ProFXI EUR/USD Daily Update

Wednesday, January 7^th 2009

 

As you know I had to leave on a daytrip earlier this morning, so I have no clue what the market did after we hit our daily profit goal. From the looks of things I see both the euro and gold hit solid support as they respectively tested key support areas and bounced. After testing the $50 level several times I see crude stayed to the upside.

Because I missed today I’m going to use the update to cover an area of trading we need to be mindful as we get ready for NFP and next Thursday’s ECB rate decision which will be one of the most closely watched ECB rate events since the financial turmoil started.

I was working on a big EUR/USD Q1 outlook but I scrapped it all. This morning I was watching CNBC and they had an in-studio guest who caught my attention. I don’t know what his name is but I found myself agreeing with almost everything he said, which is rare if I watch CNBC. He definitely sounded like a trader and he knew his fundamentals and economics better than anyone plus he was real charismatic and energetic.

They had another guest on, some guy named Byron Wien. I never heard of this Wien guy before but he looked like he’d spent 20-years in the Hanoi Hilton and he took the entire segment shot calling. The young trader challenged the old Muppet when he made the following predictions:

·         S&P 500 goes to 1200+ in 2009

·         US housing market bottoms in the first half of 2009

·         10-year yield rises to 4.00% or more in 2009

·         Gold, crude, and the dollar all strengthen in 2009

·         US employment sector bottoms and begins adding jobs in 2009

 

I couldn’t believe what I was hearing, I can’t believe this guy would actually put himself out there in that kind of way with those calls when there are too many unknowns in the global markets. What made me scrap my Q1 outlook was when the young trader laughed off those outlandish calls and said that anybody who thinks they can even predict the first quarter is crazy. He’s right. It’s a waste of time, so I’m not doing it. We’re doing just fine keeping things on a day-to-day basis here, so that’s the way it’s going to be until it goes wrong and we need to fix it. I don’t want to be another Byron Wien.

I want to cover trading psychology. This is an area of trading I feel warrants close attention and careful study as we navigate our way through the markets in 2009…

New Year Psychology:

 

Over the New Year holiday I traveled up to Michigan to spend time with family and friends. Michigan’s unemployment rate is in the 22% range and suffering intense recessionary effects when compared to other states. I was in the perfect place to do some real-life field research.

Whenever I see my nieces I like to spoil them, so we went to the closest store in town before hitting the mall. It was a Wal-Mart type place. As soon as we get in the store the greeter starts talking to me. He was a friendly fellow but about 30-seconds into the conversation he revealed the following information to me:

--He lost his job at Ford after working there for 30-years

--He’s been through three part-time jobs since he was laid off

--He had to take a part-time, minimum wage job with zero benefits

--He lost his home to foreclosure and had to move into low income housing

--His wife just filed for divorce

 

He told me all of that in less than a minute from when we first started talking, but while I was reaching in my pocket to give the guy some money because I felt so bad he said the following:

“2009 is going to be a great year, the best ever”

 

He almost made me cry but when he made that comment it all made sense… this is pure psychology at work – there’s a clear psychological effect of starting a “new year”. In the mind it feels like a time of shedding the pain and hurt from the past because a new year brings the prospects of much better times, more prosperity, and a belief that it can’t possibly get worse than it was in 2008.

It was pretty obvious that man was hurting inside and wanted somebody to listen to him but something in his mind is telling him this year is going to better than the last. After reflecting on our conversation a thought occurred to me that I may need to think like that man a little more as it relates to trading the markets.

Market psychology and risk—

 

The start of 2009 will bring a new president to the United States and this will have a strong psychological effect on not just Wall St. but all global markets. When the Obama administration and Treasury rain dollars on the US economy and basically assure the world the US financial system will never fail, I believe this will have a strong psychological effect on market participants and I believe we could see more risk taking at the very start of the year, especially after Obama is inaugurated and the markets learn more about his massive economic stimulus plan.

I have a higher expectation to see Wall St. come out with guns blazing than I do to initially seeing another leg down. The fundamentals released in January will be some of the worst in recorded history but I have to believe Wall St. already knows this. I think it would take some major unexpected downside fundamentals to severely rattle market players.

I think it’s all about the psychology right from the get go. In 2008 all markets were decimated. For the year the Dow closed down 33%, the S&P 500 closed down 38%, and the Nasdaq Composite closed down 40%. I think the Austrian equity market was the world’s worst performer closing down over 60% on the year. These are Great Depression era declines…

I believe this will be forgotten in January. But keep in mind that Q1 will only be part of the bigger picture and not the whole picture. What happens this quarter may not be a harbinger of what happens in the proceeding three quarters.

This is purely my opinion but I believe the type of psychology needed to trade the FX market right now under these conditions is one that’s free from fear and greed. Until the liquidity improves, the credit unfreezes, and the central banks stop price fixing the markets, the price action of the major currencies will remain erratic with intraday trend changes.

Trading is hard enough to trade under what used to be considered “normal” conditions. There was a time when the EUR/USD wouldn’t move much more than 220-points between London and NY and you’d be good to go for an easy short. Those days are over and we may never see them again. If traders continue to do things that didn’t work in the past, it will destroy their mental game and ability to keep the mental advantage on the market.

Just some food for thought.

