Appetite for... Good or Evil? Left or Right? Up or Down??

My long EUR/JPY position was stopped out Friday afternoon at the 133.97 level for a mere 30 pip gain. I was protecting my profits in the hopes that if the pair fell through my stop-level, I would have a chance to buy it back lower. So, here we are, Monday morning and I can buy the pair back almost 100 pips lower (see chart below). The question is should I??

The answer lies in defining global risk appetite, at least for the week ahead. If the USD should find real strength this week and the week ahead, it would mean that investors' appetite for risk is weakening and they will all flock to the USD like birds going south for the winter. And after just a few days, the momentum can build up so intensely that the US dollar may look like the L.I.E. on Labor Day - a parking lot. We saw this last year around this time (see EUR/USD chart below). Although the circumstances were a little different (the credit, housing and auto crisis was relatively fresh on the global scene), no one can say with outright certainty that momentum of that nature isn't again possible.

The US economic data out this week tells a mixed tale of good and evil. Chicago PMI came in significantly higher than expected, boosting the higher USD argument:

Mon Aug 31GMT 13:45 USD Chicago Purchasing Manager (AUG)

(actual) 50.0 (forecast) 48.0 (previous) 43.4

The remainder of the week includes improved vehicle sales expectations (which is a doomed figure, riding out the tale-end of the cash-for-clunkers momentum), higher ISM Manufacturing numbers, and lower pending home sales and construction spending figures. This mixed bag of cherries will be topped off with a worse-than-expected unemployment number, coming out Friday.

So, as GNR would say, "where do we go now?? ah ha ah ha ah ha ah haaaa...." Is the USD going up or down, left or right? The short answer is, I don't know. The better answer is most likely DOWN! there I said it...

From the charts below, support levels for the EUR/USD, Cable, USD/JPY and EUR/JPY are about 500 pips below the current market price. That's quite some wiggle room, so I would keep a fairly tight stop on any short USD or short JPY position (the safest play probably being long USD/JPY). I will look to get back into the EUR/JPY and possibly USD/JPY and/or EUR/USD once the hourly charts look a little more favorable from a risk/reward standpoint. I'll try to keep my positions posted...

Sorry for the long-winded article. I'll keep the rest short and sweet... child o' mine!

Riding the EUR/JPY Momentum Train

With better than expected U.S. GDP data out yesterday, and increased consumer spending data in the U.S. already reported today, my EUR/JPY trade from yesterday has been riding the momentum train.
I'm taking some profit here, as the pair has touched the 61.8% fibonacci retracement level off the hourly chart, from its most recent decline. I'm taking half my position off the table for a profit of over 150 pips, which is just over a 1:1 risk/reward ratio. I'll raise my stop to just below the 134 level (133.97), as that is just below where some support shows on the hourly chart and still above my entry point, so my profits are locked in (barring a severe gap down over the weekend, if the trade should last that long in the first place).

I will not look to add any positions, as it is Friday and I will, once again, take my weekly profits with gratitude and humility and run...

U.S. GDP, Jobless Claims and the Yen

As reports of a deceleration in global growth, and specifically in China, sent the carry trade lower overnight, my long EUR/JPY position was stopped-out at 133.81.

With daily support sitting around the 132 level, and hourly support around the 133 level, I got a chance to buy this pair back at the 133.30 level with a stop placed around 131.91 (see chart below).

U.S. GDP and Jobless claims figures are due out in about 10 minutes and expectations are relatively low:


GMT
12:30 USD Gross Domestic Product (Annualized) (2Q P) (forecast)-1.5% (previous) -1.0%

GMT
12:30 USD Initial Jobless Claims (AUG 22) (forecast) 565K (previous) 576K

Low expectations means this is the U.S.'s to lose. A slightly better-than-expected number should help push the markets higher, along with EUR/JPY.

And if anyone is wondering why I chose EUR/JPY, as opposed to GBP/JPY, my "indicator" pair, EUR/GBP (see chart below), should give it away, as I wrote about previously.

Consumer Confidence Increases

Consumer Confidence in the U.S. came in higher than expected:

GMT
14:00 PM USD Consumer Confidence (AUG) (actual) 54.1 (forecast) 47.9 (previous month) 47.4

The initial move was to the upside for USD/JPY and EUR/JPY. The next two or so hours will be pivotal, as the market will determine whether the pairs will have enough momentum to break through their resistence levels of 95.00 for USD/JPY and 136.00 for the EUR/JPY (see chart below), or whether this will be more of a sell-on-the-news type situation.

