: Although USD strength continued during falling equities, the US currency has shown modest declines during equity gains. Meanwhile, the unfolding strength in oil despite of a robust USD calls for $89 as a viable target in US crude. GBP is the biggest loser of the day while CAD retains its gains as crude holds firm. We still expect $1.5945 in cable. EURUSD technicals move from bad to worse and a retest of $1.42 remains in the works as early as as next week.
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Dollar bears are in control today as weaker housing market data confirms Fed President Duke's warning that the headwinds in the housing market are relatively strong. Pending home sales dropped 16 percent in November, the sharpest decline since the National Association of Realtors starting tracking the data in 2001. This latest report breaks the consistent rise in pending home sales seen between Feb and October. Given the stronger existing home sales report and weaker new home sales report, the state of the housing market was a bit unclear but the drop in pending home sales suggests that the housing market may not be as resilient as everyone expects. Although factory orders rose 1.1 percent, traders discounted the upside surprise after Monday's stronger than expected ISM manufacturing report. The risk was in pending home sales and the disappointment proved to be a bigger market mover for the U.S. dollar.
Yen Shrugs Off Japanese Finance Minister Fujii Resignation
Meanwhile the dominant story today is Yen strength. The Japanese Yen appreciated against every major currency. The move can be partially attributed to the comments from a senior Chinese official who said the Yuan is facing a new round of appreciation pressures and expectations for stronger Yuan could attract speculative flows. As a proxy for Asia, some traders will express their Yuan views through the Yen. Demand for the currency was so strong that traders even shrugged of news of Finance Minister Fujii's plans to resign due to health problems. During the holidays, Fujii who is 77 was admitted to the hospital due to fatigue after compiling the national budget for the next fiscal year. Interestingly enough, the Yen has strengthened and not weakened. If U.S. Treasury Secretary Geithner resigned for whatever reasons, the dollar would probably weaken significantly due to uncertainty surrounding his potential replacements. The lack of concern by Yen traders could reflect Fujii's popularity and effectiveness.
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GBPUSD falls back below its 200-day MA after failing to break above the 38% retracement from the Nov high at 1.6236. We pointed out 1.6240 as a robust resistance in yesterdays IMT. Weaker than expected UK construction PMI prompted aggressive selling. Daily stochastics suggest prolonged fall towards $1.5945, followed by $1.5880. GBPCHF drops back below $1.65, with the likelihood of breaching $1.6430 support mounting.
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Pound tumbled from the start of the European open today losing more than a cent as it traded nearly 200 points lower than the highs set yesterday, after an article in the UK Telegraph suggested that UK may face a sovereign debt crisis as the year develops.
The Telegraph quoted the large US fixed income investment house PIMCO as saying that they will not be buyers of UK gilts because of the massive issuance coming out in 2010. Paul McCulley, a managing director at Pimco, said: "We are currently cutting back in the US and UK because... supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines."
Cable was also kneecapped by yet another rejection by Cadbury of the Nestle takeover offer that weighed negatively on M and A flows. The rise of risk aversion weighed heavily on sterling which is highly sensitive to risk flows given UK economic dependence on capital markets.
The fears of a financing crisis is the one factor that could scuttle the nascent recovery in UK economy especially at a time when the BoE considers the possibility of exiting its 200 Billion pound quantitative easing program.
Over the past week cable has rallied strongly off its lows as the economic data surprised to the upside. Today’s UK PMI Construction numbers could allay some of the fear currently extant in the market if it beats expectations as well. For now however, the tug of war between the bulls betting on a stronger recovery and growth prospects and bears fearful of financing troubles ahead will likely continue, with 1.6000 once again the immediate level of interest and the recent swing low of 1.5837 the key level of support.