EUR/USD: 

The speculation of an imminent ECB rate cut continued to put downward pressure on the euro along with further sell-offs in the EUR/GBP combined with overall GBP strength. Gold’s sell-off helped fuel the euro’s move down to strong support at the 1.3300 level, recovering above 1.3500 currently. With exception to ISM, all USD data printed worse than expected which was no big surprise. The cooler print on Eurozone CPI took the euro bulls by surprise this morning and those of us fighting with the bears were able to profit.

Tomorrow we get German employment data, Eurozone PPI, and the most worthless piece of data ever, ADP Non Farm Payrolls. By far the most important event is a Trichet speech at 0200 EST/0700 GMT. He’ll be speaking at some party welcoming Slovakia into the EMU. All market participants will dissect his every word this morning to look for any signs and clues about Thursday’s rate decision.

Market participants have been selling the euro based purely on rate-cut speculation. Trichet knows what’s at stake and knows he’s got a platform from which he can manipulate the markets. Lately Trichet is getting more dovish compared to his hawkish rhetoric at the last press conference. There’s no way to predict what he’ll say but I am expecting heightened volatility during and after his speech hits the news wires. A Q and A is always possible. Risk will be high…

As far as trading goes, I trust nothing and will continue calling the trades just as we’ve been doing it. As we draw closer to NFP the price swings may become more erratic and chaotic, so be advised. I have a feeling this Friday’s NFP is going to be a little different from the last.

Key levels will be sent out tomorrow after London opens. Any other updates will be sent via SMS. Be careful with your risk after Tokyo opens as market conditions will be extremely thin.

-ProFXI      

ProFXI EUR/USD Daily Update

Tuesday, January 6^th 2009

 

As expected the market came out with guns-blazing today as we saw the EUR/USD start the new trading year with a “modest” 420-point top-to-bottom move. In just one 30-minute timeframe (0330 EST) the EUR/USD opened lower by 213-points. There was only one factor fueling this sharp move and it was continued market speculation of an ECB rate cut next week, just like we spoke about in last night’s update.

Gold was the euro’s strongest correlated variable today as we saw this commodity continue to correct down from the $885 level, testing support at $845 before bouncing. Crude is staying fairly supported as the Israeli-Hamas situation continues to intensify in addition to the markets seeing more money flows come out of Treasuries and back into equities.

Speaking of Treasuries, they started 2009 on the bearish side as yields rose up towards the 2.50% level after coming within a few ticks of touching 2.00% last week. I’m not quite as hopeful about Wall St. so I’m expecting to see yields take another run at the downside when the next of Treasury buying begins as a trillion or more worth of new debt must be created in 2009.

The USD was impressive today but I’m not seeing any true dollar strength. The EUR/GBP cross took a beating and when coupled with the EUR/USD, the euro was the market sell-off leader, giving the dollar a boost by default. All markets started the year on shaky ground and that same old fear is obvious.

EUR/USD:

There’s no reason the sell-off has to end. If the market continues to trade with strong speculation against about an ECB rate cut next Thursday I expect to see the euro slide even lower. London gave a strong message yesterday morning and we may see the same type of volatility after the 0300 EST/0800 GMT timeframe. Some of the latest rhetoric out of the ECB continues to get more dovish and point towards at least a 50bps cut.

Fundamentally the markets get their first test of 2009 as we get CPI out of the Eurozone in addition to ISM Services, Pending Home Sales, Factory Orders, and the FOMC Meeting Minutes. I’m forecasting all USD data to print at or below expected but I’m not convinced the data will have much effect on the market. I don’t think the markets are ready to start responding to data in an orderly function like we used to do, we’re still a long way off from that I believe.

The FOMC Meeting Minutes are going to paint a terrible picture of the US economy but I don’t think we will discover anything new or data we didn’t already know. The rhetoric in the minutes will be a dark reminder to all market participants that the issues facing credit, housing, the consumer, and growth aren’t going away any time soon and some of the worst is yet to come.

As far as trading goes, I’m going to do things exactly like I did today and take those high probability trades despite the volatility and erratic moves… it worked well today and I think this strategy should continue to be profitable, especially as we draw closer to NFP.

I have little to say about the euro. I don’t have a bias and don’t need a bias to trade it. They key is risk management and being smart with our trades. This morning we took a small loss and immediately reversed to cover our loss. Those are the kinds of moves that must be made under these market conditions, so if you’re risking on the market be advised this is how things may have to go.

Over the next few hours there a few levels to keep an eye on:

Downside: 1.3552 / 1.3523 / 1.3501 / 1.3481 / 1.3456

Upside: 1.3618 / 1.3647 / 1.3689 / 1.3708

I wanted to give an update on the possible seminar. Based on the response so far it doesn’t look like an official seminar is going to happen. Many are expressing that finances would make it difficult to spend the extra money on travel at this time. That’s understandable. There are several traders that expressed interest in getting together anyway. So, I’ll be flying to Holland on February 21^st and I plan on being there until at least February 24^th. I may stay longer depending on how things play out the next few weeks.

Right now the game plan is to meet up here:

http://www.bilderberg.nl/uk/hotels/hotel-de-bilderberg/

If you have any questions or input or whatever, please contact Andre in the chat or you can send me an email at: moderator@profxi.com. As we get closer to the date I’ll give more details but for now that’s the date and location we’re working with.

