Monthly Archives: August 2011

Daily Recap – Dow Takes an Early Jump, USD Falls

A choppy day of equities trading led to an equally erratic session in the currency markets. Especially as related to the USD,  stocks jumped up out of the gate at today’s morning bell, causing the Greenback to sell off. Once traders digested lunch, the afternoon session brought on profit taking of shares lifting the George Washington higher.

 

The Dollar and the Dow typically have an inverse relationship. When risk appetite is high investors liquidate the more conservative positions in their portfolio, often US treasuries, in pursuit of more aggressive riskier assets that offer a bigger potential return, often individual stocks or mutual funds. On days when you see the Dow sell off, it is usually accompanied by a flight to safety in which investors flee riskier assets in pursuit of safer grounds.

 

With this morning’s spike in the Dow, the USD fell – with the afternoons session reversal the USD pared it losses across the board especially against the three main commodity currencies; the CAD (Canadian dollar), NZD (New Zealand dollar) and AUD (Australian dollar).

 

The EUR fell versus the USD and the GBP today when rumors that Greece had acquired counsel to look into a possible exit from the Eurozone were denied.  Never a dull moment……

 

The charts below, from VT Trader, show the EUR/USD and AUD/USD, both 30 minute charts.  Indicators shown include the Directional Movement Index, BiColor Moving Average, and MACD.

 

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Market Gaps

Market gaps happen often in financial markets, sometimes during the market trading hours and sometimes during a weekend or long vacation when the market is closed. Gaps are simply sharp price moves from one level to another without trading at each different price tick in between, leaving a blank space on the chart where price action is interpreted. Some traders, if not the majority, try to anticipate the type of gap and the reason that it happened. This is for the sake of trying to make a profit based on analyzing the gap move in the market. Gaps can happen on any time frame chart and the longer the time frame, the more significance this gap might have.

Gaps can occur based on fundamental or technical reasons. From a fundamental perspective, for example, a report or an announcement during market opening or closing hours which caused a big market move can create a gap. It could also be caused by a technical reason, such as a formation of a clear chart pattern which could push the price quickly to a different level creating a gap.

There are different types of gaps and the hard part is to decide which type a gap is. If a trader anticipates the gap cause correctly, then he/she can make a decision which could be profitable. To be able to decide gap types, it takes some trading experience, and errors are always possible. As mentioned before, technical analysis is an art of probabilities and nothing is ever guaranteed. A trader must understand the gap type and the reasons behind it. Let’s look below at different gap types:

- Breakaway Gaps.

These are the gaps that occur at the end of a certain price action or pattern and could signal a change in underlying trend.

- Exhaustion Gaps

This type of gap occurs after the market finishes a trend. They most often occur on weekends, when traders who still believe the existing trend is in place come in at market open hours to try to position themselves at the first moments of market open. Usually the price will reverse and the market will move against the gap.

- Common Gaps

Common gaps are the gaps that happen during trading hours or off market hours without a clear reason. It is simply a change in price which could be resulting from several factors. In traders language, they would say the market gapped up or gapped down.

- Continuation Gaps

This type of gap usually occurs during trading hours and within a price pattern or price action. It means that there was a rush of buyers or sellers coming into the market at same time which caused the price to move and gap up or down.

A rule of thumb which we must bear in mind is that most gaps usually get filled within the same trading day that they initially occur. There are some exceptions though. For example, if it’s a breakaway gap, it doesn’t make sense that the price will go back to the same level where it gapped, but it will tend to fill the gap, even if it just touches the price level where the gap is before traders quickly take the price back to where it should be.

The VT Trader chart below shows the GBP/CHF daily chart, with a major price gap which occurred several days ago.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Risk returns as Hurricane Irene exits Northeast

A day after Hurricane Irene tore through the Eastern Seaboard, the financial district in lower Manhattan reopened and resumed business with far less damage than anticipated. (Thank God for that.) With most traders rushing to their terminals to check out the price of Gold, it was another commodity that stole the spotlight. Coffee, that’s right, I said coffee. Apparently this weekends NYC shut down didn’t allow the local Starbucks to receive its normal delivery of the valuable bean and this sent Wall St workers frantically searching for their morning cup of Joe. Which certainly gave a boost the the local deli’s known more for their egg and cheese on a toasted bagel sandwich , then coffee. However by noon, all had returned to normal and Starbucks was back in business.

