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Hi everyone,
In this e-mail I am going to give you my view on the markets for Sunday the 6th to Monday the 7th of March 2011 and the week.
The “Monster” Trade. Continue to LOAD UP... with the AUD/USD at 1.012 is now on confirmed BUY signals. Sentiment wise, this AUD/USD is set for further gains, and the 1.000 level looks to be bested for good. With a STOP NOW RAISED to under 0.999 as any further decline would invalidate the rationale for the trade (see below). Should the AUD/USD decline any further this trade will be closed for the time being as the AUD/USD is still expected to yield 1000 to 1500 PIPS over the next 2-3 months, maybe even sooner. Adding to existing positions is NOW recommended as scaled in BUYS (0.2 contracts at a time) on any weakness into key support zones NOW AT 1.007 and 1.012. <<< That worked out well last week. NOTE: All position trade stops are HARD stops, NOT mental stops. Remember, hard stops for overnight positions, mental stops for day trades.
About Scaling In...Scaling in simply means breaking up the initial entry position into multiple parts and deploying them at selected intervals, instead of firing the entire trade magazine all at once. The only reason we might resort to scaling is if we have good reason to believe our expected support zone may have become obsolete. We usually take an initial position in our expected support zone with a fairly tight stop. Obviously if we get stopped, we were early to the trade. Early is just another word for “wrong.” If stopped, we reassess and adapt to the new market reality. If we were not early, and our position shows us that we are right, then we add to that position once the trade has managed to “prove” itself by advancing out of the support zone box, raising our trailing/trading stop in the process. The two or more portions make up a full position. When we speak of scaling, it means we have become willing to break up the trade entry into two or more parts, with the first part at the very top of the expected support box and the second part within it. Rarely will we ever take a new position outside our expected support box.
Why the “Monster Trade”? In the AUD/USD sideways action of recent weeks has served to further unwind the earlier overbought condition while forming a Head and Shoulder bottom continuation pattern on the 4-hour chart with the neckline coming in the 0.996 area. The interpretation of the pattern in the AUD/USD presented in the last update, which was that it is marking out an upwardly skewed bullish "running correction”, remains unchanged. All that has happened in the past few weeks is that it has reacted back across the up sloping channel to arrive at support near its rising 50-day moving average again and again retesting that area. As we can see on the chart this reaction has resulted in a complete easing of the intermediate-term overbought condition as shown by the PPO indicators, which are now bias long with a new BUY signal on the daily and working on a BUY in the weekly right at the zero line which looks to be happening...and this sucker is ready to explode to the upside. The noted convergence of the short-term downtrend channel earlier last month was an indication that the AUD/USD would soon break out of it to the upside to resume its advance and make new highs, which it has yet to do but I expect it to this week as it breaks out of consolidating from this region. The AUD is seen here, http://www.stockcharts.com/charts/gallery.html?$XAD.
WEEK AHEAD: Even with a safe haven bids seen in the markets last week on account of soaring crude oil prices, the U.S. Dollar could not get any sort of decent bid and slowly, grudgingly sold off. This fact, more than anything else, is telling us that the Dollar is very close to crashing through major chart support just north of 75. After all, if it cannot rally on a strong U.S. non-farm payrolls (NFP) number in combination with a safe haven bid, what is it going to take to rally it? For the time being, everything is about crude - not even the NFP payrolls number matter. Last week the dollar sank on the days that crude rose and also fell on concerns over the events in North Africa and the Middle East. Combined with hawkish talk from ECB President Trichet about possibly raising rates in the Eurozone, and that was enough to send Dollar buyers scurrying for cover as the EUR caught the safe haven bid! Go figure...except that to say sometimes the technicals do lead the fundamentals...helped with crude setting fresh 30 month highs daily. The pivot support and rising monthly trend-line support did break with the expected chop back and forth as follow-through weakness on a small weekly bearish engulfment pattern from late last month was confirmed.
