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July 13th, 2009 @ 11:44 am by Matt "NewstraderFX" Carniol

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There were two very good articles (actually, one is a thread in the forum section) posted on FF recently that I thought had a lot of relevance for traders. What I’d like to do here is expand on both and tie them together because I think there are some very valuable forex trading lessons to be had. The first was an article posted by Piptrain called “How The USD/JPY Can Predict The End Of The Recession” and the thread that caught my attention was called “Giving Up” by Jimmy Jones.

Piptrain made the very astute observation that USD/JPY had gone from being a co-incident to a leading indicator for the S&P. This is incredibly important because if you know the market is setting up to be in either a “risk on” or risk off” trend, you can enter some trades with potentially huge returns.

To review, “risk on” means investors are buying riskier assets like stocks and commodities as they sell the safe ones-the USD and Treasury’s. Risk off is of course the opposite. The market went into severe risk off mode after Lehman Bros. collapsed last September and we’ve now come to the end of the risk on rally that Bernanke ignited in March.

What also happens when the market is in risk on mode is that the yen falls as traders sell it against the (formally) higher-yielding currencies. At least, that was the case until USD/JPY apparently became a leading indicator of the market’s appetite for risk.

USD/JPY (as well as the other yen crosses) had basically been falling right along with the S&P ever since the market peaked in October 2007 and the move into the yen accelerated when global stock markets collapsed through last Fall after the Lehman bust.  But starting at the beginning of 2009, things changed.

USD/JPY started appreciating in January even as the S&P headed lower, making a bullish divergence just as the MACD sometimes does. The way things look now, what USD/JPY was telling us was that the market was setting up to be in risk on mode; the only thing it needed was the right fundamental catalyst which it got on March 15 when Fed Chairman Bernanke went on 60 Minutes and announced the Central Bank was “electronically” printing dollars. Active depreciation of the dollar is a pretty sure way to ignite a stock rally because if the dollar looks set to depreciate, anything you buy with it (like stocks and commodities) has to gain in nominal if not real terms.

Even more interesting is that during most of the recent rally, USD/JPY was going down-in other words, it was making a bearish divergence, signaling that the rally could only go so far because investors were not truly buying risk. All it needed to completely kill it off was perhaps something like the poor NFP report we got 2 weeks ago.

An even stronger indication that the market is moving into full risk off mode is that USD/JPY is continuing to depreciate even as stocks head lower-in other words, it isn’t making a bullish divergence now which is entirely justified especially after all the recent talk about deflation being a bigger concern than inflation along with the G8 saying that now is not the time to begin withdrawing the extraordinary monetary and fiscal policies that have been implemented during the crisis.

So what can be gained from this?

  1. It does indeed look like stocks and commodities are headed lower, which means the dollar will gain against the higher-yielding euro, pound and A$.
  2. If stocks do go down and USD/JPY starts showing a bullish divergence, we’ll know the market is at least prepared to gain given the right set of economic fundamentals.
  3. If stocks eventually gain and USD/JPY shows a bearish divergence, stay ready for an eventual decline
  4. If USD/JPY gains along with stocks, the rally probably has legs.

Giving Up

Jimmy Jones is talking about giving up trading because after finding success during the rally, he’s found things to be very difficult more recently. The exact reason why Jimmy Jones has found it so difficult to trade lately is because the market entered a consolidation period where price moved back and forth but did not trend. Trading is relatively easy when markets are trending because you can “set and forget” or even take profits along the way and buy on dips (in an up-trending, risk on market) or sell on strength in a down trend. But when markets are moving sideways, as they have been over the past few weeks, it’s very easy to see your account get shredded.

Trend following systems like moving average cross-overs all share the same characteristics-they look good in a trending market but fail utterly when markets are moving sideways. They cannot tell you when a trend will end and they certainly can’t tell you when markets will go sideways, which as we know are the most difficult markets to trade. In fact, sideways markets are the main reason why so many forex traders fail.

There are some traders who claim to be good in these types of markets but for the vast majority of us (myself included), they’re just too hard. I basically avoid them like the plague and if that means I don’t have trades for a few days, weeks, or even months-fine. I’ll keep my powder dry for the time when I believe markets can trend. In other words, the decision not to trade is a trade itself.

The only way to avoid this type of price movement is to be an astute observer of what’s happening with the markets in terms of the willingness to buy (or sell) risk and what makes that especially hard is that is that different circumstances create a different set of conditions. For example, what killed the March rally in my opinion was all the talk about deflation from people like Bill Gross of PIMCO, economist Nouriel Roubini and FOMC member Janet Yellen. Why? Because if deflation is truly the risk, the dollar is not likely to depreciate which means the risky assets bought with it (stocks and commodities) are not likely to gain.

I’m not saying this is easy. You have to do your homework. But being aware of what’s going on will help you spot when the trends might start and more importantly, end.

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March 4th, 2008 @ 9:12 pm by Vito Henjoto

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Don’t you miss volatility?

I Do miss Market Volatility! A volatile market for Currency Traders, would relate to a kid with candy, so much to do in so little time. The Adrenaline pumping, Calculating charts in a frenzy is much much better than staring at the charts not going anywhere. These few days is just like watching primary kids having a Table Tennis match, tedious and boring.
Market has been quiet this week, with EUR/USD and GBP/USD still trapped in a range market conditions. Momentum to break either way for them would probably happen today, with a barrage of data to be released today. Read the rest of this entry »

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March 3rd, 2008 @ 9:06 pm by Vito Henjoto

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Further weakness in the dollar or that’s it?

