Wall St. finally got its rally Wednesday... not a bear market rally but a classic textbook relief rally. The media says the market's got excited after hearing a rumor the Chinese plan on creating a new economic stimulus package of their own. That might be the story but the fact is, sellers were non-existent yesterday causing the relief rally for the Dow, S&P 500, euro, cable, crude, etc. Nearly all global markets were lacking sellers.
There's a huge difference between a relief rally and a bear market rally because the missing component between the two is buying power. The reason why yesterday's upside gains on the Dow and S&P 500 was a relief rally was due to the fact the intense volume selling disappeared and the profit-takers were in abundance.
In a bear market rally not only does the volume selling disappear and the profit-taking come in, but the bulls recognize what's happening and use the opportunity to pile in on the long side to use their liquidity to drive prices higher, trigger stops, and cause short-covering. What happened was a definite lack of volume selling pressure but also a lack of volume buying pressure to that replicated the type of selling momentum we saw Monday and Tuesday.
While the bears were taking-profit and removing short-side liquidity from the market the bulls mostly sat there all day and watch prices drift higher. There's clearly no groundswell of even slightly bullish sentiment on Wall St. The Dow and S&P 500 were perfectly set-up to make substantial gains on Wednesday and the bulls let their opportunity pass them by.
Right before Wall St. closed yesterday I made a comment in the chat about seeing how who had the nerve to hold their S&P 500 and Dow longs into the close... sure enough the S&P 500 sold-off right into the close with the futures falling from 723 to 702 in a matter of just a few hours. Traders are starting to get too predictable these days.
But with a new day we get a whole new set of challenges we need to contend with...
ECB:
As far as the EUR/USD is concerned the only thing that matters today is what happens at 0745 EST and 0830 EST. Trichet will take center stage as all global market participants watch and listen for any signs or clues for Trichet's bias on rates going forward.
My forecast is for a 50bps rate cut, dropping the ECB's key lending rate to 1.50% vs. the Fed's effective 0.00% Fed Funds Rate. Anything more or less than a 50bps cut is going to cause a considerable amount of speculation and panic in these markets and that would be a whole separate issue we need to contend with. I don't think Trichet is in the business of causing panic so we should expect that 50bps cut.
No matter what I think Trichet has to cut at least 50bps today. He has no choice because his precious Eurozone is crumbling under the weight of the global financial turmoil. His biggest producer, Germany, is in the midst of a sharp recession with no signs of letting up in the near future. All those forecasts I gave last year about the Eurozone falling into a terrible recession are finally starting to play out, it's just taken a little longer for Europe to catch up to the U.S.
I'm not sure how many traders realize this but the Eurozone economy is actually larger than the US economy when you break it down in terms of GDP valued in the US dollars. The Eurozone is (was) quite larger than the US in terms of GDP with Germany being Europe's biggest economy and the world's third largest.
Now they're screwed and Europe's in worse shape than many expect and some are admitting. Just this morning month-over-month German Retails Sales printed -0.6% vs. an expected 0.3%. I won't take the time to go through the laundry list of all the reasons why the recession in the Eurozone will get worse, there's plenty of that in past updates, but my point is I don't believe Trichet can say much to instill confidence in Europe. Trichet will need to really dig deep to find any bright spots in Europe. If he paints anything but a bleak picture he's lying.
Euro risk--
Potentially there is one thing Trichet could say that would send the EUR/USD on a free-fall -- any mention of a threat to European sovereign debt or a default in any European economy. Even if he say's something about a small player like Latvia being at risk of a sovereign default I would expect to see the euro drop sharply.
I'm convinced a default in Europe is on the horizon. I can't predict who or when but I feel like it's coming sooner rather than later. Europe is holding at least $22 trillion in the same exact toxic assets that made US banks and financial institutions insolvent and in need of a government bailout. Anybody that thinks Europe's banks will magically escape the same fate is either crazy or knows something I don't know.
