"Currencies reflect economies — but do not necessarily effect economies."

I thought this was a great quote.  There has been a lot of talk as to how and why the Dow continues to climb as the U.S. Dollar Index continues it’s slide.  In many ways, currencies are the "stock of a county" but they reflect interest rates far more.  A higher rate lends itself to a stronger currency while lower rates weaken a currency.  That’s is exactly why the Euro and Pound is so strong against the Dollar.  Both these Euro and Pound are moving higher due to the fact that their respective governments/banks are expected to raise rates.  The FOMC — it is widely expected — wil cut rates.  No whether any of this will happen is irrelevant.  It’s been baked into the cake!  Remember the market doesn’t just move based on what has happened…most movement is based on a perception of what will happen.

Currently the Dow sits just below the high I marked on the chart below.

The Dow is moving higher for precisely the same reaons the U.S. Dollar moves lower.  The exepectations of a rate cut and add to that the Euro and Pound are moving higher based on expected hikes from the ECB and BOE.

The 1.3600 level on the Euro/USD will be a formiddable level and the GBP/USD will now battle to stay above the 2.000 level it has traded up to.  The Dollar does have about three key support levels that can be found on the weekly chart that are the most likely price points for buyers to step in.

These support levels will coordinate with the resistance levels on the EUR/USD most directly.  Currently the EUR/USD has resistance at the "00" and 1.3616.

I’m just getting back on my feet after a particularly nasty fight with the flu.  I’m sad to say the flu won.  It has now run it’s course and I am just now getting a good picture of the price action that has transpired.

I will get back to my regular schedule but I wanted to share a single idea today.  One I think that most traders learn early on in their studies and slowly forget as time passes. 

Don’t sell new 52 week highs and don’t by new 52 week lows.

There is a strange desire to pick tops and bottoms.  It’s the glory trade.  I never do it.  This does not mean I don’t trade new highs and new lows.  There are certainly ways to trade new highs and new lows.  Simply put, a trader waits for the next set up.  Usually when there is a new high or low it accompanies a trend which means there is a 12 to 2 o’clock or 4 to 6 o’clock Wave. 

If you take a look at the Wave here, there is little reason to look to short this move.  Irrelevant of any fundamentals, political or economic opinion, the EUR/USD has made it’s trend clear.  One of the most common questions I get when a market reaches a new high is whether I would short it since it is "overbought".  Rubbish.  Who says this is overbought?  Overbought to whom?

Bottom line is that my own entry strategies do not set up a short in this scenario.  It keeps me trading with the trend.

If there is a opportunity to play some sort of correction or reversal then it will first appear on the 30 minute chart.  The GBP/USD has been extremely strong these past weeks.  The 30 minute chart set up a momentum play this morning which — as all momentum plays do — could have broken either way.

There should be no bias to which way this chart could break.  Simply confirm any break with the MACD Histogram.  This consolidation below the huge 2.0000 resistance level is not viewed to be an opportunity to short.  Did you look at the Histogram?  It’s about the zero line which means the only break that could be confirmed would be the break up through resistance.

Here’s the view at the 2:00am EST break.

So my point and lesson here is not to fight the trend.  Do not ever believe a market is too high or too low…well, you can think it but don’t act on it. 

How many traders thought the U.S. Dollar was too low at 82.00?  As of the 13th the Dollar made a new 52 week low.

I have opinions rolling around in my head but I put them aside when it comes time to trade.  The chart holds the only opinion I need.  And if I didn’t say it clearly enough before.

Don’t sell new 52 week highs and don’t by new 52 week lows.

I appreciate the fact that I am able to present my market analysis on the ‘net.  My Chartology on the ‘net blog is new and I am really humbled and overwhelmed by the response I have received.  Thank you for reading — I hope to continue to present charts and ideas that benefit you all.

So I received a great comment regarding the EUR/USD break yesterday.  This comment had some interesting thoughts and I think it brings up some good points so let’s talk about it.

"the EURO now is overvalue the break yesterday was pure Manupilation by big hand and they moved it higher in thin illiquid market before the Easter break they just hunt for the stops ,I feel sorry for the euro because Euro currency isn’t free the last two week is big example for the set up ,they took the EURO higher with the bad and good news no one will know when they will stop and no one will have trust in trade like this ,Do you think that Europe’s economy will not suffer from overvalue currency ,EURO is not free like AUD and NZD all them control big hedge funds and the play with the chart to control our trade because they have power and money according to thier position and they will eat us ,big fish eat small fish ."

