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Jay Norris is a 20-year CBOT floor veteran, author of the Best Seller "The Secret to Trading Forex, Futures, and ETFs: Risk Tolerance Threshold Theory", "Mastering the Currency Market", McGraw-Hill, 2009, and "Mastering Trade Selection and Management", McGraw-Hill,... More
My company:
Trading University
My blog:
Seeking Alpha
My book:
The Secret to Trading Forex, Futures, and ETF's: Risk Tolerance Threshold
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  • An Orderly Bear Market In Euro: Like Spring Come Early!

    Of the previous three currency bear markets as measured by the Euro - see Figure 1 -- two happened very fast and ended quickly, while the last one lasted a little longer, yet only because it had counter-trend up-moves between sell-offs. The impulse sell offs in the 2011-2012 bear move were as fast as those seen in 2008 and 2010 and just as difficult to trade. The lesson here is that sell-offs in financial markets are generally corrective in nature, which means heavy volume and rising volatility - the opposite conditions seen in bull markets.

    (click to enlarge)
    Figure 1.

    Given markets trend less than 30% of time, and most traders focus on counter-trending or mean reverting tactics, when large fast sell-offs do occur a good many traders are left behind, because they just aren't accustomed to, nor trained for operating in a full blown trending environment. This however has not always been the case. Orderly bear markets have, and presumably do occur.

    (click to enlarge)
    Figure 2. 2000 Bear Market in Stocks

    An orderly bear market, along the lines of, say, the 2000-2001 bear in U.S. stocks, would be a great turnabout - see Figure 2. That bear market was preceded by a relatively orderly bear market in Euro currency - see Figure 3 (extrapolated from the old D-Mark).

    (click to enlarge)
    Figure 3. Bear Market in D-Mark

    We can't think of anything more exciting than an orderly, trending bear market and would welcome that more than even an early spring and a record salmon run!

    Jay Norris is the author of The Secret to Trading: Risk Tolerance Threshold Theory

    Trading involves risk of loss and is not suitable for all investors.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 26 6:34 PM | Link | Comment!
  • Stocks & Currencies: This Time Is “Un Poco” Different

    Usually when someone says "this time is different" we automatically raise an eyebrow, because we know that seldom is "this time" any different. Markets are notorious for repetitive behavior. In fact that's one of the secrets of successful trading: taking advantage of the repetitive nature of people and markets. What moves markets is economic environment and emotion; in either order. Emotions feed off the environment and will often extend a market move even after environmental conditions have changed. That dynamic is what creates the underlying market movements we call bull markets and bear markets. What has been different about the economic environment these past several years is the influence that global central bankers exert on markets in carrying out their social/economic policies. If you had not noticed this change at the beginning of 2009, with the advent of The American Recovery and Reinvestment Act of 2009, a.k.a. QE I, you probably did not have such a good go of it these last few years. The QE's and the zero interest rate policies they heralded in have been game changers. Regardless of what you thought the economy's prospects were over the past several years, as a trader or investor you had little choice but to go with the bull flow of things if you wanted to survive.

    European countries were in a similar situation. Regardless of what they thought was best for them they had little choice but to go along with what the Germans and the ECB dictated. The Italians today however, may be signaling a different course by resurrecting their aging former PM, and reformed playboy, Silvio Berlusconi. While confusion as to whose ruling Italy may be good cause for concern on the Continent, where a delicate, and intricate arrangement between a variety of countries and characters have kept the banking system and economy afloat, why should it panic U.S. stocks like this? Pre-January FOMC minutes it may not have, but the possibility of the Italian complication upsetting the balance the ECB has engineered , combined with dissent at the Fed with some members wanted to stop QE III by year end creates much more uncertainty for the markets than they faced just a week ago. What kept traders and investors harnessed to the long side of the market these past several years was seeing the lengths that central bankers were willing to go to prevent a market panic and restore economic growth. While Bernanke and Draghi are still committed to those lengths their opposition is becoming more obvious and the market is taking notice. Which takes us back to what is a little different about this cycle all along: it was not based on an economic recovery, but on the success of central bankers to engineer a recovery. If the ECB does not succeed because of an obstinate Italy, or any other member, and opposition against QE by FOMC members grows, markets will lose confidence, as they did today. This is especially frightening because it takes away the current end game: economic recovery, for the foreseeable future.

    Jay Norris is the author of The Secret to Trading: Risk Tolerance Threshold Theory

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 25 6:26 PM | Link | Comment!
  • The End Game For The Euro Rally Is Here

    While last Wednesday's Fed minutes did not really reveal anything new, they came after a slew of disappointing U.S. data over the past several weeks, and they reminded everyone that Fed Chairman Bernanke, the father of zero interest rate central banker policy, is disappointed in the economic recovery. The sharp slide in stocks and currencies this concern caused was enough to shift the Day to Day Pattern in the Euro to bearish, and we have accordingly shifted from looking to buy dips in the Euro to looking to sell rallies. The Euro now joins AUDUSD on the list of currency pairs where the majority of tradable patterns are now bearish - see Figure 1. The shift does not mean that we run in and short the Euro, but it does green light sell signals for day traders and swing traders. We still cannot rule out a double-top for EURUSD, though the January high just above 1.3700 looks a long way off now.

    (click to enlarge)
    Figure 1. Risk Tolerance Threshold Ratios for AUDUSD and EURUSD

    The concern in the markets following last Wednesday's Fed Minutes is the subtle change in Bernanke's demeanor. Previously he had addressed that the economy was not as strong as he would like, and he was taking steps to make improvements. Now he is saying that he has taken strong steps to help foster economic and employment growth, but we are still not seeing it. The significance of Bernanke and the Fed's outlook is critical to Europe. If central bankers were not on the same page in supporting Draghi's efforts it is unlikely the European Central Bank could have staged the Euro's recovery from the low 120's. Not that this support is questioned now, but if U.S. quantitative easing is being questioned by not just Bernanke's opposition but possibly by the Chairman himself, we should not be surprised by reverberations across all markets.

    (click to enlarge)
    Figure 2. EURUSD Daily EURUSD Chart

    We see the current 7-month rally in the Euro as a counter-trend rally with the Primary Pattern still being down, which is what makes the current Day to Day shift so significant for us. See Figure 2. From the day-traders and swing trader's perspective the Day to Day Pattern is a reflection of day to day news and is the most influential time frame pattern. From an economic perspective we would like to see an improvement for U.S. data going forward. From a trader's perspective however we're already in sell the rally mode in leading indicator markets such as the Australian Dollar, Gold, and now the Euro. Price is king and always will be. We had no trouble buying dips in-line with the Fed and the ECB's efforts to stimulate their economies by all means possible, but we are not so sentimental as to not shift gears in-line with less optimistic expectations if need be. Case in point: that Day to Day Pattern in EURUSD

    Jay Norris is the author of The Secret to Trading Forex, Futures & ETF's: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signals in live markets on the London / U.S. overlap every Monday and Thursday go to Live Market Analysis

    Trading involves risk of loss and is not suitable for all investors!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 22 12:56 PM | Link | Comment!
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