What an interesting start to the week... Monday was another historical day, that's for sure and I was glad to be a part of it. I told our traders in the chat there's no way I was going to sit on the sidelines and not trade these historical moves... fortunately we ended our trading with modest profit but the learning lesson from today's market action is priceless.
Never let a chance to be a part of history pass you by.
Wall St. meltdown:
I suppose we should start the update with a quick look at the carnage on Wall St. as that's the center of the world's attention right now. The Dow hit lows not seen since April of 1997. The S&P 500 futures did nothing other than sell-off from the minute Asia opened Sunday night right through Monday's NY session. It wasn't until after NY closed and the tremendous selling pressure dissipated that the S&P 500 futures were able to recover off the 700 level.
The S&P 500 has closed down 10 out of the last 11 trading days... it's down over 22% in 2009, after losing 4.7% on Monday. The Dow dropped a respectable 4.7% today. What can really be said? It was a bloodbath.
Endless volume selling--
When we look at the price action of any tradeable instrument on a spot market, be it a currency pair, stock, or commodity, the price action itself usually tells the whole story. Unfortunately for us FX traders we have no way to measure volume but with something like the S&P 500 futures we can gauge volume because that market has a central exchange unlike the EUR/USD.
I saw the most intense volume selling of equities in my brief trading career... at times the volume selling favored the bears by as much as a 30:1 ratio. For most of the NY session the ratio of bears vs. bulls was a constant 20:1 in favor of the bears. Even when those indexes would move up a few ticks the bears piled back in to drive the price down.
This is purely speculation and conjecture but I believe that same level of heavy volume selling seen on Monday will be unsustainable over consecutive trading days. When I consider the human behavorial aspect to what we saw on Wall St., I think there was a lot of anger, revenge, and hopelesness in today's heavy equities sell-off.
I think the guy who got a couple thousand back on his tax return or the pissed off housewife with a TD Ameritrade account were probably also very active in the market on Monday helping to drive prices down through nothing other than a tidal wave of selling.
As of right now (2200 EST) the S&P 500 futures have already recovered to the 713 after closing right on the 700 level. After what I saw today I'm even more convinced of a soon-to-arrive relief bear market rally.
Have these markets seen their lows? I don't think so. In fact I think we're just starting the second half of the World Cup of Financial Chaos. We have quite a ways to go and there's no bottom put in for the euro, equities, or their market correlated variables. But a trader wouldn't want to get caught on the wrong side of a relief rally when bulls get a chance to short squeeze the bears. The bounce back up should be violent and exaggerated.
USD ready to break resistance:
The USD Index is right on the brink of slicing through resistance levels as we sit near highs not seen in recent memory. I still think it's make or break time for the USD Index. If this kind of fear and anxiety remains in the air I don't see why the index can't move through the 89 level. The next stop up would be around 91.50/92.00.
What's keeping the lid on the USD Index for now is the resilient EUR/USD. Monday's losses on the GBP/USD helped push the index higher but the euro stood its ground in light of the intense equities sell-off in addition to the economic mess in the Eurozone. I really have no explanation for how the EUR/USD is able to hover around the 1.2600 level right now, it makes no sense but I'm not bullish on the pair.
Overall the USD, EUR, and JPY were quiet on Monday as all eyes were on Wall St. That may soon change as market participants will have to deal with an ECB and BOE rate decision plus an abysmal NFP which could print over the -600K level. At some point soon the euro, cable, yen, and dollar will need to be reckoned with.
Here's the dilemma as I see it... the Fed can either have a strong USD which would make the spiraling deficit more manageable or they can have a weak USD which will act as a catalyst to jump start growth, re-inflate the economy and put a bottom in equities. My feeling is Bernanke and crew would prefer the weak USD scenario and he'll let the next generation deal with the massive debt load his president's administration is putting on future earners in America.
As proud as Trichet is of his euro he needs that thing sold-off just as much as Bernanke needs the dollar sold-off. The problem with a battle-of-worsts in the Forex market is that there is no real, absolute value of any currency because each currency is pegged to another. The price of any currency is purely relative based on whatever it's counterpart is doing.
Both the US and Eurozone needs a worthless currency right now but when you consider the dollar and the euro, I can't imagine market participants sending more money flows into the euro compared to the dollar.
I think a stronger EUR/USD sell-off will be required in order for the USD Index to move up much further.