Let’s Re-cap yesterday, Nothing much happened until Around the release of the ISM manufacturing Index From the US, Market was expecting a forecast of 48.0 from a previous of 50.7.

Right Before the data was released EUR/USD printed a new Historical High of 1.5275, when the actual Data shows up 48.3, still Weaker than the previous month but better than the actual forecast, Euro went right back to where it started.

Is this market’s way of thinking, “ Hey The economy is not that bad, yeah it’s slowing but not as bad as we thought” ? Maybe… but USD/JPY back to its 3 years low @102.60, still shows sign that Traders in the market are not willing to think that way.

Risk Aversion is There and will probably stay this week,with what I call the Rate week, we have 5 Major Central banks with their rate decision, Starting with the RBA in about 2 hours time. Read the rest of this entry »

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March 2nd, 2008 @ 11:19 pm by Vito Henjoto

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Dollar slammed last week but recovered some ground on Friday.

The Dollar has recovered some lost ground against all Majors on Friday, profit taking has been blamed for the drop especially in Euro and AUD.
The drop in Dollar mid last week was hugely attributed to comments made by Fed Chairman Bernanke on his 2nd day testimony, in which he stated that smaller banks are most likely going to be affected with all the Economic concerns for the USA.

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January 23rd, 2008 @ 7:40 am by Bogdan Parascanu

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Wednesday’s Jan 23rd midday analysis -13.00 GMT

EurUsd has retraced towards the middle point of yesterday’s range after finding resistance at the 1.4670 area, looking at last weeks chart we can see that around the mentioned level the pair formed a consolidation pattern, this indicates the importance of the former support turned into resistance zone. Without any more surprises we expect the pair to resume its down trend especially while we are trading below 1.4600.

eur-jan-23-08-noon.gif

GbpUsd failed to stay above 1.9600 and after forming a bearish divergence on the smaller timeframes we already saw a test of the 1.9500 support level, if this is breached we expect to retest yesterday’s low at 1.9330 on the way to the bigger bearish target of 1.9180.

gbp-jan-23-08-noon.gif

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January 20th, 2008 @ 7:31 am by Bogdan Parascanu

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EUR/USD Technical View

EurUsd failed to print a new high on the weekly chart, it stopped just under the November 23rd high at 1.4966 at the resistance offered by the trendline that connects August and September 2007 swing lows. Breaking the weekly movement on a daily basis we see that Monday the pair pushed higher and although it made a new high on Tuesday after that we had a straight down move supported by a speech from an ECB banker and the fact the EurUsd was trading in an overbought area. The weekly low was made on Thursday at 1.4587 and after that we saw the bearish momentum slowing down and the pair closed just above 1.4600. We maintain our bearish bias for the following days with the mention that Monday is a holiday in the US and trading might be slow; perhaps the most important bearish target is December 20th low at 1.4300 which is also an important support level a place where bullish traders will want to use as a base for a repeat of December’s movement.
Resistance Levels

  • 1.5000– round number
  • 1.4966- Nov 23rd high
  • 1.4735 –Nov 9th High

Support Levels

  • 1.4500- round number
  • 1.4300 – Sept 30th High
  • 1.4000 – Round number
  • 1.3850 – July 24th High

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January 15th, 2008 @ 2:35 am by Bogdan Parascanu

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EUR/USD Technical View

Euro printed a new high on Monday at 1.4915 just at the the up sloping trendline connecting August and September 2007 lows. The pair got in touching distance of the 1.4966 high and it still got a chance to get there in the next few days even if it doesn’t break decisively above the mentioned trendline. Forming a toppish pattern around the 2007 high or close to the 1.5000 psychological target will give bears a new opportunity to open shorts as we see the beginning of a bearish divergence on the higher timeframes. We didn’t expect the pair to move this high but after making a new high and showing some bullish momentum we are starting to look at what will happen if and when we will reach the 1.5000 level, like we said it’ll be a good place to short but there are already numerous voices in the markets that say it will go even higher.
Resistance Levels

  • 1.5000– round number
  • 1.4966- Nov 23rd high
  • 1.4735 –Nov 9th High

Support Levels

  • 1.4500- round number
  • 1.4300 – Sept 30th High
  • 1.4000 – Round number
  • 1.3850 – July 24th High

Read the rest of this entry »

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January 14th, 2008 @ 7:47 am by Bogdan Parascanu

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Monday’s Jan 14th midday analysis -13.00 GMT

EurUsd pushed higher and got above 1.4900 so far in today’s trading session and although at the moment is trading just a few points below that it has built up some bullish short term momentum, perhaps enough to make it to the 1.5000 zone in the next few days.

eur-jan-14-08-noon.gif

GbpUsd moved also higher, but with little momentum covering only 70 points from the Asian low to the early UK session high. Trading above 1.9600 is hard the pair having some tough resistance to break at 1.9650 which is also a former low from early this year and also is the 50% Fibonacci retracement of the 1.9830/1.9480 down move.

gbp-jan-14-08-noon.gif

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