Liquidity in the Forex, equities, and commodities markets were non-existent Thursday as market participants spent the NY session running on pure emotion, and reacting to every piece of news and rumor they could get their hands on. Until the last 60-minutes of Wall St. stocks mostly drifted lower after taking an initial beating onodd retail sales data.
Volume was extremely light, the bears didn't want to sell and the bulls weren't buying either even with the Dow and S&P 500 pushing towards strong support levels. And then all the sudden we get reports from Reuters and the AP about a program within the economic stimulus package designed to drop mortgage rates for homeowners facing foreclosure.
That was it, that was the whole story and what led the Dow to surge 213-points into the close. There's literally no more information on the matter, just that the government will enact a program to drop interest rates on homeowners ready to enter the foreclosure process. They call it a mortgage subsidies program but it's just another form of government price fixing on rates.
And the move we saw the last hour of Wall St. is called a short squeeze. These things happen all the time under the type of market conditions we're in. A mortgage subsidies program to drop interest rates on people that are flat broke anyway didn't put in a bottom and signal the turn around of the entire financial crisis. The bears dominated Wall St. the past 48-hours and the smart money on Wall St. took the late day news as the perfect opportunity to short squeeze the bears. We've seen this play out time at least once every two weeks the past few months and we'll see it again in the future, guaranteed.
Better than expected retail data disappoints--
Retail sales beat all market expectations and printed strong to the upside. I believe it was the first such gain since people ran out of extra cash from Bush's $168 billion economic stimulus a year ago. Why did Wall St. panic and sell-off? Why did the USD and JPY make strong gains and Treasury yields drop? It's simple -- the numbers mean nothing. It doesn't matter that Retail Sales printed with a 1% gain because when I break down the numbers, it's laughable what I'm seeing.
For example, retail sales for automotive parts are up 1.6%. That's looks like a huge gain, right? Not really. People are buying car parts because they're not buying cars. When you break down the psychology behind the numbers it's simple to see why the retail data is a joke. So instead of buying a $25,000 car from GM or Ford, a guy will spend $1,200 to fix the car he's got now. That's a $23,800 difference between buying a car and buying car parts and we're supposed to get excited about this retail data?
All those 80% and 90% off sales also helped window dress Thursday's numbers but this too is no sign of a recovery. 90% off sales are deflationary in nature and a terrible sign for any economy. Don't expect Thursday's retail data to have any lasting impact on Wall St., we'll be on to the next thing today.
Disjointed market correlations signal instability--
On Thursday we saw spot crude take a dive into the $33's before recovering. As crude was tanking the S&P 500 futures headed towards the 800 level while spot gold surged through $950 and the euro bounced around.
In the past, under what I would consider "extreme" market conditions, I rarely saw a case where gold, crude, and the EUR/USD all moved independently of each other. With crude and gold being denominated in the USD, even under stressed market conditions it would be unusual to see gold and the dollar gain and move up in tandem. Obviously thing have changed quite a bit the past 6-months and we trade in a new market environment that is even more like guerrila warfare. Traders are taking enemy fire from all sides and from places we didn't know could impact our market. Today a trader asked me what the point of me even watching those correlation is? He wanted to know why I still watch gold, crude, and equities as trade indicators for the EUR/USD.
This trader has the wrong view. I may not use the price action of gold and crude as I used to when the EUR/USD was on an unstoppable bullish run a year ago but this doesn't mean those correlated variables don't speak volumes about the market's intentions.
Variables like the S&P 500 futures and gold are even more valuable to me now than ever. They continue to serve me well as they reveal:
·The overall risk appetite of the market
·The level of panic, fear, and greed in the markets
·Overall liquidity levels of the markets
·Probabilities for extended price moves
·Probabilities for directional changes
When those correlated markets are disjointed and moving counter to how their correlations work by the universal laws of nature, this is the market's way of giving you a sign. Pay attention.
EUR/USD:
Fundamentally we have a number of key events on Friday's calendar, especially for the fragile euro. German GDP and French jobs data will dominate the early Frankfurt and London sessions. I have to forecast German GDP prints right at or slightly below expected. I won't take the time here but traders should spend 10-minutes looking at Germany's recent export data and export news and you will see why there's a real problem in Germany, why they're in recession and why GDP puts the EUR/USD at downside risk early this morning. Later at 0500 EST we get Eurozone flash GDP data and I'm also expecting a downside print here. The news for the euro will not likely be good.