EUR/USD:
The mess in Europe should get even nastier. I'm convinced a smaller Eastern European is on the brink of default and it's just a matter of time before we get more downgrades on European sovereign debt. Why does Germany and the ECB want an Eastern European nation to fail? I don't know, I don't have an answer for that but I'm sure politics are at play, just like in the US.
European banks are holding at least USD$22 trillion worth of the same exact toxic assets US banks were and are still holding... the same assets that make their balance sheets scream "insolvency". You have to look very hard to find any good news out of the Eurozone and especially out of the European banking system. The risks are only increasing in Europe.
The EUR/USD's market correlated variable, crude oil, closed the day down 10% from last week's high after the rally failed to sustain. The gold sell-off was fierce and relentless with the spot price falling over $70 since it breached $1,000 just a few days ago. The EUR/Gold correlation remains largely disjointed but the EUR/Crude correlation is proving to be more reliable.
Fundamentally, we have a number of key events on the calendar for Tuesday. The most important are Bernanke's testimony before the Senate Budget Committee at 1000 EST followed by Geithner's testimony before the House Ways and Means Committee at 1230 EST.
Those two certainly put Wall St. at risk for another meltdown, especially Geithner. Geithner needs to step up and instill some confidence in these markets. When Geithner decides to get that "oops I I think I sharted" look off his face maybe Wall St. will stop selling-off. Wall St. hates Obama, I think they've made that much clear. I'm beginning to think these guys are happy to see the rapid erosion of wealth, maybe there's more than meets the eye here.
Just as critical as Bernanke and Geithner's testimonies is Trichet's before the House of Finance in Frankfurt. I think all those of those guys put the EUR/USD at risk tomorrow, more so downside risk than upside risk. The big data for tomorrow that my weigh on Wall St. and currencies is Pending Home Sales. This is data from January and I'm expecting a print as bad or worse than expected.
As far as trading goes, I'm going back to shorting the euro on the rises. I don't like what's happening in Eastern Europe, with the ECB, Trichet, Germany, and EMU members like Italy, Spain, and Greece. I don't believe any extended euro gains are sustainable with the risks in the European banking system and the pending rate cut and negative economic outlook on Thursday.
If you're trading these extreme conditions use good risk and money management. More updates later and key levels early Tuesday morning.
-David
Never let a chance to be a part of history pass you by.
Wall St. meltdown:
I suppose we should start the update with a quick look at the carnage on Wall St. as that's the center of the world's attention right now. The Dow hit lows not seen since April of 1997. The S&P 500 futures did nothing other than sell-off from the minute Asia opened Sunday night right through Monday's NY session. It wasn't until after NY closed and the tremendous selling pressure dissipated that the S&P 500 futures were able to recover off the 700 level.
The S&P 500 has closed down 10 out of the last 11 trading days... it's down over 22% in 2009, after losing 4.7% on Monday. The Dow dropped a respectable 4.7% today. What can really be said? It was a bloodbath.
Endless volume selling--
When we look at the price action of any tradeable instrument on a spot market, be it a currency pair, stock, or commodity, the price action itself usually tells the whole story. Unfortunately for us FX traders we have no way to measure volume but with something like the S&P 500 futures we can gauge volume because that market has a central exchange unlike the EUR/USD.
I saw the most intense volume selling of equities in my brief trading career... at times the volume selling favored the bears by as much as a 30:1 ratio. For most of the NY session the ratio of bears vs. bulls was a constant 20:1 in favor of the bears. Even when those indexes would move up a few ticks the bears piled back in to drive the price down.
This is purely speculation and conjecture but I believe that same level of heavy volume selling seen on Monday will be unsustainable over consecutive trading days. When I consider the human behavorial aspect to what we saw on Wall St., I think there was a lot of anger, revenge, and hopelesness in today's heavy equities sell-off.
I think the guy who got a couple thousand back on his tax return or the pissed off housewife with a TD Ameritrade account were probably also very active in the market on Monday helping to drive prices down through nothing other than a tidal wave of selling.
As of right now (2200 EST) the S&P 500 futures have already recovered to the 713 after closing right on the 700 level. After what I saw today I'm even more convinced of a soon-to-arrive relief bear market rally.