If you're a trader, watch that Trichet press conference, it's an absolute must for today. If anything else, during the Q and A session you'll get to see a few emotional outbursts from the guy and that's always entertaining.
EUR/USD:
Today I'm nothing but bearish on the euro, bottomline. That doesn't mean I'm loading up on euro shorts in anticipation of today's ECB rate event. I still have an open euro short from the call we made last night but it will be closed for +1 in case the EUR/USD turns back higher towards the 1.2650 level.
So far in early London trading the euro is mostly under pressure and remains towards the downside. It's been failing above the 1.2624 level so far this morning but obviously we have several hours between now and the Trichet press conference.
The S&P 500 futures have continued to sell-off right through the Asian session and hover back near the 700 level. Crude won't quit and gold bears failed to send that thing through the $900 level after spiraling down $100 the past few trading sessions.
Wall St. has to contend with Initial Claims, Factory Orders, and another boring speech by Geithner. Wall St. will not likely open with the Dow and S&P 500 too much to the upside. It's possible the bears and the bulls are going to sit there and wait for the other to make a move today. Yesterday's relief rally ended up being pathetic as both equities indexes fell apart at the end.
I will post some EUR/USD key levels later on in the London session. So far we've managed to make decent profit this week in the midst of the chaos and I plan on trading again today. These conditions are here to stay and I enjoy the challenge, so we'll see what we can do.
VeriteFX--
Just a quick note on VeriteFX... we're officially launched now. I wanted to get a quiet start, not make a big deal out of it. Just after the first day we had over 100 traders as members and we're represented on every continent on earth except Antarctica.
Spread the word and let other traders know we're here and trading. We've got a great group of traders already settled in and things are going well. Traders that are new to the community or new to our style of trading should take the time to read the following links:
About Us
Results Page
The VeriteFX trading community is free and open to all traders. If you would like to join us you can sign up here.
The blog is now open for traders to post comments and questions. If you have a question about something you read in the blog, about trading, the markets, etc. feel free to post and I'll do my best to answer in a timely manner. Any offensive crap or childish stuff will be deleted, we're not going to play that game. This is a professional trading community for the serious-minded trader.
That's all for now. Be safe in the markets today and use good risk and money management.
-David
There's a huge difference between a relief rally and a bear market rally because the missing component between the two is buying power. The reason why yesterday's upside gains on the Dow and S&P 500 was a relief rally was due to the fact the intense volume selling disappeared and the profit-takers were in abundance.
In a bear market rally not only does the volume selling disappear and the profit-taking come in, but the bulls recognize what's happening and use the opportunity to pile in on the long side to use their liquidity to drive prices higher, trigger stops, and cause short-covering. What happened was a definite lack of volume selling pressure but also a lack of volume buying pressure to that replicated the type of selling momentum we saw Monday and Tuesday.
While the bears were taking-profit and removing short-side liquidity from the market the bulls mostly sat there all day and watch prices drift higher. There's clearly no groundswell of even slightly bullish sentiment on Wall St. The Dow and S&P 500 were perfectly set-up to make substantial gains on Wednesday and the bulls let their opportunity pass them by.
Right before Wall St. closed yesterday I made a comment in the chat about seeing how who had the nerve to hold their S&P 500 and Dow longs into the close... sure enough the S&P 500 sold-off right into the close with the futures falling from 723 to 702 in a matter of just a few hours. Traders are starting to get too predictable these days.
But with a new day we get a whole new set of challenges we need to contend with...
ECB:
As far as the EUR/USD is concerned the only thing that matters today is what happens at 0745 EST and 0830 EST. Trichet will take center stage as all global market participants watch and listen for any signs or clues for Trichet's bias on rates going forward.
My forecast is for a 50bps rate cut, dropping the ECB's key lending rate to 1.50% vs. the Fed's effective 0.00% Fed Funds Rate. Anything more or less than a 50bps cut is going to cause a considerable amount of speculation and panic in these markets and that would be a whole separate issue we need to contend with. I don't think Trichet is in the business of causing panic so we should expect that 50bps cut.