Gold has not offered much support to euro as in times past. Spot gold failed at the $950 level but I remain somewhat bullish on this commodity and would expect to see continued buying on the dips.
The other big risk event for Friday is the start of the G7 meetings in Rome. We can expect folks like Trichet and Geithner to take center stage at this event. The markets will get the G7's communique of course but I don't expect it to say anything groundbreaking or shocking. What can the G7 do? If anything it will be the G20 that can bring a wider global effort to solve the global financial crisis.
I have no forecast or bias for the EUR/USD on Friday. It could make it's weekly high or low on Friday, it could range, it could run in circles, I have no idea and I don't care. My trading plan involves playing price action patterns after I see the euro has exhausted itself by moving too far up or down over a set number of 30-minute EUR/USD openings. That's my whole plan, I'm just playing fluctuations in price and not trying to catch a monster move.
A few key levels to watch as these could be price zones where bulls and bears may want to battle it out:
The EUR/USD has continued to show signs of stronger support below that key 1.2850 level I've been talking about for weeks. It's possible the euro's weak fundamentals weigh on it but there are bigger fish to fry, so keep an eye on its market correlated variables. Trading on Friday will carry a high level of risk so I urge all traders to use good risk and money management. Trading on Friday's is not for the tame of heart and not reccomended, if you had a profitable week, enjoy an early weekend.
The circus came to town in DC on Wednesday as eight top Wall St. CEO's put on a show for congress and all of the financial world. The show was not just for Wall St. or global market participants, this was for American taxpayers as well. JP Morgan's Dimon, Morgan Stanley's Mack and the six other CEO's knew their sound bytes would be broadcast over all the network news channels and they'd be cannon fodder for both left and right wing journalists alike.
I was expecting hostility and we got civility. The CEO's put on a good show but what puzzled me was the emphasis they placed on how detrimental their banks and brokerages are to other financial institutions. They took the stance of being justified for taking $200 billion in taxpayer money because if they had not, they would have been unable to service the financial sector. And then they told congress they don't actually need the money. Great, give it back to America please.
Isn't that the exact thing making taxpayer's blood boil? Taxpayers are asking, "why do we have to give the Fed money to give to the banks to bail out their friends?" It's not exactly that simple but that's how the average American taxpayer is thinking right now. Taxpayers burdened with the responsibility of propping up insolvent institutions by pumping liquidity into too-big-to-fail banks like BOA and Citi is just a fancy, bureaucratic form of money laundering. It's a plan that cannot sustain over the long term.
The whole event was a complete waste of time and did nothing to give Wall St. any sense of confidence. Those eight CEO's are not the ones congress should be grilling or leveling charges against. Those eight men did not start the current financial crisis.
Congress should talk to people like former Fed Greenspan. It was Greenspan's Fed that sold congress on the idea of flooding the credit markets with easy money and then giving the consumer sector nearly unlimited access to home loans and home equity lines of credit without even providing documented proof of income.
Most signal the start of the sub-prime market in 1998 with it peaking in 2005. The year 2005 was the pinnacle of the US housing boom and it's been downhill ever since, being exacerbated by the collapse of US home prices and a full blown recession. Lets talk to former AIG CEO Hank Greenberg who helped set the wheels in motion for mortgage-backed securities. Better yet, lets take a Louisville slugger to Greenberg's head because there's no answers up there anyway.
Lets talk to the idiots running Lehman Brothers, Bear Stearns, and Goldman Sachs in the 1990's and early 2000's. One of those idiots was former Goldman Sachs CEO and former Treasury Paulson. I doubt we'll see Paulson on the stand any time soon.
If congress was serious about their witch hunt they'd bring in those that were responsible for sub-prime, MBS's, CDS's, and trillions worth of cheap credit. Some of those politicians blasting Wall St. should remember they gave the Fed and Treasury approval to create the sub-prime market in the first place. Google: Community Reinvestment Act.
Markets in panic mode:
It was another wild day in the markets... spot gold surged to the upside during London and through the first half of the NY session, starting at $911 and making it all the way to $947 before falling back to $939 after NY closed. Spot gold's strong gains were another clear sign of risk aversion and panic in the global markets. Week after week gold has been the only commodity I've been somewhat bullish on. As long as panic reigns, gold should continue to see buying on the dips.