As always, be smart with your risk and money management tomorrow, it will be volatile and certain market participants will continue to position ahead of Friday’s NFP. Any updates will be posted and sent via SMS.

-ProFXI

ProFXI EUR/USD Daily Update

Monday, January 5^th 2009

 

As you will notice this is not a typical weekly outlook. I’m still working on my EUR/USD Q1 outlook report and until I have that completed I’m going to write smaller daily updates. The other reason is because in terms of risk, I feel the best trade strategy is to take things on a day-to-day basis this week. Maybe even on an hour-to-hour basis if the volatility requires.  

The first quarter of 2009 has officially begun and normal trading will resume when all global markets open between now and Monday morning. Just because things get back to normal doesn’t mean they get back to normal… the issues of tight credit, rising unemployment, and contracting growth were not magically fixed at the stroke of Midnight on January 1^st.

Psychology and geo-politics:

For me, at least for the first week of the month the fundamentals of the market will take a backseat to trading psychology. The start of a new year can be like a time of renewal and cleansing and many market participants will believe in their minds that 2009 can’t possibly be worse than 2008. If the psychology aspect plays out as I’m expecting I’m looking for equities to find support in addition to commodities. Its possible Wall St. comes out with guns blazing and if they do, I won’t be shocked.

Geo-politics—

The other key theme for this week will be geo-politics. Israel has escalated their offensive on Hamas and as more market participants and liquidity return to the markets this week, the Israeli-Hamas conflict could come into play with crude, gold, and the USD.

I got a nasty cold on my trip so I was sitting in bed watching those ridiculous political news shows that air on Sunday mornings. I’m not sure if they were previously recorded but they were all saying how supportive the Arab and Muslim world is being towards Israel. I do not find this to be the case at all based on my own research. I see the rhetoric and tensions rising in fact.

Egyptian Foreign Minister Ahmed Abul Gheit said Israel’s offensive was made in “brazen defiance”. Of the UN, he said, “The Security Council's silence and its failure to take a decision to stop Israel's aggression since it began was interpreted by Israel as a green light”. A Jordanian official said “the invasion will have dangerous repercussions and negative effects on the region's security and stability”. The chief of the Arab League accused the UN of ignoring the turmoil in Gaza. Diplomats from Arabia are accusing the US of blocking any UN efforts to support the Palestinians and to halt the Israeli assault on Gaza. I could go on but you get my point.

Israel seems determined this time. I expect the rhetoric from the Arab world and Muslim community to rise in the coming days if Israel keeps up their offensive. This means we can likely see volatility with crude, gold, and the EUR/USD. When the Israeli-Hamas conflict first arose, gold and the euro were gaining. I will be watching these market correlated variables very closely this week.

The Americans are the only ones that can stop the Israelis. So far they have the full support of the Bush administration. I don’t believe the Obama administration will be quite as warm to the Israelis as the Bush administration has been. Both Bush and Obama are globalists but Obama is more bent towards the peace side of globalism whereas Bush was after the power side of globalism. Maybe Obama’s after peace and power… time will tell.

It will be interesting to see how things play out this week with Israel, the US, the UN, and the global pressure mounting against Israel. These are very ancient lands we’re talking about. Thousands of years of history, bloodshed, love and hatred mixed with extreme prosperity, extreme poverty, and extreme fanaticism across the board. Depending on your belief system, these lands are considered the cradle of civilization. Whatever it is, the conflicts in that part of the world always seem a little different than your normal war-type situation.

EUR/USD:

I believe the Obama camp will step up their economic stimulus rhetoric this week now that major market players will be back behind their desks and most global markets will be up and running again as usual. Obama will likely keep giving Wall St. needed support in the short-term. The other mega fundamental factor for Monday that we need to be mindful of is what I’m forecasting:

THE ECB IS CUTTING RATES NEXT WEEK

I won’t take the time to go through all the latest ECB rhetoric but based on what is coming from Trichet and his comrades, I now must forecast at least a 50bps rate cut from the ECB at their next meeting on Thursday, January 15^th. This is my expectation and it will not change unless Trichet comes out and directly says he’s not cutting rates next Thursday.

Should the global equities, commodities, and FX markets run wild thinking the ECB is cutting bigger next week in addition to the BOE, we will likely see stronger volatility in all markets this week. The last ECB rate cut actually gave the euro support but I’m not convinced the same will be true this time. The Fed is essentially done cutting rates; you can’t really go much lower than 0.00%. Or can you?

If the ECB cuts rates by 50bps, the ECBs key lending rate drops to 2.00%. If the interest rate factor comes into play it could cause downside weakness for the euro. The fundamentals out of the Eurozone won’t be any better this week nor will they for the US. The fundamentals will continue to deteriorate as the month goes on.

As far as helping find market direction for the EUR/USD, I will keep a close eye on the S&P 500 futures. If the two “market moving” factors of greed and fear come into play as I’m expecting them to, I would look for equities to continue ticking higher. How the EUR/Equities correlation decides to play out this week is totally unknown and will not be known until we get rolling on Monday morning. 

