Crude and global equity indices whip Forex markets around:
The markets got themselves off to a wild and volatile start this week... the price action seen in the equity, commodity, and especially the Forex markets was rather fierce. It all started during the first few moments of the Asian session and squarely with crude oil. As soon as traders in Asia and then Europe had access to the market they started selling crude which put immediate pressure on the Nikkei and then on the European bourses, all before NY traders had a chance to get to their desks.
With crude oil under continuous pressure between the Asian and European sessions, the S&P 500 and Dow futures both sold-off. The combination of crude losing 4% of its value before NY even opened along with US equity futures plunging sent the GBP/JPY and EUR/JPY in a free fall. The US dollar and Japanese yen both gained ground across the board as fear was running rampant through the markets and risk was taken off the table.
Heading into the Wall St. open the Dow and S&P 500 were looking fairly grim and certain market participants continued piling into the dollar and yen, either for protection against NY possibly continuing to sell crude and equities or for technical reasons or out of sheer panic, however, the market direction set during Asia and Europe did a complete u-turn and went back around the bend...
Correlated markets continue to show direction and trade opportunities--
The equity, commodity, and higher-risk, higher-yielding currencies all bottomed within minutes of each other and all turned back up in tandem during the early part of the NY session this morning. The catalyst was the ISM Services report which printed much better than expected. The ISM data was released at 1000 EST and between 1000 EST and 1030 EST the S&P 500 futures, Dow futures, crude oil, gold, the EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY had all stopped sliding, reached their bottom, and retraced their losses in lockstep.
Traders that follow the correlated markets to trade FX got a gift on a silver platter this morning as all the higher-risk markets bottomed at the same time and reversed at the same time. It was good to see that even in the midst of the chaos the old market correlations were still performing as they should. And as we talked about in our chat today, the pattern sequence of the 30-minute price opens of pairs like the EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY all signaled extreme price exhaustion and over-extension even before Wall St. opened.
I started buying the GBP/JPY and GBP/USD at 0303 EST this morning. On the pound-yen specifically, price was so exhausted and over-extended I started buying it at the 154.40 level and continued buying it all the way down to the 153.20 level, the lower it went, the more exhausted price became to the downside and the higher my payout probabilities became to see a strong reversal retracement.
Not only did the 30-minute price opens of the GBP/JPY and GBP/USD show a repeated cyclical pattern of price overshooting too far to the downside, the fact that the move lower on the majors and yen crosses was purely emotional and not based on fundamentals or geo-politics was a dead giveaway there was no real selling conviction behind the moves and that the depreciated price valuations on those pairs were completely unsustainable.
By the time Wall St. closed this afternoon the Dow and S&P 500 were in the green and all of the higher-risk, higher-yielding currency pairs were within spitting distance of where they started the week on Sunday evening.
The fallacy of an established trend part II:
In yesterday's update I wrote a commentary about how it was a completely false premise to claim there are any established trends in the markets, specifically in the currency market. I know my opinions on this issue made a few eyes roll, but about 6-hours after I wrote and published that commentary I got an email from one of our community members with a link to an interesting story posted on Bloomberg last night. The title of Bloomberg's article:
'Currency Funds Crushed on Dearth of Market Trends'
Hmm... so maybe I'm not crazy after all... according to this Bloomberg article, the world's largest currency hedge fund has lost over 5% because there is no clear market trend. And what really put a smile on my face was after I did a little research on this fund, called FX Concepts, and found out that it has been traded almost on a purely technical basis using computer generated technical indicators to find momentum.
The fund's trading is based on a technical model and I think it's fairly obvious why the fund has been hammered -- lagging indicators cannot perform in a market environment where fundamentals, geo-politics, and central bank monetary policy directly affect the emotions of market participants and dictate where they send their money-flows.
From the Bloomberg article:
"I am not trying to make any excuse, but certainly it has been difficult," said John Taylor, chairman of New York-based FX Concepts, which manages about $12 billion. "Unfortunately, there's lack of consistence of what's happening. I am wondering how stupid the market can be for how long."
There's a good lesson here for Mr. Taylor and all traders -- the market is never stupid and the market is never wrong, it is us traders who are the stupid ones when we fight against the market correlations, the fundamentals, and central bankers. What is stupid is using a system that consistently fails, needs to be tweaked out all the time, or signals trades that are in direct contrast to the underlying fundamental and geo-political factors which move markets.
Nobody likes to lose, I hate losing, but there's got to be a point where a trader takes a step back to evaluate their own trading to figure out what they are doing wrong. Blaming the market is the first sign the market is holding a trader hostage. Thinking the market is just being stupid is another good sign a trader has lost the psychological battle and is wandering aimlessly.
In the month of June my win ratio was 90.30% and guess what happened the 9.70% of the time I lost? It was my fault, not the market or my trading system. Every single loss I took in the month of June and those I've taken in the month of July were because I was either impatient, emotional, or I tried to trade against the fundamentals, geo-politics and correlated markets. It's that simple.