The Dow rallied up over 250 points today led by major banks. This ‘take on risk’ attitude pushed the USD lower and the EUR traded back over 1.45. The AUD/USD broke through short term resistance at 1.06 and is currently less than 25 pips away from 1.07. Traders are eager to see if this trend continues through the Asian session which is now underway.

The USD/CHF continued its climb north after being completely beat up in the past couple of months. With the Swissy weak across the board the Greenback took advantage and traded well above 80 and even hit a fresh 6 week high just under 82.40.

In summary, it looks as if risk is back in play and that should make for an interesting week.

 

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Nervous traders await Jackson Hole

With Traders eagerly or as some might say nervously awaiting Fridays pow wow, in the hometown of the most awesome ski resort on the planet, todays action was far less dramatic as in weeks past. However as usual in FX there was some good movement. The EUR sold off to the point where it broke 1.44 until it staged a late comeback and recovered to about 40 pips off of its low.

Gold took a major hit and that boosted the USD across the board, further explaining early morning weakness in the EUR. The sought after metal fell off a cliff – giving back weeks of solid gains trading as low as $1745 an ounce a far cry from the high of $1911. If you got into the gold rush late…..Ouch!

The FX trade of the day was to short the GBP when comments from the BoE were perceived as dovish. The pound fell against pretty much everything and anything. For those that trade the news, this was an obvious one.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Heikin-Ashi Candlestick Chart

Chart patterns are one of the most relied upon ways to anticipate a market move, whether it’s in currency, commodity, equity or bond markets. Most traders use the Japanese candlestick charts because it offers traders the vision they are looking for, but today we want to focus on the Heikin-Ashi candlestick chart.

Most traders are familiar with traditional Japanese candlesticks. They are the green and red, or black and white bars you normally see on the default setting of a chart, and they show visually the open, high, low, and closing prices for any given period of time. If you aren’t familiar with candlesticks, for more information check out our candlestick education section.

Heikin-Ashi candle charts are a way to view the market with less volatility than what’s really happening and this is because of the way it is formulated. if we look at the formulas used to create the Heikin-Ashi charts we will see that it’s totally different than the standard candlestick charts.

Close price = (Open+High+Low+Close)/4

Open price = (Open(Previous Bar) + Close(Previous Bar))/2

High price = Max(High, Open, Close)

Low price = Min(Low, Open, Close)

Based on the above formula we can expect to see a candle stick where volatility of price action has less of an effect. The same chart patterns that traders look for and try to apply on the standard Japanese candlestick charts also apply to the Heikin-Ashi chart. If we look at the attached charts and compare the same candle on both types we can see that the Heikin-Ashi offers a view that absorbs part of the excess volatility leaving the pattern more clear to the viewer.

We have attached an example of a head and shoulder pattern that has formed on the NZD/USD daily chart. We have been looking at this pattern formation for a while. Today’s candle changed the pattern slightly on the traditional Japanese candlestick chart, however on the Heikin-Ashi chart the pattern still looks the same. A good example of using an alternative chart type to cancel out some of the noise in the market.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Mixed Start to the Week

Going into today’s trading week, the dollar was mixed through the Asian to the US session. News over the weekend about the Bank of Japan and the Japanese finance minster, Yoshihiko Noda, considering easing monetary policy if the JPY rises further put bearish pressure on the currency. Global equities markets however were not as volatile as previous sessions.

The EUR/USD ranged today from 1.4346 to 1.4433. The EUR started out stronger in the overnight session, but the USD rallied back to recoup its losses later in the day.

On the equities front, the Dow Jones Industrial average and the S&P 500 ended higher after a choppy session, +37.00 (0.34% change) and +.29 (0.03% change) respectively. Commodities like oil rallied on the lower dollar in the early session and on some political tensions out of Libya. It settled at $84.34 a barrel, up $1.93 for the day. Gold also took flight up $45.60 to $1,897.80 a troy ounce, also from the weaker dollar in early sessions.