Consumer Confidence & the Carry Trade

The U.S. Consumer Confidence report us due in less than one hour and expectations are slightly higher than last month:

GMT 14:00 PM USD Consumer Confidence (AUG) 47.9 (forecast) 46.6 (previous month).

This is certainly an important figure in the forex world, as it can very much impact the USD and the carry trade, even instantaneously. Let's take a quick look at last month (chart below), when the numbers came in 2.4 points lower than expected (forecast was 49.0, actual number was 46.6).

As you can see in the above chart, both USD/JPY and EUR/JPY (the ideal carry trade currency pairs) plummetted about 100 pips prior to the release of the consumer confidence numbers, then dropped over 100 pips in the 3 hours following the release.

My EUR/JPY trade, which is still on since last week, has been volatile, but still working for me. Like I mentioned last week, long the EUR/JPY (or short the JPY) is my preferred direction (this is a carry trade), so I'm more willing to ride out the heavy waves of volatility in return for a potential big upswing, and every day that I'm still long the pair, I earn money on the interest-rate differential).

Right now, the momentum cetainly seems to be in my direction and so I have two choices: stay put with my current trade or add to my position. Since I missed a very nice entry point at the 134.20 level, around 2:00am EST, I think my best bet is to stay put and ride out the wave as far as it takes me.

Winner, Winner, Chicken Dinner...

I'll take my chances that the makers of the movie 21 don't sue me for using this title. Looks like the EUR/JPY trade is going very well. I definitely made the right decision to stick with it, as the recent existing home sales numbers, released 10:00am EST, exceeded expectations. The U.S. equity market surged, as did the carry trades (basically, anything against the JPY).

The EUR/JPY broke out of the hourly resistance I mentioned earlier today, and I will look to take some profit here for a risk/reward close to 1:1. The only difference between how I'm taking profit here and last Friday's profit taking on the GBP/JPY "hedge," is that being short the JPY (long EUR/JPY) is very much my preferred direction and so I'm more willing to leave some risk on the table, even if it's through the weekend. Additionally, after taking some profit, I will raise my stop-loss to the 133.81 level in order to protect the remainder of my trade.

Volatility City and the Dreads of Fridays

There's clearly some resistance around the 134.50 area for the EUR/JPY, as shown in the chart below.

The resistance has made itself known since the night before, so if I was more of a day trader, I could have taken at least some profit up at around the 134.20 level last night with the intention of buying back lower. Thanks to the intense volatility of the forex market in general, I could have taken profit at the resistance level around 7:00-8:00 pm EST last night and bought back again about 100 pips lower by midnight to 1:00 am, a few hours later. Would've, could've, should've... but I did not! and I have no regrets either. There is simply no time for regrets in this business. I am grateful for the profits I make and look forward to future trades. That's all.

So, right now, we're at the same resistance level and it's Friday! Dreadful Friday, with the uncertainty of an entire weekend looming ahead. I will wait out a few more hours before making any decisions on my existing trade with the EUR/JPY, but I am hopeful that it very well may break out to the upside and I can take some profit before the end of trading today.

I Meant For That To Happen...

I'll be perfectly honest, I'd rather the EUR/JPY just have taken off in a straight line upward last night. But it didn't and I was well prepared for that. Just as I wrote yesterday, I was suspicious of a false break, which is exactly what happened (see chart below).

Luckily, my stop was well below that and, not only I am still in the trade, but I am averaging down by buying another 2 lots around the 133.25 level (which is about 50 pips below my initial long position). Also, the 4-hour chart (see below) shows a nice reversal candle, which is even more incentive to get involved here. Additionally, the daily chart (not shown) has not shown a break in support.

Although I don't like the drama and would have liked for the trade to have gone my way immediately, this could be even better. Since I'm averaging down, I'm also establishing a new (and higher) stop at around 131.91, therefore, further minimizing my risk.

Original Long:

Risk: 175 pips

Reward: 230 - 400 pips

Additional Long:

Risk: 137 pips

Reward: 270 - ?? pips

Long EUR/JPY, As Promised

As per my trading plan, mentioned the last 2 weeks, I initiated my long EUR/JPY position this hour (see chart below).
Risk: 230 pips
Reward: 230-400 pips

I missed a beautiful entry point last night around the 133 level, but that's the way it goes. I think the dip over the past 6 hours provides an adequate entry point. I'm placing my stop well below the obvious hourly support at around 133 because I want to give my trade a little room and don't want to get stopped out because of a false break. Because the amount of risk (230 pips) is a little more than I'm usually comfortable with, I'm taking on only 2 lots. If the pair dips further and forms some support above my stop, I'll buy another 2 lots.