I don’t disagree with this comment.  I feel that manipulation, running stops, and more are an everyday occurrence in any market.  There are so many influences on how and why prices move — as long as they keep moving I am happy.  The only thing that "puts me out of business" is a sideways market.

I think of hedge funds, banks, institutions as elephants walking in the sand.  They are so large they are going to leave tracks.  It’s my job to recognize where they are heading.  That’s what charts do for me.

Whether the EUR/USD "should" be trading higher is irrelevant.  The politics of it are as well.  As a trader, my job is react to the movement.  If I feel I do not want to trade the move, that is certainly a decision I can make and longer time frames like the 180, 240 and daily were not setting up the buy that I outlined here.

If the market is too illiquid and a trader feels there is too much risk because of it — much like I feel after London closes each day — then I have the choice not to enter any trades that trigger during these illiquid hours.

As of this morning the EUR/USD is back down below 1.3400 so the psychological level is broken.

Prices have returned to approximately where they were before the rally.  Many of my fellow traders played the move up and down and are happily taking their profits and enjoying their weekend.  I played the move higher but did not play the move lower (see post "U.S. Dollar and the majors conflict this morning")  Either way, what the EUR/USD "should" be at nor the manipulation that ran it up and down didn’t enter my mind.

Trusting the market’s movement comes from trusting my charting set ups.  I don’t need to trust other traders’ motives.  I accept that some factors that move the markets may beyond my knowledge and understanding.  No trader understands nor knows of all the factors that effect a market.  But each trader find the tools that allow them to measure the moves and comprehend movement.  I remember a great quote from one of my favorite trader, natty gas legend, Eric Bolling:

"Players on the Street are opinionated. Quants think they hold all the keys…Value investors mock their growth stock counterparts…analysts deride traders. Technicians ignore fundamentalists. They meet every day in the markets and place their chips. It can get a little hairy."

The U.S. Dollar tells an interesting story as Friday’s trading is wrapping up for today.

Even with the strength of a stronger than expected NFP number, the U.S. Dollar has resistance at the "00" and 83.00 is a ceiling going into the weekend.  This tells me that as good as the data was, there is still a lot of hesitance to take the Dollar significantly higher.  Monday will offer another push as equities traders are able to to react to this data for the first time.  I am bullish on the Dow and Naz and this report will simply feed that charting analysis.

Hopefully this post will give you all a better idea of how I trade and analyze the market.  Special thanks to elc for the comment.

Have a Happy Easter!

Trading in front of any reports is always daunting.   Trading in front of NFP is downright intimidating.  I don’t trade the data but rather study price action leading into the release so that I can position myself in the market if a trade sets up and confirms.  There’s a big difference between playing a report and trading what you see on the charts.  So that being said let’s take a look at the morning’s set ups before NFP.

Since the NFP is a U.S. Dollar focused event, it’s best to look at the Dollar correlated pairs which means my attention is on the EUR/USD, USD/CHF, GBP/USD, and USD/JPY.  These pairs will be most effected by movement in the U.S. Dollar.

It’s about 2:00pm EST so we already know what happened this morning.  NFP surprised to the upside.  However we can take a look at the four pairs in front of the release. 

Let’s start with the U.S. Dollar.  The goal is to take a reading as to the strength or weakness of the chart.

The Dollar found support but until the current green candle there was little reason to think that that Dollar was anything but neutral to perhaps even slightly bearish according to the brief break of the uptrend line support.  So going into the report, I will take an approach that must assume a neutral to bearish strategy.  However, nothing done without looking at each individual pair.

The EUR/USD and GBP/USD both move oppossite the U.S. Dollar so this means I will be looking for strength on both.

This view at 8:00am EST shows strength which is line line with the slight weakness in the Dollar.  In fact, the EUR/USD even seems slightly more bullish than the Dollar’s weakness would imply.

The GBP/USD has a completely different look.

I look for correlation and for the majors to move in sync with their relationship to the U.S. Dollar and I don’t have this here at all.  So this is where I must question what the charts are telling me.  This is the first strong signal that I should not execute the trades in front of NFP.  But I still have two more majors to take a look at.

Well, the USD/JPY is not helping here at the 8:00am candle is showing strength.  The USD/JPY and USD/CHF should move with the Dollar, not oppossite it.