Right now this is purely a traders market. There is zero trend and a lack of clear direction and nobody can predict if or when things will get back to how they were in 2006 and 2007 when all you had to do was buy the euro every time it dipped. The lack of an established trend is exactly what the central bankers want and they always get what they want because they hold all the power. It doesn't matter to me how a trader picks and chooses their entries but whatever process is used should consistently perform or else the trader ends up like Mr. Taylor who probably can't sleep at night knowing his multi-billion dollar hedge fund has been steamrolled by the market.
Tuesday trading:
For all the AUD/USD traders don't forget the RBA has an interest rate and monetary policy event at 1230 EST this morning. There's not a single fundamental event for the US dollar tomorrow, but there are several market-moving events for the pound sterling. Manufacturing, production, consumer confidence, and retail inflation data will all be released in the early European session and I fully expect to see the market react to this data, leading to heightened volatility on the GBP/USD and GBP/JPY.
As for the euro the biggest fundamental event is the latest German Factory Order data. In my view, the markets are still looking for reasons to buy the euro against the dollar right now. Between the Fed, BOJ, BOE, and ECB, it is the ECB which currently has the highest interest rate and the tightest, most conservative monetary policy. That is why the euro losses to the dollar have not been nearly to the degree as the pound sterling's losses to the dollar. The EUR/USD has held up fairly well in light of the sell-offs in equities and commodities compared to the GBP/USD and GBP/JPY.
For tomorrow also keep in mind its the day before the G8 meetings in Italy and certain market participants may want to either square up their books or pre-position ahead of the event, and those moves could cause some more price swings like we saw today. In addition, earnings season starts the day after tomorrow plus there will be some big Treasury auctions later this week. All in all, it will be a busy day with the potential to see some surprises, especially if we get any pre-G8 rhetoric out of the Fed, ECB, China, Russia, India, or Brazil.
For me personally I'm still biased to short the dollar and yen into their strength when I get a high probability price pattern to trade. I still feel more comfortable buying pairs like the EUR/USD, GBP/JPY, and EUR/JPY on their dips when they show over extension to the downside. Crude should remain the linchpin which makes or breaks the markets.
I can't predict what the emotional state of the markets will be tomorrow, it changes almost every day, but if euphoria and greed are back on the table, equities, commodities, and the higher-yielding currencies should have a strong day. If a fundamental or geo-political event takes risk off the table and inject fears back into the markets we're likely to see a repeat of what happened in the Asian and European sessions this morning.
Be smart with your risk and money management... if you're in doubt, sit it out.
-David
The markets got themselves off to a wild and volatile start this week... the price action seen in the equity, commodity, and especially the Forex markets was rather fierce. It all started during the first few moments of the Asian session and squarely with crude oil. As soon as traders in Asia and then Europe had access to the market they started selling crude which put immediate pressure on the Nikkei and then on the European bourses, all before NY traders had a chance to get to their desks.
With crude oil under continuous pressure between the Asian and European sessions, the S&P 500 and Dow futures both sold-off. The combination of crude losing 4% of its value before NY even opened along with US equity futures plunging sent the GBP/JPY and EUR/JPY in a free fall. The US dollar and Japanese yen both gained ground across the board as fear was running rampant through the markets and risk was taken off the table.
Heading into the Wall St. open the Dow and S&P 500 were looking fairly grim and certain market participants continued piling into the dollar and yen, either for protection against NY possibly continuing to sell crude and equities or for technical reasons or out of sheer panic, however, the market direction set during Asia and Europe did a complete u-turn and went back around the bend...
Correlated markets continue to show direction and trade opportunities--
The equity, commodity, and higher-risk, higher-yielding currencies all bottomed within minutes of each other and all turned back up in tandem during the early part of the NY session this morning. The catalyst was the ISM Services report which printed much better than expected. The ISM data was released at 1000 EST and between 1000 EST and 1030 EST the S&P 500 futures, Dow futures, crude oil, gold, the EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY had all stopped sliding, reached their bottom, and retraced their losses in lockstep.
Traders that follow the correlated markets to trade FX got a gift on a silver platter this morning as all the higher-risk markets bottomed at the same time and reversed at the same time. It was good to see that even in the midst of the chaos the old market correlations were still performing as they should. And as we talked about in our chat today, the pattern sequence of the 30-minute price opens of pairs like the EUR/USD, GBP/USD, GBP/JPY, and EUR/JPY all signaled extreme price exhaustion and over-extension even before Wall St. opened.
I started buying the GBP/JPY and GBP/USD at 0303 EST this morning. On the pound-yen specifically, price was so exhausted and over-extended I started buying it at the 154.40 level and continued buying it all the way down to the 153.20 level, the lower it went, the more exhausted price became to the downside and the higher my payout probabilities became to see a strong reversal retracement.
Not only did the 30-minute price opens of the GBP/JPY and GBP/USD show a repeated cyclical pattern of price overshooting too far to the downside, the fact that the move lower on the majors and yen crosses was purely emotional and not based on fundamentals or geo-politics was a dead giveaway there was no real selling conviction behind the moves and that the depreciated price valuations on those pairs were completely unsustainable.