No matter what I think Trichet has to cut at least 50bps today. He has no choice because his precious Eurozone is crumbling under the weight of the global financial turmoil. His biggest producer, Germany, is in the midst of a sharp recession with no signs of letting up in the near future. All those forecasts I gave last year about the Eurozone falling into a terrible recession are finally starting to play out, it's just taken a little longer for Europe to catch up to the U.S.
I'm not sure how many traders realize this but the Eurozone economy is actually larger than the US economy when you break it down in terms of GDP valued in the US dollars. The Eurozone is (was) quite larger than the US in terms of GDP with Germany being Europe's biggest economy and the world's third largest.
Now they're screwed and Europe's in worse shape than many expect and some are admitting. Just this morning month-over-month German Retails Sales printed -0.6% vs. an expected 0.3%. I won't take the time to go through the laundry list of all the reasons why the recession in the Eurozone will get worse, there's plenty of that in past updates, but my point is I don't believe Trichet can say much to instill confidence in Europe. Trichet will need to really dig deep to find any bright spots in Europe. If he paints anything but a bleak picture he's lying.
Euro risk--
Potentially there is one thing Trichet could say that would send the EUR/USD on a free-fall -- any mention of a threat to European sovereign debt or a default in any European economy. Even if he say's something about a small player like Latvia being at risk of a sovereign default I would expect to see the euro drop sharply.
I'm convinced a default in Europe is on the horizon. I can't predict who or when but I feel like it's coming sooner rather than later. Europe is holding at least $22 trillion in the same exact toxic assets that made US banks and financial institutions insolvent and in need of a government bailout. Anybody that thinks Europe's banks will magically escape the same fate is either crazy or knows something I don't know.
If you're a trader, watch that Trichet press conference, it's an absolute must for today. If anything else, during the Q and A session you'll get to see a few emotional outbursts from the guy and that's always entertaining.
EUR/USD:
Today I'm nothing but bearish on the euro, bottomline. That doesn't mean I'm loading up on euro shorts in anticipation of today's ECB rate event. I still have an open euro short from the call we made last night but it will be closed for +1 in case the EUR/USD turns back higher towards the 1.2650 level.
So far in early London trading the euro is mostly under pressure and remains towards the downside. It's been failing above the 1.2624 level so far this morning but obviously we have several hours between now and the Trichet press conference.
The S&P 500 futures have continued to sell-off right through the Asian session and hover back near the 700 level. Crude won't quit and gold bears failed to send that thing through the $900 level after spiraling down $100 the past few trading sessions.
Wall St. has to contend with Initial Claims, Factory Orders, and another boring speech by Geithner. Wall St. will not likely open with the Dow and S&P 500 too much to the upside. It's possible the bears and the bulls are going to sit there and wait for the other to make a move today. Yesterday's relief rally ended up being pathetic as both equities indexes fell apart at the end.
I will post some EUR/USD key levels later on in the London session. So far we've managed to make decent profit this week in the midst of the chaos and I plan on trading again today. These conditions are here to stay and I enjoy the challenge, so we'll see what we can do.
VeriteFX--
Just a quick note on VeriteFX... we're officially launched now. I wanted to get a quiet start, not make a big deal out of it. Just after the first day we had over 100 traders as members and we're represented on every continent on earth except Antarctica.
Spread the word and let other traders know we're here and trading. We've got a great group of traders already settled in and things are going well. Traders that are new to the community or new to our style of trading should take the time to read the following links:
About Us
Results Page
The VeriteFX trading community is free and open to all traders. If you would like to join us you can sign up here.
The blog is now open for traders to post comments and questions. If you have a question about something you read in the blog, about trading, the markets, etc. feel free to post and I'll do my best to answer in a timely manner. Any offensive crap or childish stuff will be deleted, we're not going to play that game. This is a professional trading community for the serious-minded trader.
That's all for now. Be safe in the markets today and use good risk and money management.
-David
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