Have these markets seen their lows? I don't think so. In fact I think we're just starting the second half of the World Cup of Financial Chaos. We have quite a ways to go and there's no bottom put in for the euro, equities, or their market correlated variables. But a trader wouldn't want to get caught on the wrong side of a relief rally when bulls get a chance to short squeeze the bears. The bounce back up should be violent and exaggerated.
USD ready to break resistance:
The USD Index is right on the brink of slicing through resistance levels as we sit near highs not seen in recent memory. I still think it's make or break time for the USD Index. If this kind of fear and anxiety remains in the air I don't see why the index can't move through the 89 level. The next stop up would be around 91.50/92.00.
What's keeping the lid on the USD Index for now is the resilient EUR/USD. Monday's losses on the GBP/USD helped push the index higher but the euro stood its ground in light of the intense equities sell-off in addition to the economic mess in the Eurozone. I really have no explanation for how the EUR/USD is able to hover around the 1.2600 level right now, it makes no sense but I'm not bullish on the pair.
Overall the USD, EUR, and JPY were quiet on Monday as all eyes were on Wall St. That may soon change as market participants will have to deal with an ECB and BOE rate decision plus an abysmal NFP which could print over the -600K level. At some point soon the euro, cable, yen, and dollar will need to be reckoned with.
Here's the dilemma as I see it... the Fed can either have a strong USD which would make the spiraling deficit more manageable or they can have a weak USD which will act as a catalyst to jump start growth, re-inflate the economy and put a bottom in equities. My feeling is Bernanke and crew would prefer the weak USD scenario and he'll let the next generation deal with the massive debt load his president's administration is putting on future earners in America.
As proud as Trichet is of his euro he needs that thing sold-off just as much as Bernanke needs the dollar sold-off. The problem with a battle-of-worsts in the Forex market is that there is no real, absolute value of any currency because each currency is pegged to another. The price of any currency is purely relative based on whatever it's counterpart is doing.
Both the US and Eurozone needs a worthless currency right now but when you consider the dollar and the euro, I can't imagine market participants sending more money flows into the euro compared to the dollar.
I think a stronger EUR/USD sell-off will be required in order for the USD Index to move up much further.
EUR/USD:
The mess in Europe should get even nastier. I'm convinced a smaller Eastern European is on the brink of default and it's just a matter of time before we get more downgrades on European sovereign debt. Why does Germany and the ECB want an Eastern European nation to fail? I don't know, I don't have an answer for that but I'm sure politics are at play, just like in the US.
European banks are holding at least USD$22 trillion worth of the same exact toxic assets US banks were and are still holding... the same assets that make their balance sheets scream "insolvency". You have to look very hard to find any good news out of the Eurozone and especially out of the European banking system. The risks are only increasing in Europe.
The EUR/USD's market correlated variable, crude oil, closed the day down 10% from last week's high after the rally failed to sustain. The gold sell-off was fierce and relentless with the spot price falling over $70 since it breached $1,000 just a few days ago. The EUR/Gold correlation remains largely disjointed but the EUR/Crude correlation is proving to be more reliable.
Fundamentally, we have a number of key events on the calendar for Tuesday. The most important are Bernanke's testimony before the Senate Budget Committee at 1000 EST followed by Geithner's testimony before the House Ways and Means Committee at 1230 EST.
Those two certainly put Wall St. at risk for another meltdown, especially Geithner. Geithner needs to step up and instill some confidence in these markets. When Geithner decides to get that "oops I I think I sharted" look off his face maybe Wall St. will stop selling-off. Wall St. hates Obama, I think they've made that much clear. I'm beginning to think these guys are happy to see the rapid erosion of wealth, maybe there's more than meets the eye here.
Just as critical as Bernanke and Geithner's testimonies is Trichet's before the House of Finance in Frankfurt. I think all those of those guys put the EUR/USD at risk tomorrow, more so downside risk than upside risk. The big data for tomorrow that my weigh on Wall St. and currencies is Pending Home Sales. This is data from January and I'm expecting a print as bad or worse than expected.
As far as trading goes, I'm going back to shorting the euro on the rises. I don't like what's happening in Eastern Europe, with the ECB, Trichet, Germany, and EMU members like Italy, Spain, and Greece. I don't believe any extended euro gains are sustainable with the risks in the European banking system and the pending rate cut and negative economic outlook on Thursday.
If you're trading these extreme conditions use good risk and money management. More updates later and key levels early Tuesday morning.
-David
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