Hope for dollar bulls has faded fast and now looks terminal with each failed rally attempt. The corrective rally materialized and stalled below the broken 50% retracement at 78.5 which is now also the declining 50-day moving average. With monthly rising trend-line now broken (at 77), and was expected as that was the third attack at that line (1st July 2008; 2nd Dec. 2009 and 3rd Oct.-Nov. 2010) and also confirming the three times a bounce and then a failure rule. With each subsequent bounce becoming smaller and smaller in the USDX, a fast move to 75 should be in the cards followed by a collapse to as low as 72 but beware that a bounce is possible here as sentiment has gotten a little ahead of itself and there are plenty of new “Johnny-come-lately” players to the short the USDX party right now as the USDX is near a zone of weekly support at 75.5-76.5.
Therefore, I will be looking for a small and fast U.S Dollar rally this week to both scalp some PIPS on and then load up long on longer term U.S. Dollar denominated pair BUYS at the same time. Witness a weekly PPO SELL signal in alignment with a new daily SELL. So look to go long U.S. Dollar denominated pairs on any weakness (USDX strength) into some retracement zones anytime this week, although I expect a USDX rally early to mid-week as the USDX is looking pretty sick now and due for a bounce, as seen in the USD daily and weekly chart here http://www.stockcharts.com/charts/gallery.html?$USD.
The EUR is the inverse of the USDX and with the backdrop of a PPO that now has triggered a daily BUY signal against a weekly BUY signal extended from the 50-day moving average, and the bounce here looks to continue and now look for some bottom action on lesser time frames to enter and go long. The current upside short term target of 1.37 areas has been achieved and now look for 1.41, although a retrace to 1.385 is possible before 1.425, 1.45 and 1.50 can be seen in short order, as can be expected on future dollar weakness as seen in the chart here, http://www.stockcharts.com/charts/gallery.html?$XEU. Place your trades accordingly. All charts courtesy of www.stockcharts.com.
The GBP has seen some serious choppy swings and a reversal upon reversal bar on the daily and we have been avoiding this on of late but still watching it with a long bias as it becomes less stretched on the long side. A PPO daily SELL that needs to turn up against the backdrop of a weekly BUY signal makes cable choppy as of late. All these cross-currents still make cable a cautious play, as seen here, http://www.stockcharts.com/charts/gallery.html?$XBP.
The JPY was too extended to play but has filled the gap under 122 and cautious longs on JPY (converse weakness in USD/JPY) can be played as seen on the chart given here http://www.stockcharts.com/charts/gallery.html?$XJY.
This week is banker speak heavy and rate policy and report heavy later in the week. They are:
1. Mon. Mar. 7, 2011 - (7:00am EST) EUR ECB President Trichet speaks and (8:30am EST) CAD Building Permits.
2. Tues. Mar. 8, 2011 - (8:15am EST) CAD Housing Starts. Note: EU, BOJ and AUD RBA Banker speak throughout the trading sessions and (7:30pm EST) AUD Home Loans. Note: this day could affect the “Monster Trade”, and hard stops are recommended
3. Wed. Mar. 9, 2011 - (3:15am EST) CHF CPI; (3:00pm EST) NZD Official Cash Rate and RBNZ Rate Statement and (7:30pm EST) AUD Employment Change/Unemployment Rate. Note: this data could affect the “Monster Trade”, and hard stops are recommended
4. Thurs. Mar. 10, 2011 - (4:30am EST) UK Manufacturing Production; (7:00am EST) GBP UK Official Bank Rate and MPC Statement; (8:15am EST) AUD RBA Gov. Stevens Speaks Note: this speech could indicate future rates and could affect the “Monster Trade”, and hard stops are recommended and (8:30am EST) CAD and US trade Balance and US Unemployment Claims.
5. Fri. Mar. 11, 2011 - (4:30am EST) UK PPI; (7:00am) CAD Employment Change and Unemployment Rate and (8:30-9:55am EST) US Retail sales and Prelim UoM Sentiment and Inflation Expectations and (3:45pm EST) UK BOE Gov. King speaks.
There is no swing trade for today’s Asian-London-U.S. session.
That's it for today. Remember that I trade in the Live Forex Trading Room between 1am-6am Eastern Time. I will be hosting my regular 3-4 hour session and assessing and exploiting PIP opportunities as they arise.
Enjoy trading and good luck everyone!
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