For the week ahead, look out for on the US front New Home Sales data in which we can see the gauge of economic momentum and if there is an increase in people’s confidence to buy a house. Then on Wednesday we’ll see Durable Goods Orders, which is a leading indicator of industrial production and capital spending. Thursday we have Jobless claim data, where we can hope that the trend takes a turn for the lower by staying below the 400k mark. Friday is an important day for data and speeches starting at 8:30 am (EST) with the Gross Domestic Product number in which we can comprehend the total value of the US production and economic activity. Then at 10 am (EST) Fed chairman Ben Bernanke will give a speech in Jackson Hole, Wyoming, where we have to pay attention to the language he uses on the status of the economy.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Weekly Recap – Gold, Green and PIIGS on the Wing

It seems European countries are intent on achieving fiscal responsibility when pigs learn to fly. It would appear that day may be closer than many think. This week’s EU meeting minutes sent financial services stocks plummeting as the meeting was initially viewed as just another opportunity for an economic censure of its weaker members without presenting a long-term viable solution.  Despite the markets’ initial reactions, once analysts had a moment to truly digest what was said and how the future of the Euro-Zone may play out, the euro began its first substantial rally in some time.  France and Germany appear unable or unwilling to provide further capital to prop up the Euro-Zones fledgling economies. While this isn’t exactly new news, what was substantial is their commitment not to abandon the euro which left a bit of a logical gap. How do you continue to grow the euro and its auspices while pretending its weaker members aren’t really about to drag the whole union into bankruptcy? The answer is surprisingly simple. If they can’t hack it, you let the PIIGS fly!  This sent the euro soaring as traders began to salivate at the notion of a leaner and more stable euro anchored by its wealthier and fiscally responsible members.

Across the Atlantic the U.S. had a relatively tepid week comparatively as it continues to reclaim some of the ground it lost amidst its own fiscal crises. As apathy begins to set in over the prospect of a US default and the global economy shows signs of a slowdown, treasuries rallied this week helping restore faith in the Greenback and its role as the world’s reserve currency.  While the rally in USD helped bears breathe a little easier, not all was rosy as a flurry of sour economic data created more questions than it answered. Unemployment Claims jumped over 1% well past most analysts’ estimates. Existing Home Sales not only disappointed analysts expectations but actually declined from the month prior. Abysmal numbers out of the Philly Fed Manufacturing Index rounded out the week’s disappointments and added to speculation that we are indeed headed towards a second slowdown in less than 5 years.

Gold continued its epic surge as it reached a new record high of $1877 an ounce before settling around $1851.  Further buoying gold’s advance, an announcement by Venezuela which posses the world’s 15th largest gold reserve to recall $11B in reserves from financial institutions around the globe. The move was made alongside further commitments from Venezuela’s political echelon to increase domestic gold production and nationalize its gold mining industry. While scientists have yet to discover a way to make money grow on trees, apparently some have settled for the prospect of plucking it from the ground. Perhaps it’s time for Goldman Sachs to invest some serious resources in alchemy and its practitioners?

 

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Bearish Equities Teach Forex for Hedging

Equity markets were down today in Europe and Asia as concern about the euro zone debt crisis continue to weigh heavily on our collective trading minds.  Things were no better stateside.  The US equity markets opened this morning with some pent up bearish energy, dropping almost 4% by 10am.  Slowly, and throughout the course of the rest of the day, prices continued to slide, with the S&P closing down 4.46%, the Dow down 3.68% and NASDAQ down a whopping 5.22%.  Ouch.

As many seasoned currency traders will often do when equities are tanking, let’s turn our attention to some of the safe haven currencies we depend on in times like these.  After the sharp correction that took the EUR/CHF from its low of 1.0102 to 1.1552 in four short days, buying pressure has re-strengthened the swissy for 2 straight days as nerves prevail.  The Swiss National Bank (SNB) is doing all it can to keep the price of its currency lower, but despite their best efforts, a representative pair, the EUR/CHF dropped all the way to 1.1239 today as shaky markets forced investors to the safety of the Swiss franc.  The SNB has even started to hint at negative interest rates.  That means charging for the privilege of having a bank account in their nation, a situation we haven’t seen since the 1970s.

As the precipitous drop during the US trading session flattened out, and a full- fledged sell off of US stocks seemed less likely today, the swissy gave back some of its gains to close around 1.1376.  Why so much talk of the CHF?