Last week the Fed announced a brand new program to print a fresh $500 billion (non-TARP money) to buy mortgage-backed securities from GSEs like Fannie Mae and Freddie Mac. That’s really nice of them. When I was up in Philly a few weeks ago I discovered a brand new Audi that really caught my eye. It’s out of my price range but wouldn’t it be nice if I could go print myself off $90,000 to buy something?

Point being – inflation is right around the corner. I think the Treasury has printed well over $2 trillion in fresh USD since August of 2008. The US monetary base continues to rise and I’m forecasting the Treasury will print at least another $1 trillion in fresh USD during the first half of 2009.

While the short-term prospects for the euro look bleak, if the euro can somehow weather the next storm brewing it may emerge once again as the dollar’s fiercest rival. The USD will be punished for the actions of the Fed and Treasury. If the ECB can manage to keep rates at least 100bps higher than the Fed’s interest rate at all times, the longer-term prospects for the euro may look decent.

At this point, I trust nothing. I’m not a euro bull; I’m not a dollar bear. I have no faith in the Fed, Treasury, ECB, or Wall St. to do anything logical or sane. From a purely trading perspective, I’m entering the new trading year with only one loyalty and that is to the integrity of my trading.

Consistent performance is the top #1 priority for trading the EUR/USD. Between the time the Team took over at the end of October and now the performance has crushed the market and other FX subscription sites. But just as easy as we made those profits the market can take them away at the start of the year with a few erratic moves.

This means risk and money management will be as critical as ever. From a mental standpoint, it’s not healthy for a trader to start the year off on the wrong foot. We’re starting with a clean slate and I encourage all traders to attack the market with precision and in a methodical manner. In my view we are not trading within conditions that will allow for much time-risk exposure. Anybody that believes this is a “buy-and-hold” market will be in for a harsh wakeup call.

If I make 20-points on a trade and miss a 200-point move it’s not going to faze me. I won’t be as if I lost 180-points. My trading strategy will be to allow my criteria to line up and take consistent profits without the need for a market bias or clear trend in place. There are only two big numbers I have in mind right now for the EUR/USD: 1.2800 on the bottomside and 1.4700 on the topside. Either can happen. Both might happen. To me it’s meaningless; I’ll take daily profits and be happy enough with that.

I wish all traders nothing but success and prosperity for 2009. I’m committed to keeping the positive production and momentum going and I’m hopeful for a great year. I’ll see you in the chat.  

-ProFXI     

Compared to yesterday most markets had a rather muted response as we grind down to the last few trading hours of the year. Wall St. got a touch of that old euphoric feeling as the Treasury announced it's using $5 billion of taxpayer money from the TARP program to bailout credit giant GMAC. Keeping corporations alive and solvent during a season when all markets need a washout is only going to prolong the process and will fix little. GMAC is another example of a company that should be allowed to die and not propped up with funny money printed by the Treasury.

As we forecasted all EUR and USD data printed worse than expected with exception of Chicago PMI. Consumer Confidence hit a new all-time low printing well below what analysts were expecting. For some reason they thought gas prices would help bolster consumer sentiment. The sharp decline in gas prices have surely acted like a tax benefit to consumers but correlating low gas prices with increased spending during a time of drastically rising unemployment and rapidly declining home values is not very smart.

If a consumer doesn't have a job, thinks he may lose his job, and can longer use his home as an ATM it doesn't matter how cheap gas gets and how many 80% off sales are in the mall. The unemployment rate is currently at a 15-year high and I'm forecasting we go sharply higher in the first half of 2009. The 10-city Case-Shiller Index is reporting a 25% decline in home prices year-over-year. I'm not sure what their net bottom line prediction is but I think home values can easily see between a 28% and 35% decline before we're all said and done.

The further home values plunge, the deeper the consumer will entrench. But I'm counting on the Obama administration to unveil a nearly $1 trillion economic stimulus plan shortly after he's sworn in. Obama and Bernanke will rain dollar bills on the consumer and housing sectors in 2009. The one benefit of the hundreds of billions of freshly printed USD will be inflation - the kind of inflation that makes equities go up, bond yields go up, commodities go up, and funding currencies go down. Inflation at its purest and truest form is the printing of money. High prices do not cause real inflation; it's the abundance of cheap money and low interest rates.

The Fed has created an environment of low rates and an unlimited supply of liquidity and backstops in order to price fix the markets. The end is actually in sight although there will be many bumps along the way and at least one more catastrophic season of panic within the markets in my opinion. The end that is in sight is the next bubble created courtesy of the central banks. Wasn't it Greenspan's artificially low rates and dovish monetary policy that created the last bubble we're currently trying to clean up?

They say if we forget our history, history is doomed to repeat itself. It's my opinion we're already on our way to repeating history just based on the fact the Fed's effective interest rate is now 0%, a first in the Fed's 95-year history. Add to that the trillions of new USD streaming through the money supply and a dangerous bubble with Treasury prices and we've got ourselves a recipe to create another bubble rooted in cheap money and low interest rates.  

Speaking of money supply, the Eurozone has seen a further decline in M3. I have mixed emotions about this. I'm not sure reducing the money supply is the best idea right now. I think some of us keep forgetting Europe's in no better shape than the US and is also in a recession and suffering from a contraction in growth and employment.