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When most people start trading, they do not put much thought into their trades. They will either buy or sell a currency pair (probably the EUR/USD) because they think they see a trend or maybe even because they put a moving average on the chart. Sometimes there is no reason at all for the trade, they just want in. Either that trade nets a small profit or the trades starts going against the new trader. The trader that gets the small profit will feel invincible and likely base trades in the near future on the same reason as the first one. Of course they expect every trade to win. The trader whose position moves against them leaves their position open, stares at the their computer without blinking, and laments that they will get out if the market only goes back to break even.
Sooner or later, the trader who won their first trade puts on a loser and acts much like the trader above who lost their first trade. After a large loss to the account, the trader then puts on a large position trying to win it back. Inevitably that trade crushes their account, or a trade soon after will. Sound familiar?
The reason that new traders blow out their account is that they assume trading is easy, they don't realize the role their emotions play in trading with real money, and they have no trading plan. Well, it doesn't take long to learn on your own that trading isn't easy, so we won't spend too much time discussing that. However, using a consistent trading plan is the only way to reign in your emotions and develop consistency in your trading. If you enter at random places and exit when your "gut" tells you to, you are in for a lot of pain.
Every remotely successful trader I have ever spoken with has a trading plan. These traders do the same thing every time, occasionally tweaking one aspect of their plan at a time. Trying to change everything at once makes it impossible to tell what is working and what is not. We will go through the important aspects of a trading plan below, and we will go over how the FX360.com technical analysis works with these principles.
First off, I believe it is imperative to identify your entry, stop, and profit target(s) before entering every trade. If you try to determine your exits once you enter the trade, your emotions will skew your view of the facts unless you are a robot. If the exits are planned before entering, it is tough for your emotions to screw you up. By placing your exits in the system when you enter the trade, it is much easier to stay disciplined to your plan. Another advantage is that you don't have to stare at your computer 24 hours a day waiting for a place to exit.
I also feel it is important to know your risk:reward ratio before entering a trade. How on earth can you determine your risk reward:ratio if you don't plan your stop and profit target(s) before entering the trade? It can't be done. To measure this ratio, simply divide the distance between the entry and the profit target by the distance between the entry and the stop. Everyone's concept of a "good" risk:reward ratio varies, but I prefer to have a risk:reward ratio around 1:1.5.
Once you have planned your entry and stop, you can also determine your position size. Your position size should generally be the same percentage of your equity each trade. Most traders risk 1-3% on each trade, using the same percentage for every trade. In other words, all trades are weighted equally. The same amount of capital should be risked on a trade with a 300 pip stop as a 30 pip stop. In order to determine your position size, simply multiply your total equity by your percentage risk per trade (typically 1-3%), which is the amount of money you should risk per trade (X). Next, multiply the number of pips between your entry and stop by the currency's pip value (Y). You can also draw a line from your entry to stop using the value calculator to get Y. Then divide X by Number Y to get the number of lots you should trade. Once you practice this, it is easy.
The methodology we use (geometric pattern recognition) makes it very easy to follow this plan. Everything is already planned out, all you need to add is your total equity and percentage you want to risk for each trade (typically 1-3%). By planning your trades out before you enter you can now trade on any time frame because you are risking the same amount for each trade. This will lead to much more consistent results that using static numbers when determining position size.
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Many so called market mavens and talking heads have been mentioning over the past few weeks that the U.S. Dollar index is not the main catalyst for the market rally. Well today the market is purely moving inverse to the dollar. Over the last three weeks the volume has been extremely light and that allows the institutional money that controls the markets to easily keep the market floating higher. The weak dollar is still the main catalyst for the higher moves in this market.
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Im not sure if this is a symmetrical triangle or a wedge but its very aggressive. These lines I think were drawn around 18th dec as per a chart by WS so its a pretty well behaved market so far
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By Nicholas Santiago on January 4th, 2010 1:00pm Eastern Time
The SPX(NYSE:SPY) market is trading higher to start the first trading session of 2010. This all comes on the back of a weaker U.S. Dollar(NYSE:UUP). Many traders and investors have been discounting the weak dollar/stronger stock market relationship over the past three weeks as both have moved higher together. Today that old relationship is certainly alive and well as the dollar is getting crushed and the market is soaring. Obviously gold(NYSE:GLD), oil(NYSE:USO), and agriculture stocks such as Potash(NYSE:POT) are all higher today. In the past the market usually trades higher during the first few days of the new trading year. The key is to see what it does once the volume comes back into the markets. It is said that the market goes the same way as the month of January goes. Last January was negative month and the market staged a historic rally in 2009. Therefore, watch the leading stocks and indexes going forward and don't listen to any old market sayings.