Closing Out Before the Weekend

I took the remainder of my GBP/JPY short position off at 156.55, for a 250 pip gain. Since my risk was 150 pips, I made 1.67 times what I was willing to lose on this lot, a 1:1.67 risk/reward ratio, which is not bad at all. I'll take the money and run, especially with the uncertainty of a weekend ahead. I'll be looking more aggressively for an entry into a long EUR/JPY, USD/JPY or GBP/JPY position next week...

Taking Profit Friday and Protecting Trades

Per Yesterday's GBP/JPY trade, I'm taking a few contracts off the table to lock in some profit. The important part of taking profit, especially while leaving a portion of your base position on, is to try to lock in more profit than you initially risked. The good ol' risk/reward ratio in effect.


I was willing to risk about 150 pips on my initial trade. I took half my position off the table this past hour, locking in 188 pips (per chart above). Furthermore, I've adjusted my stop-loss to below my initial short, around 158.53, in order to protect the remainder of this trade, as I'm not as willing to maintain my risk on the "hedged" portion of my trade strategy. By placing my stop below my initial short, I'm automatically locking in a minimum profit of about 50 pips on the remaining lots of my trade. Keep in mind, this is not my preferred direction against the Yen, as I noted clearly in yesterday's piece. I always want to be short the Yen (long EUR/JPY, GBP/JPY, USD/JPY, etc).

I'm still watching the EUR/JPY and USD/JPY for entry points in the long and interest-rate favorable direction. There was a point around 3:00-4:00 pm EST where I could make a case to have entered at least an initial position, but I did not see a favorable risk/reward ration for an appropriate trade.

In the old days, something silly like risk/reward would never have stopped me. Now, I must stay disciplined and trade ONLY when it is favorable to do so. I seriously doubt I will enter this side of my strategy this week.

Be wary of entering trades on Fridays, as I have given back perfectly productive weekly gains all because the Market sometimes goes against all rhyme, reason and sanity on Fridays.

Gentleman, Start Your Hedging...

Looks like the number of Initial Jobless Claims for the week was slightly higher than expected. Although this was not wonderful news for the U.S. economy, it was far from terrible. So, the economy seems to be doing less worse every day. It's only a matter of time before this recession is a thing of the past. When will that time come? I can only say it will not be today!

I started the first phase of my mid-term trading strategy today with a hedge. I shorted GBP/JPY this hour (8:41 am EST) with a stop set at the 160.50 area (chart above). The pair retraced back up exactly 61.8% from it's most recent decline to the 155.95 level (from the 8/7/09 high of 163.05), and then followed by a very convincing hourly down bar this past hour.

Risk: 150 pips

Reward: 100-250 pips

This is not my preferred direction. I'd much rather own anything against the Yen (buy EUR/JPY, GBP/JPY, USD/JPY, etc). However, like I said above, this is only the first phase of my trading plan, and I am waiting very anxiously in the wings to go long EUR/JPY as soon as I see an appropriate entry point. I will try to post here as soon as I make my move.

Contrarian Trade Looming and a Presidential Leak

By now, everyone in the forex world knows that the NFP numbers were much better than expected, especially since President Obama leaked the news last night at a fund raiser in Virginia:

I'm convinced that actions we've taken in the first six months have helped stop our economic freefall….We're losing jobs at half the rate we were at the beginning of this year...

Well, so much for surprises! However, good news is still good news and the recent slowing in job losses is undeniable. I'm sure there will be a great deal of hoopla through various media outlets about how the US economy is on track and all signs point to a firm recovery through the rest of this year. Let me say now that this does NOT necessarily mean the USD will be rallying, especially for the upcoming week. It is too late to place any trades today, as the the train has officially left the station. But next week will provide plenty of opportunities. Let's take a look.


My main "indicator pair," the EUR/GBP (chart above) has been basing, or flagging, for months. Since the preceding direction is upward, we have to assume that since the pair has not broken down, it is setting up for a move higher; therefore, I will be favoring a long EUR, short GBP bias.

The EUR/USD (chart below) has been rallying basically since March 2009 and I will look for an opportunity to buy the pair next week, once I see some kind of reversal pattern from its most recent short-term dip.


The same concept will be applied to the EUR/JPY, only I expect this pair to rally more so if the equity markets rally as well.

I will also find a spot to possibly go short the GBP/JPY, in case the equity markets take a hit. This pair seems to be a proper target to fall, even if only a corrective dip.

I will follow up with more details and precise trade levels next week.