The environment created through the Fed and Treasury's manipulations of the market requires central banks to pump up the money supply not decrease it. The decline in M3 will not help the Eurozone deal with the same economic and financial issues we're facing in the US. The decline in Eurozone M3 should give market participants more reason to believe the ECB will cut rates at least once during Q1 of 2009.  

EUR/USD:

Overall the euro should have a rather quiet day tomorrow. Japan, Australia, and New Zealand are closed this evening so conditions will be the extremely thin. Germany and Italy are closed tomorrow and US markets will be shortened due to the holiday. We get Initial Claims and Crude Inventories but the data will have little to no impact on the market. Honestly, there's really not much to say about trading tomorrow, it probably won't even be worth the time we spend starring at our trade stations.

Instead of making up a bunch of crap about the euro I'd rather talk about trading...

Today I received a few questions about taking losses; specifically these traders were asking when the proper time to take a loss on a negative entry is. I figured I'll use today's update to address this issue and offer a few thoughts...

The idea of "when" is not really a factor that I take into consideration when deciding to cut a trade. I have a bunch of reasons why I'll take a loss and each reason is different from the next and will be used in the decision making process based on real-time market conditions and where I'm at with my ROI goals.

Many traders have a tendency to let the negative entries run a lot longer than the positive entries. I'm guilty of it, we all are. That aspect of trading is purely psychological and ties directly into the two biggest emotional struggles traders contend with - fear and greed. Teaching a trader how to pull the trigger and cut a loss is impossible. In the 26-months I've been trading I probably spent the first 19-months refining my system for handling losses. And that's with the luxury of being a fulltime trader, it's taken that long.

All I can say is the art of loss-taking is best learned through trial and error and much experience in the market through all types of conditions. But in my opinion one of the main reasons why traders find it difficult to recover from a loss is because percentage-wise, they take too big a loss when you compare the size of the loss to their available equity and usable margin. I think it's imperative for traders to limit their losses to a certain percentage of equity and usable margin or else a trader runs the risk of taking a loss so big they don't have the liquid to recover from the loss in a timely fashion.

In my view it's the lack of trader liquidity combined with the high leverage of FX that cause traders to get washed out of the market and suffer multiple margin calls. As you'll recall three weeks ago on the TS2 account I took a $45,000 loss, knocking my balance down to $29,000 from $74,000 but my equity was at $103,000 when the losses were taken and after all open positions were closed it turned into a net positive gain of $36,000 while not allowing my usable margin to drop below 93%. The $29K balance went to $110K when the account became flat that week.  

The beautiful thing about that and the only way I made it work was because I had the liquidity to get myself out of the hole and to use the market to cover my loss and provide a net positive gain. Obviously I had to pick the perfect trades to get me out of the jam, that's a whole other aspect of covering losses, but the point I'm trying to make is, had I not had the liquidity to trade against my negative entries I never would have recovered and made the ROI I did that week.

In that situation all I really did was base my loss taking on my equity and usable margin and determined how many positions I'd need and what kind of margin to use per position to cover my loss and then end up in net profits. The problem with retail traders that are grossly undercapitalized is they overleverage their accounts and then they take too big a loss percentage-wise when based on usable margin and equity.  

Let me give you a brief example scenario:

Balance: $52,000

Equity: $50,000

Usable margin: $47,000

Size of negative entry: $2,000

For this scenario I've made a $1000 liquid entry which is paying me $20 per point based on 200:1 leverage. So, $1000 liquid cash money has come out of my usable margin in addition to reflecting the $2K negative open entry. Percentage-wise, the size of my unrealized loss is about 4% of my usable margin and if I were to take the loss my equity and usable margin would lose the $2K but my usable margin would get the $1K entry amount back when the trade is closed.

Based on the size of that account for this example a floating 4% loss is testing my pain tolerance and I would need to take quick action to fix the problem. I hate hedging so for me it would likely mean doing a market reversal like you've seen me do or I would just cut the trade and wait for an opportunity to make my money back.

Many traders will carry losses of $2000 on a $10,000 account. That's a 20% floating loss and is something an undercapitalized retail FX account likely will not recover from or survive. Unfortunately the lack of liquidity and capital for the retail trader will still haunt even the strictest risk managers. The smaller your account and the less liquid you are means you have to put strict percentage limits on your losses because it's going to take longer to recover unless you go heavy and ultra overleveraged to revenge trade on the market which is never recommended.

I've become a strong advocate for the retail FX trader to limit themselves to small losses because the deeper you allow the market to take you the harder it is to climb back out of the hole when you have limited resources. Nobody likes to take a loss but especially in this environment it's imperative a trader not allow the market to get away from them. I'm not talking about using the industry standard 20-point stop loss but rather using market-timing and price action to determine the loss strategy and game plan to recover.  

Think about how much easier it is to recover from a $100 loss as opposed to a $1000 loss when you only have a few hundred dollars of liquid usable margin to work with. The beautiful thing about the market is that the small losses can quickly be recovered typically within 48-hours as opposed to traders who spend months trying to recoup what was lost in a few days of overleveraged trading.

I'm not suggesting traders start using physical stops on their platform, I still prefer the mental stop loss method, but losses must be taken nonetheless and I think if traders started looking at their floating negative entries as a percentage of their available margin and equity it would open their eyes to become smarter risk managers and they would see more realized profits at the end of the week. Hopefully this gives traders some food for thought.