When the dollar is weak it is important to look at how leading stocks trade that are not inflationary or commodity related. Apple Computer(Nasdaq:AAPL), Google(Nasdaq:GOOG), JP Morgan(NYSE:JPM), and Goldman Sachs(NYSE:GS), are all leading stock that are trading higher today that are not commodity related. On the flip side leading stocks such as BIDU Inc(NYSE:BIDU), and Amazon(Nasdaq:AMZN) are actually negative on the day showing weak relative strength intra day. This is reason for concern when some leaders are not participating in such a big rally.
What will 2010 bring for the markets? Many of the talking heads in the media are looking for another huge year. Personally, I would not go out and buy the new Ferrari just yet. Throughout history the nine year of a decade is usually a very bullish year. This is not the same case for a zero year of a decade. This year may bring people back to reality a little bit. The major indexes are up over fifty percent from the March 2009 low. Do they go back to new all times highs again this year?
The 10 and 30 year bond yields have been rising lately and this could put some more pressure on the already depressed housing market as mortgage rates will rise. The last time the 10 yr bond yield reached 4.00% the stock market actually had a four week pullback in June 2009. This was as close to a correction as the market has seen since the March lows. We are getting close to that level again so beware of 2010.
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Currencies and stocks are starting the New Year with a bang. On the heels of solid manufacturing data from China and an optimistic outlook for the New Decade, higher yielding currencies appreciated throughout the European trading and into the U.S. trading session. The broad sell-off in the U.S. dollar this morning indicates that risk appetite is driving price action in the foreign exchange markets. The Dow and Nasdaq climbed to a fresh 15 month highs as soon as the U.S. equity markets opened for trading and this momentum is reinforced by the strong U.S. ISM data.
U.S. Manufacturing Sector Chugging Along
In the month of December the ISM manufacturing index climbed to the highest level in more than 3.5 years. The details of the report were mostly encouraging with the new orders and employment components increasing. The increase in manufacturing activity should help to ease job losses in the sector. Despite the strength of the dollar last month, the manufacturing sector continues to chug along. The decline in new export orders suggests that the increase in demand could be domestic, which would be a nice change of pace. Also, the widening of the new orders-inventory gap points further increases in activity. The significant rise in the prices paid component indicates that inflationary pressures are beginning to return. Although construction spending declined for the seventh month in a row, the pace of contraction is not as significant as the average decline over the past year.
The big question this week is whether the U.S. Payrolls will rise for the first time in 2 years. Many economists are optimistic and believe that job growth has returned. Although we are skeptical, we recognize that the price action in the dollar reflects this same sentiment. We will reserve our judgment on payrolls until Wednesday's ADP, Challenger and service sector ISM reports after which we will publish our outlook for NFPs.
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Higher than expected manufacturing figures in the UK and Eurozone are boosting European FX against the deteriorating JPY and retreating USD. Nikkei-225 rose 1% to 10,654, closing above its 100-week MA. FTSE-100 is up 34 pts at a fresh 13-month high of 5447, facing its 200-week MA at 5552. GBPUSD regains its 200-day MA for the 4th straight day, testing the 38% retracement from the Nov high at 1.6236, which also coincides approx with the highs of Dec 18 & 31st. Next resistance emerges at Cable has usually extended its gains into the US session on days of stronger UK data and particularly in those of strong confirmation in the US. All eyes will be on US ISM at 15:00 GMT. SEE ECON CALENDAR for today's data as well as the rest of the week. http://bit.ly/5pdFANRead more…