By the time Wall St. closed this afternoon the Dow and S&P 500 were in the green and all of the higher-risk, higher-yielding currency pairs were within spitting distance of where they started the week on Sunday evening.
The fallacy of an established trend part II:
In yesterday's update I wrote a commentary about how it was a completely false premise to claim there are any established trends in the markets, specifically in the currency market. I know my opinions on this issue made a few eyes roll, but about 6-hours after I wrote and published that commentary I got an email from one of our community members with a link to an interesting story posted on Bloomberg last night. The title of Bloomberg's article:
'Currency Funds Crushed on Dearth of Market Trends'
Hmm... so maybe I'm not crazy after all... according to this Bloomberg article, the world's largest currency hedge fund has lost over 5% because there is no clear market trend. And what really put a smile on my face was after I did a little research on this fund, called FX Concepts, and found out that it has been traded almost on a purely technical basis using computer generated technical indicators to find momentum.
The fund's trading is based on a technical model and I think it's fairly obvious why the fund has been hammered -- lagging indicators cannot perform in a market environment where fundamentals, geo-politics, and central bank monetary policy directly affect the emotions of market participants and dictate where they send their money-flows.
From the Bloomberg article:
"I am not trying to make any excuse, but certainly it has been difficult," said John Taylor, chairman of New York-based FX Concepts, which manages about $12 billion. "Unfortunately, there's lack of consistence of what's happening. I am wondering how stupid the market can be for how long."
There's a good lesson here for Mr. Taylor and all traders -- the market is never stupid and the market is never wrong, it is us traders who are the stupid ones when we fight against the market correlations, the fundamentals, and central bankers. What is stupid is using a system that consistently fails, needs to be tweaked out all the time, or signals trades that are in direct contrast to the underlying fundamental and geo-political factors which move markets.
Nobody likes to lose, I hate losing, but there's got to be a point where a trader takes a step back to evaluate their own trading to figure out what they are doing wrong. Blaming the market is the first sign the market is holding a trader hostage. Thinking the market is just being stupid is another good sign a trader has lost the psychological battle and is wandering aimlessly.
In the month of June my win ratio was 90.30% and guess what happened the 9.70% of the time I lost? It was my fault, not the market or my trading system. Every single loss I took in the month of June and those I've taken in the month of July were because I was either impatient, emotional, or I tried to trade against the fundamentals, geo-politics and correlated markets. It's that simple.
Right now this is purely a traders market. There is zero trend and a lack of clear direction and nobody can predict if or when things will get back to how they were in 2006 and 2007 when all you had to do was buy the euro every time it dipped. The lack of an established trend is exactly what the central bankers want and they always get what they want because they hold all the power. It doesn't matter to me how a trader picks and chooses their entries but whatever process is used should consistently perform or else the trader ends up like Mr. Taylor who probably can't sleep at night knowing his multi-billion dollar hedge fund has been steamrolled by the market.
Tuesday trading:
For all the AUD/USD traders don't forget the RBA has an interest rate and monetary policy event at 1230 EST this morning. There's not a single fundamental event for the US dollar tomorrow, but there are several market-moving events for the pound sterling. Manufacturing, production, consumer confidence, and retail inflation data will all be released in the early European session and I fully expect to see the market react to this data, leading to heightened volatility on the GBP/USD and GBP/JPY.
As for the euro the biggest fundamental event is the latest German Factory Order data. In my view, the markets are still looking for reasons to buy the euro against the dollar right now. Between the Fed, BOJ, BOE, and ECB, it is the ECB which currently has the highest interest rate and the tightest, most conservative monetary policy. That is why the euro losses to the dollar have not been nearly to the degree as the pound sterling's losses to the dollar. The EUR/USD has held up fairly well in light of the sell-offs in equities and commodities compared to the GBP/USD and GBP/JPY.
For tomorrow also keep in mind its the day before the G8 meetings in Italy and certain market participants may want to either square up their books or pre-position ahead of the event, and those moves could cause some more price swings like we saw today. In addition, earnings season starts the day after tomorrow plus there will be some big Treasury auctions later this week. All in all, it will be a busy day with the potential to see some surprises, especially if we get any pre-G8 rhetoric out of the Fed, ECB, China, Russia, India, or Brazil.
For me personally I'm still biased to short the dollar and yen into their strength when I get a high probability price pattern to trade. I still feel more comfortable buying pairs like the EUR/USD, GBP/JPY, and EUR/JPY on their dips when they show over extension to the downside. Crude should remain the linchpin which makes or breaks the markets.
I can't predict what the emotional state of the markets will be tomorrow, it changes almost every day, but if euphoria and greed are back on the table, equities, commodities, and the higher-yielding currencies should have a strong day. If a fundamental or geo-political event takes risk off the table and inject fears back into the markets we're likely to see a repeat of what happened in the Asian and European sessions this morning.
Be smart with your risk and money management... if you're in doubt, sit it out.
-David
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