This will likely be the last update of the week. I'm traveling for New Years tomorrow morning. We'll be back when the market opens Friday morning to see if the market will offer any trades before we close out the year. But at this point there's no reason to push trades, it's been a killer month and a good ending to 2008.

We're making progress on the potential seminar in the Netherlands. After the first of the year we'll hopefully have more details. If you have questions about the seminar be sure to get with Andre. I think if we can make this seminar happen we'll focus a lot more on the psychology of trading and the risk aspect in regards to taking losses, banking profits, etc.  

I'd like to encourage all traders to use the holiday break to "detox" from the markets and trading. Get your mind on other things and enjoy the break. I think the markets could come out with guns blazing the first week of January. It'll be time to get back to work and get back to making money.

The trading conditions will continue to be difficult and at times frustrating. At least for the first week the liquidity will likely remain low but the volatility should pick up making for more exaggerated moves and quick reversals. I continue to caution on buying the USD. My longer term view on the USD is strongly bearish and I know at some point the dollar will be punished for the actions taken by the Fed and Treasury.

A few levels to watch for on the euro-

Upside: 1.4168 / 1.4194 / 1.4222 / 1.4267 / 1.4293

Downside: 1.4088 / 1.4057 / 1.4011 / 1.3962 / 1.3918

If you trade the rest of this week please use smart risk and money management. Take care and have a great New Year.

-ProFXI  

ProFXI EUR/USD Team Update  

Monday, December 29, 2008

 

It’s always nice to start the week with a 700-point roundtrip on the EUR/USD. Today’s volatility didn’t come as a big surprise as we forecasted these conditions in last night’s update but several traders were asking why we had such extreme price swings today.

 

Most of it boils down to the lack of liquidity. These holiday trading conditions are so thin it takes very little liquidity to cause an exaggerated price swing. The brokers have been hitting stops and cleaning out the retail FX market since London opened. As far as I’m concerned whatever the euro did today means nothing in the grand scheme of things once we start 2009.

 

In addition to extremely thin conditions, most of the market correlated variables saw volatility which either lent support to or against the euro. Take the S&P 500 futures for example… after seeing initial strength this market correlated variable helped bring the euro down from the 1.4300 level this afternoon. Geo-politics are lending support to gold and crude right now. Crude settled above $40 on the NY close and gold is getting close to testing some key resistance zones around the $900 level.   

 

As the euro was running up this morning the calls from analysts for the EUR/USD to go all the way to 1.4700 and as high as 1.7000 started coming over the news wires. It happens every time we move more than 200-points but you never hear from these shot-callers when the market does the opposite and they realize these markets are erratic due to the time of year and thin conditions and the moves mean almost nothing.

 

EUR/USD:

 

Fundamentally we get German CPI data, Consumer Confidence, Case-Shiller, and the Chicago PMI tomorrow. I’m expecting all USD data to print at or below expected but the data will mean very little tomorrow. Equities remain in trouble and I don’t think we can blame the time of year on the issues facing the Dow and S&P 500.

 

As far as trying to forecast exactly what the market’s going to do tomorrow is mostly pointless. As I mentioned last night I’m still cautious about buying the USD right now. I can make a better case for the euro to find support against the dollar. That being said I’m not at all ruling out more euro downside testing in the near-term view.

 

I don’t think Wall St. has fully reckoned itself to the state of the US economy, to the actions taken by the Fed and Treasury, and they may not be prepared for how conditions in the jobs and consumer sectors are going to deteriorate in Q1 of 2009.

 

Unemployment has room to go at the top. The holiday retail sales data is going to spook Wall St. but once they see tens of thousands of businesses filing for bankruptcy I think those shocking events could send another tidal wave through the global equities markets. And it’s for that reason why I believe we could see another short season of market participants buying up the USD and selling-off other major currencies.

 

I personally see a rather high probability that the Dow and S&P 500 have not made their lows or have put in a firm bottom and I believe sometime between February 1^st and March 31^st 2009 that the downside in equities will need to be tested again. This could have the same effect on the euro as this fall and that’s why I believe the euro is not immune from more sell-offs.

 

What all traders should realize is these difficult trading conditions aren’t going away any time soon. When the New Year begins the markets are going to magically fix themselves and return to more orderly money flows and price action. I think the high risk conditions are here to stay for at least another three months in my opinion.

 

It’s for that reason why I’d like to encourage all traders to take the holiday break to think about their risk and money management plan for the first quarter of 2009. Even after a move like today it’s no secret overleveraged traders took big losses today if they were on the wrong side of the market. The trading conditions we’re in right now can have intra-session trend changes. That means risk management is paramount and the key to saving an account from heavy losses or worse.  

 

As far as trading goes, I will be trading again tomorrow. I’m enjoying the volatility of these conditions so I will take advantage when the market allows. The euro’s low was my downside key level of 1.3918 given in last night’s update. 1.3918 is a very key level according to what I’m seeing with the EUR/USD and it has proven to be solid support as I see the euro has since recovered to the 1.4080 level right now.

