rhetoric we get out of the Fed, ECB, Treasury, or from a geo-political event.
If crude and gold find buyers after their downside correction on Tuesday, it may be smart to buy the euro on the dips as those moves in commodities would likely give the euro a boost along the way. The 1.3120 to 1.3080 levels are important. There will be stops sitting below 1.3100 in addition to buy orders waiting to be picked up at 1.3080. Expect some fireworks down there should the market move for a test at those levels.