This look at the USD/CHF seals the deal.  The situation is this…the USD/JPY and EUR/USD are both bullish while the GBP/USD and USD/CHF are both bearish.  These moves are in conflict.  That is the problem here this morning.  Each of the these entries hedges the other — which is not what I want.  For me to take multiple positions there must be correlation or I am simply working again myself.

If I took all four triggered trades, the EUR/USD and USD/CHF would have been losers and the GBP/USD and USD/JPY would have been winners — easy to see in hindsight. 

The decisions to trade any report, but especially NFP, has to be done from complete confidence in what you see in your analysis.  All four of these charts had clean set ups, but the conflict with not only the U.S. Dollar but with each other is what takes credibility away from the set ups.   

The Dollar got swept off its feet and not in any romantic notion…no I mean like a a nice judo leg sweep that puts you flat on your back, the one that came fast and you didn’t see coming.  That was the U.S. Dollar.

The Dollar had been trading within a nice range 84.20 to the upside and 83.80 to the downside.  Both major psychological numbers and both with multiple tests.  The EUR/USD had also been a contributor to the range as it was held below the 1.3400 level.

The New York session began with a 7:00am EST breakout in the EUR/USD.

The sideways Wave and balanced triangle pattern was the set up, a classic momentum look.  The positive MACD Histogram at the time of the price break completed the trigger to enter.  The break was 1.3370.

The U.S. Dollar has been weak, there is no doubt when looking at the daily chart.  One thing to note is the proximity of current prices to the December 2006 low.

The 30 minute chart broke down as buyers bid up the Euro.  What made this weakness different that past sell-offs was the support that it broke as it traded lower.  Taking out the "80" tick was a clear signal that the buyers who had support this level in recent days were no longer there or no longer willing to as the Euro headed higher.

The EUR/USD entry long at the "70" pip had an initial profit target of 1.3395 as it was necessary to respect the potential resistance at 3400.  If prices could move beyond 3400 had as much to do with Euro buyers at this level as it did U.S. Dollar sellers below "80".

The current perch of the EUR/USD is a precarious one as the heights it has found are not only one year highs but also heading up to multi-year highs.  There is a saying that stock traders adhere to:  buy 52 week highs.  Now I do not like doing so unless that 52 week high is set up by a momentum play or unless I can get a correction entry.  But I certainly do not want to play a short in the face of a 52 week high.

The EUR/USD broke the "00" with the momentum play back at "70" and while traders would do well to take some of the position off the table as the battle at "00" happens, there is no reasons that a portion of the overall entry could not sit back at a nice trailing or break even stop to see if there is more life in the move.

We now head into tomorrow’s NFP with a markedly weak U.S. Dollar.  The non-farm payroll is likely to also have a two-part move as the Dollar has the possibility of being effected Monday morning when U.S. stock traders are able to react to the number for the first time.  Remember that the U.S. equities markets will be closed tomorrow as will the NYBOT where the U.S. Dollar Index is traded.

Carry trades. I know
some folks love them.  I am a trader and
to me when I hear the word “carry trade” all I hear is the word “trade”.  I think far too often traders who enter carry
trades forget about the set up that should accompany a smart, well-executed trade.   The “carry” part of the trade is just gravy to
me, an extra. 

Since trading is about assuming and managing risk. Here is the risk regarding carry trades: The
risk of any carry trade is that currency rates will change and the investor (or
trader) will have to pay back a now more expensive currency with less valuable
currency.  (check out Wikipedia for good examples
of carry trades). Carry trades are more
investing set ups if you ask me…but I am not here to pass judgment, just share
my opinion.

On the subject of carry trades, we have to talk about the
USD/JPY.  The Yen has been in a rather
ugly distribution cycle at the bottom of the recent sell-off.  This sideways cycle found support just above
the “00” of 115. and is currently testing the “00” of 119.  One concept that you will hear again and again
from me is the need to respect the major of “00” and “50”and minor
psychological numbers of “20” and “80”.

The 0.618 Fibonacci is also waiting up this height. The 0.618 is the “golden mean” and probably
the most followed Fibonacci level, along with the 0.500.  That 0.618 is also only four pips from the
119.20. So what is the “20”.  If you
thought “minor psychological number”, good, give yourself a cookie. So not only does the Yen have the 119.00
resistance to deal with – and this will not be an easy level to break up
through between now and Friday’s NFP, but if and when it does, the 119.16 and
119.20 is waiting.  The difference with
the “16” and “20” resistance is that the Yen will have the momentum of breakig
through the “00” behind it as well as being up through the Wave and having the
support of that as well.