 

I’m still very skeptical of the USD right now so if I short the EUR/USD I will do so on a scalp basis unless otherwise noted. Don’t forget tomorrow could be considered the last full trade day of 2008 as Europe and many other banks will be closed on Wednesday through Friday. That means there will be profit-taking, loss-taking, and book squaring which will cause more volatility and price swings.  

 

-ProFXI

As we forecasted in the weekly outlook the EUR/USD opened the week and made an upside move right through the open of Frankfurt. London will bring the euro down a bit for some downside retracement.

We took losses on our euro shorts and closed our 1.4009 and 1.4156 euro longs at 1.4265 right before London opened. 

I will not buy the USD today. I will continue to buy the euro on thedips as long as the momentum and path of least resistance is up. Additional upside levels to watch: 4256 / 4272 / 4293

Gold is also finding strong buying demand which I suspect is due to the Israeli conflict. Should continue to push north the euro should run up with it. 

 Be disciplined with your risk and money managment today, it should be volatile after NY opens and we get some money flows from Wall St. 

-ProFXI

 

Most of my thought processes are currently in 2009 but there are a few issues we need to cover for this last week of the year. It’s possible the EUR/USD volatility picks up compared to last week as I’m seeing a higher probability for news and geo-political events to affect the global markets. In my opinion geo-politics and Wall St. take center stage as we close out the last trade week of 2008. Fundamentally and geo-politically this week shouldn’t bring much euphoria to Wall St.

Back in October we forecasted the worst holiday retail shopping season in decades and I believe this forecast will be proven correct in January when we get December’s retail sales figures. Preliminary holiday numbers from top US retailers is grim.    

According to SpendingPulse, US retail sales during the traditional holiday buying period between November and December dropped 8%. I believe I forecasted a 7% drop in holiday retail sales a few months ago. When we get the retail data that strips out food and fuel, the numbers are going to be dreadful. What I cannot predict is how Wall St. intends on reacting to the dire retail data it’s going to deal with on Monday and in Q1 of 2009. How Wall St. reacts can very much affect how the euro reacts to the dollar.

Some retailers are in such a state of panic they’re actually discounting themselves out of business. It’s just like when crude quickly ran up towards the $150 level, the market out-priced the value of this commodity and it crashed along with all of the other out-priced commodities. Retailers are going to out-price themselves in a deflationary way and the end result will be mass retail bankruptcy fillings starting in the beginning of Q2 in 2009.

Consumer deflation—

Saturday morning I woke up feeling like a consumer. There were two things I wanted to buy – a new pistol and a shirt I didn’t get for Christmas. I figured it would also make a great time to do field research to see how many shoppers were in the malls and how many bags they had in their hands. I started at Bass Pro Shops at an outlet mall. Their handgun selection was weak and the sales were even weaker so I left.

The outlet mall was fairly empty. The food court was packed but the stores weren’t and people seemed to be in the shopping mood but weren’t even enticed with 75% off sales. I took off for the most upscale mall in Nashville to see what was happening over there. It was the same situations as the outlet mall… light traffic, not many buyers, ridiculous sales, and shelves full of merchandise nobody wanted.  

I call this “consumer deflation”. This is when the consumer sits on the sidelines waiting for sales to get bigger and discounts to get even more insane. Consumers catch on quick… consumers know they have retailers by the throat right now.

Consumers will force prices lower by saving instead of spending. Consumers want 80% off sales. They want buy 1 get 3 free sales. Consumers can and will impose their will on the retail sector for as long as this financial turmoil persists. Remember this – for at least the next 6-months cash is king.  

Crude and gold:

Crude—

Last week crude reached my downside target of $38 and then some. Crude’s still a mess and will remain a mess until the underlying fundamentals of the market turnaround or we get some massive market manipulation to put in a firm bottom and send crude back up.

Of course downside weakness in crude presents potential downside weakness for the euro. For the most part the euro has remained resilient as crude has fallen but crude’s continued testing of downside support levels will keep the euro’s gains somewhat capped.

I don’t like the idea of crude being under $40 right now because it increases the potential for unrest and geo-political tensions in the Middle East, Asia, and Russia. The markets are far too fragile for the types of flare ups that are beginning in Israel. Now we have Pakistan and India making troop movements that display signs of hostility. None of this is good and will only cause more panic and uncertainty in the markets. If the issues on the Gaza Strip go on much longer I would expect Israeli troops to make a ground offensive.  

It doesn’t take an Ivy League educated economist to realize that when crude makes a 70% correction in a matter of 4-months at some point battles are going to erupt in hotspots around the globe where there is a close connection to crude. The instantaneous loss of $105+ petrodollars per barrel of crude will somehow need to be reckoned with soon. I’m not sure all market participants realize what a blow this is to OPEC and other oil producing nations.

Very good things and some very bad things are funded with petrodollars. Now what?

Gold—

I have much more hope for gold than for crude. I don’t personally know any gold bugs but with at least $1.5 trillion in freshly printed USD the past 3-months I have to guess that gold bugs are bullish on gold. I’m not a gold bull or bear but if somebody put a gun to my head and made me take a gold trade on the spot market, I’d buy gold on the dips.    

If gold continues to find support and buyers it will help keep the euro supported against the dollar. I’m hoping at some point in the near future the markets do the proper thing and sell-off the dollar, buy gold, and buy the euro based on the actions taken by the Fed and Treasury since August 2007 through the present.  