Spot crude was hammered today, falling just shy of the $34 level. After NY closed spot crude was trading in the mid-$35's, sitting near key support levels. The S&P 500 futures had an equally rough day as they went on a free fall towards the key 820 level. Both crude and the futures weighed on the EUR/USD and EUR/JPY for the entire NY session.
The Treasury auctioned a historic $21 billion in 10-year notes at yield of 2.82%. It's my opinion Treasury Geithner was coached to cause panic ahead of the Treasury's record-breaking bond auction. Equities were rallying the few days leading up to this week's Treasury auctions and there's no way the Treasury can have equities rallying and the global markets feeling safe when they have billions worth of the 3-month, 6-month, 3-year, and 10-year bonds to auction. So, a little market manipulation, a little fear, a little panic, and the Treasury accomplishes its goal of sending money flows their way and not towards Wall St. the past 72-hours.
Netherlands meeting:
As some of you know I'll be in the Netherlands the week of February 22nd. The first few days of the trip I will be meeting with traders who are flying in from around Europe. I wanted to give an update which will answer a few questions I've received the past few days.
We're meeting outside of Amsterdam at the Bilderberg Hotel and unfortunately at this point I cannot allow any others to join us. Several have asked if the meetings will be recorded. I'm afraid we won't be able to accommodate those requests. There won't be anything on Youtube this time.
The past few weeks things have evolved and my trip to Europe is taking on a different direction. The issues we'll be discussing and working through at our meeting will center around two areas: trading and certain economic and financial matters. The trading portion will involve deconstructing the price action patterns and human behavior element and how those factors control the EUR/USD's fluctuations in price.
The structure of our meeting and caliber of attendees would not translate well to video or audio recording. But if any traders are interested in doing a more traditional style trading seminar later in 2009 I'm certainly open to the idea and would pursue that type of endeavor.
EUR/USD:
There are several key fundamental events on the calendar tomorrow which should cause market volatility after the 0830 EST timeframe. Here's a look at the EUR/USD's risk events for Thursday:
The markets should get dismal Eurozone industrial data, an Initial Claims print over 598K and likely over 602K, and retail sales data that I'm expecting to print worse than the economists are forecasting. The markets will have to deal with more recessionary data and a gloomy outlook for the US consumer sector. There are almost no bright spots with the consumer. Not even with the luxury retailers who are down over 25%.
Trichet is a real wild card. His behavior has been erratic during these past few weeks of the financial turmoil and there's no telling what he will do or say on Thursday. He freaked out at his last news conference when he was pressed on his comments about March's rate bias. I can only guess that Trichet is stressed about the cracks in the Eurozone and he's under political and social pressure to slice rates and take fast measures to sure up the European economy and banking system.
For at least a week I've cautioned against shorting the euro below the 1.2850 level and I maintain this view until market conditions change and show me otherwise. I should have further market updates as more liquidity enters the market later on, so check back for updates.
VeriteFX update:
Right now there are 30 of us in the new chat testing out all the features of the community and we don't have an official end date to the testing phase. So far the feedback has been tremendous and we're using this opportunity to get a feel for how we want to do things.
I'm spending this week of testing getting comfortable with the new trading environment, the new technology, and the new features at my disposal. The technology we have is superior and the entire trading community self-contained right within the chat environment. Traders who are in there now testing will surely share a good report on their experience so far.
We are now doing real-time market updates on the VeriteFX blog which can also be accessed here: http://twitter.com/VeriteFX
Trading conditions on Thursday will be crazy so be smart with your risk management.
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.
EUR/USD:
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.
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:
Chrysler: -55%
GM: -49%
Ford: -40%
Toyota: -32%
Nissan: -30%
Honda: -28%
Subaru: +8% (go to Colorado and you’ll see why this is possible)
Hyundai: +14%
EUR/USD:
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.
Jobs—
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.
EUR/USD:
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.
Trading—
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.
In the January 12, 2009 edition of the International Herald Tribune, so-called political genius Henry Kissinger wrote a commentary calling for the formation of the dreaded “New World Order”. You can read his commentary here: http://www.iht.com/articles/2009/01/12/opinion/edkissinger.php
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…
Risk warning:
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.
VeriteFX.com:
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.
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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.
EUR/USD:
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:
·USD/Gold correlation
·Yields and prices on US Treasuries
·USD Index
·Crude
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.