It is a perfect case study of the need to have a currency component in your portfolio if you ever hope to be able to describe it as balanced.  Case in point – an investor with a portfolio of US blue chips would likely have seen a 3% to 5% loss today.  That same investor, hopping into a long position in the swissy (short the EUR/CHF would be one way), using only 1% – 2% of their available margin (that means 1:1 or 2:1 leverage, NOT 100:1 or 200:1) – would have seen a 2% – 4% return on the opposite but corresponding spike in the value of the Swiss monetary unit.  Instead of closing the books today a big loser, investors with a balanced portfolio, (only stocks and currencies for the simplicity of this example) would have had anything from a 1 or 2% loss, to a 1 or 2% gain.  Much less volatile, and much better.

Of course, safe haven currencies are not a perfect hedge for equities, or anything else for that matter, and on another day the “balanced” portfolio could have just led to larger losses across the board.  As we all know there is no such thing as a sure bet, but as modern portfolio theory espouses, more balance and less volatility is often the way to go.

The 5 min chart of EUR/CHF shows some of the action of the pair today, first down almost 300 pips, then back up over 100, to close the day for a net loss of about 150 pips.  These quick moves highlight the need for good timing in this market, and that is where technical analysis comes into play.  To learn more about using technical analysis to time your entries and exits, visit our free education section, specifically Chapter 3 – http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-3-technical-tools/

On the chart below is RSI – Relative Strength Index – which measures the difference in magnitude between an instrument’s recent gains and losses, and by comparing the value of the RSI  to price action, can help identify potential reversal points.
EURCHF 5 minute chart

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Line and Candlestick Patterns

Trading the financial markets is a challenging career. Traders are required to follow strict rules in order to have a chance to survive. This includes risk management, controlling personal emotions, and a firm understanding of technical analysis.

It is a popular notion that candle sticks charts are one of the best chart views, showing in depth details. This is true to a certain extent, as they show traders more details than other chart types such as line or point and figure charts. Candlesticks show open, close, high and low prices for the day, in nice colors, which provides a visual representation of price action.

Most traders tend to ignore line charts, although they are the most basic chart type to use in the financial markets. The line chart offers a better view for longer term price action, with less details as it is created by connecting the close price only for the specified period to form a line. Line charts offer to traders the price action over a period of time eliminating volatility seen on other chart types which in some cases could influence a trader’s decision; what could be called reacting to the noise.

Looking at a line chart could be better if a trader wants to view longer time frame in the market without taking volatility in consideration. The opposite is true for a trader who is looking for short term trading, or in other words scalping.

We wanted to show an example of how the market view can confirm or differ by looking at different chart types. On the candle stick chart we can see a downward channel which indicates a downtrend for the EUR/USD. When we look at the line chart, we can see a descending triangle forming which indicates a possible breakout to the downside also.

Technical analysis is the art of identifying possible trend reversals and anticipating price action technically, hence traders would use the chart patterns to identify and decide on their entry price as well as stop orders and Limit orders to take profit which assists with the main rule in trading forex that trumps all other rules – risk management.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Google Boosts Equities

After a very volatile week last week, many traders where a bit skeptical on how the market was going to pan out entering Monday’s trading day.

The global equity markets seem to have come back after heavy losses in the beginning of the week last week. One of the bigger stories today is the news of Motorola’s Mobility unit being purchased by Google, sparking a jump in equity markets and a drop in the USD. News also of Empire Manufacturing Data coming out weaker than expected at -7.72 vs. prior -3.76 added more bearish pressure to the drop of the greenback. Traders look like they are cutting back on their risk exposure.

The jump in global equity markets helped the EUR/USD hit 1.4475with a low at 1.4250. The Dow Jones Industrial average and the S&P 500 rose up 1.9% (213.88 points) and 2.18% (25.68 points) respectively.

Commodity markets benefited from the weaker dollar as oil rallied up $2.50 to settle up $87.70 a barrel. Gold prices rose up $19.13 to settle at $1,764.99 a troy ounce.

This week watch out for some big news during the European Session tomorrow. All eyes will be on the meeting between the EU leaders, with Germany’s Prime Minster Merkel and France’s President Sarkozy discussing the euro debt crisis. It will be interesting to see the language they use and what their respective outlooks are. On the US front, housing starts data and industrial production data will be released. On Wednesday the Producer Price Index, where we can see a change with core inflation, will be released. Thursday will be a busy day with the release of the Consumer Price Index data, Jobless Claims, Existing Home Sales, and the Philadelphia Fed Survey. Stay on your toes traders!

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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