Its imperative we watch the events unfolding on the Gaza Strip – these events could turn into a serious geo-political situation which could have an effect on commodities and the EUR/USD this week. The ongoing debate is whether an Israeli/Islamic-country conflict would be good or bad for the USD. I don’t think there’s a black-and-white rule on that. If the conflict makes gold and crude rise, the euro should rise right with them in my opinion. The Israeli’s will lose the PR battle but will win the physical battle. No matter what, if tensions escalate and more blood flows in the streets of Gaza we may see increased volatility in commodities and FX.    

Treasuries:

Any analyst saying there’s a bubble in Treasuries is correct. Treasury prices cannot sustain at these levels and yields are getting to the point of worthlessness. The bubble in Treasuries presents a big problem for the USD and an interesting scenario for the EUR/USD. To make a long story short – everything happening with Treasuries right now is USD- in my view.  

Back in July of 2006 the 10-year yield reached a topside resistance level of 5.20%. As the 10-year yield hit resistance around the 5.20% level, the EUR/USD hit support around the 1.2440 level back in the July-October 2006 timeframe.

In August of 2007 the 10-year yield against tested the resistance level at 5.20% and the euro made a massive drop against the dollar. The EUR/USD dropped to hit support at the 1.3400 level just as the 10-year yield was hitting resistance at the 5.20%. As the euro’s market correlated variable hit resistance, the euro hit support and both took off in the opposite direction.

When the financial turmoil hit obviously this market correlation went out of whack like the rest of them. But now we have the 10-year yield falling over 400bps. This is a big “if” but if the market does the proper thing, money flows should exit the Treasury market soon, Treasury bears should go on a rampage and the dollar should pay the price.

EUR/USD:

Once again trading conditions will be abnormal and at times frustrating. All markets will be ill-liquid which means hours of slow times could be met with a sudden price swing. I would expect most big market participants have made their moves for 2008 but there’s always a potential for price swings caused by end-of-year book squaring.

I have no trade bias because it’s unlikely the EUR/USD is going to break out big topside or bottomside this week unless we have a surprise geo-political event that causes market volatility. Right now the liquidity is not there and the big money players are done until January. Overall I will say I’m more biased against the USD right now under current market conditions.

When the Dow and S&P 500 open on Monday they will be hit with bad news in addition to issues with Israel and continued irregularities in the Treasuries market. It’s possible the EUR/USD re-correlates with equities this week; I will be on the lookout for this correlation to potentially re-emerge and trade it accordingly. 

The fundamental calendar is light. The only big data the markets contend with is Consumer Confidence, Initial Claims, Crude Inventories, and ISM. I’m forecasting US data to print at or below forecasted this week but it won’t really matter, the markets know what to expect. There could be a few bright spots from the holiday retail shopping season, so let’s keep an eye out for those reports which could give Wall St. a potential surprise boost.   

As of the writing of this update the EUR/USD has been floating between 1.4011 and 1.4060. We may see the market attempt some upside testing between the time we open and London. Although the market’s not opened yet I have a few key levels we need to keep an eye on for upside/downside testing.

Downside—

The euro has continued to push higher against the dollar but the following market correlated variables could bring it down to test some downside levels: gold, crude, and the S&P 500 futures. Should those dollar-denominated variables test the downside they will likely drag the euro down with them. Key downside levels:

1.4038 / 1.4002 / 1.3977 / 1.3952 / 1.3918

New downside key levels will be posted after 0600 EST/1100 GMT on Monday as I usually do.

Upside—

I have little faith in the euro but it makes more sense to buy the euro on dips as opposed to the dollar right now based on current market conditions. This doesn’t mean the market will follow the same logic but should commodities and equities find support, the EUR/USD should have just enough reason to continue drifting higher as we close out the year. The risk is that bad data, falling equities, and weak crude will be a drag on the EUR/USD.

Should the market open the week with a bullish mindset, we could see the following upside levels tested:

1.4078 / 1.4096 / 1.4123 / 1.4138 / 1.4157

New downside key levels will be posted after 0600 EST/1100 GMT on Monday as I usually do.

As far as trading goes I’m very optimistic this week can present better trade opportunities compared to last week. The team will be trading while the markets are open and looking to meet our daily pip goals. It’s not going to be the easiest conditions to trade in but money can be made. It will be essential for all traders to be smart with their risk and money management this week. Don’t get greedy and do not overleverage your accounts, it’s not worth it.  

It’s been a crazy year and fortunately for us we’re ending 2008 on a high note and well into profit from when the team took over the last week of October. As always, we’ll end the month flat and in profits that are beating market expectations. December’s ROI is well above my 10% monthly benchmark so no matter what I will end the week flat even if I have to take a small loss. I want to start 2009 with a clean slate and a fresh mind to trade the markets.

Any important updates will be posted in the chat and sent via SMS. Lastly, I’ll be traveling up to Michigan on Wednesday morning to spend New Years with family. I’ll be around Sunday through Wednesday morning, we’ll be closed for New Year’s Day, and then I’ll be back around 0200 EST/0700 GMT on Friday.

Keep up with the geo-politics this week…

-ProFXI