So to carry or not to carry? Whatever you decide make sure that the entry is a confirmed trade in and of itself, and
let the carry be icing on the cake.

The USD/CAD is always on my mind when we get Crude Oil
Inventory numbers and Natty Gas inventory numbers.  Today’s Crude Inventory was a great
opportunity to see if the Canada was setting up in front of the 10:30am EST release. 

Now frankly none of my five time frames looked as good as I
hoped it might as 10:30am approached. Looking
at this 240 minute chart of the USD/CAD there was little that pleased the eye.  With 1.1600 overhead as resistance, I would be
happier with a breakdown – but if a break to the upside confirmed I would take
it – knowing that the ceiling just above was one that would be coming at my
head fast! 

I think knowing when NOT to trade is probably most
beneficial distinction successful traders make most often.  Looking at the 240 Canada let’s break down some pros
and cons.  My Wave is sideways here
(three magenta lines are the 34 EMA on the high, low, and close) so the entry
style will be a momentum which will allow me to trade a breakout or breakdown.  There is certainly no lack up trendlines
surrounding the congestion on this chart either, but none form a balanced
symmetrical or asymmetrical triangle.  Balance
is especially important for symmetrical triangles as the two trendlines that
form the pattern are best when there is – as the name implies! – symmetry in
the angle of the up and down trendlines. The MACD Histogram is well established above the zero line and this
means that a break to the upside will be confirmed just as long as the Histogram
stays there.

The reason this trade isn’t appealing is that the triangle
pattern, which represents the price trigger for an entry is not balanced and
thus not reliable.  When in doubt…don’t
jump.

Since the USD/CAD is a “split personality” currency pair, let’s
take a look at Crude. The corresponding
240 minute chart is also consolidating with a sideways Wave. 

While you don’t have to have intraday crude oil charts handy
to trade the Canada, I am a futures trader also and I like having access to both as the relationship is
synergistic – as all good trading is!  Crude
is selling off after the geo-political panic run-up never came to fruition. There is daily chart support in crude at the
64.15 level which ofcourse will be further strengthened by the “00”.  I am not a bear here but rather looking for a
deep enough pullback to set up a buy.  62.60
is my target for a swing long.  However, short term traders might find a 240 short below the uptrend line support a nice short term correction play.

Think of it as the Earth and Sun…the U.S. Dollar continues
to gravitate and circle around the 83.00 level.  The move during the afternoon New York session was
suspect as it occurred only after the European/U.K. session wrapped up and thus
could only occur during the forex doldrums.

When Europe and the U.K. opened this morning prices
quickly found the “00” and has been trading around it since.  There have been a few short lived moves higher
and lower around the “00” but traders during the
New York session seem to want to push the
U.S. Dollar just below the 83.00 level.  With 83.21 holding as resistance and 82.82 holding
as support, the minor psychological levels have the larger range established.  The S1 pivot level at 82.89 is also acting as
support.

The follow-through has been very poor specifically because
the U.S. Dollar does not wander too far past 83.00 for very long.  Expect more of this until Friday’s NFP.

The EUR/USD is adding to the U.S. Dollar’s range-bound
action as it has its own significant level to contend with.  The last time prices were able to pierce
1.3400 it was sent lower very quickly.  With
the consolidation that is occurring below the “00” now, there is likely to
forces at work: Too few traders who are
willing to run the U.S. Dollar lower while running the Euro higher before NFP
and the selling pressure between 1.3380 and 1.3400.

With the RBA making a decision on interest rates yesterday
evening (April 3^rd) there was sure to be some volatility in the
AUD/USD.  The 180 minute chart below
shows the move that resulted from the rates being left unchanged.  This is what was already discounted into the
market and with no surprise the Aussie sold off. 

The sell off broke the 0.8100 level with ease but the
question would be, could sellers keep the Aussie below the “00”.  I like to see price make a test of this level
thus giving a visual cue as to “00” begin established as resistance. 

Instead prices rallied into after the announcement as the
Aussie headed back up to where prices had been trading before the hot zone. This morning the Aussie continues higher and
gold has been much the reason.
 

The rally this morning thus far in the gold market has
certainly helped the Aussie continue its rally; add to that the weakness in the
Dollar.

There is more than enough for a chartologist like myself to make a decision about the on-going
strength of the AUD/USD.  Keep an eye on
0.8200 as the Aussie makes its way higher towards this significance resistance
level. The Aussie continues to want to
head up and head up to the 1996 highs of 0.8212.