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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • World Markets Cheat Sheet 12/28: BEST FX TRADES FOR ILLIQUID RISK ASSET BOUNCE - BUT AVA FX WARNS: BEWARE THE ILLIQUID YEAR END TRADING SCAM 0 comments
    Dec 28, 2009 4:42 AM


    NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS OF RECOMMENDED TRADES GO TO http://fxmarketanalysis.wordpress.com/ AND SELECT "DAILY OUTLOOK" FOR TODAY

    Stocks: Prior Day: Asia Mixed, Europe, US up, Today: Asia, Europe Up. Pre-Holiday thin liquidity is dangerous –don't be scammed –stand aside and enjoy the holiday.

    - FX: bias against safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD retreats against everything as poor housing data serves as profit taking excuse despite the prior day's even more positive housing data

    - Main events: Sun-JPY: Prelim Industrial Production m/m, Retail Sales y/y, Avg Cash Earnings y/y, Mon-GBP, CAD: Bank Holidays Tues-CHF:UBS Consumption Indicator, EUR: German Prelim CPI m/m USD: S&P/CS HPI y/y, CB Consumer Confidence

    - Big Theme: Profit Taking on USD Rally Spurs Bounce In All Anti Dollar Positions on Pre-Holiday Thin liquidity: DON'T BE SCAMMED BY ILLIQUID MARKETS – SEE RECOMMENDATIONS BELOW FOR THE COMING DAYS

    STOCKS

    US: The bellwether S&P 500 held above 1120 at week’s end and so too did the other major indices make modest gains to close at fresh 52-week highs following a holiday-shortened low volume session Initial jobless claims declined to 452K units (consensus: 470K units) in the week ended December 19 from 480K in the previous week. Despite the volatility of the data, the better-than-expected results spurred speculations of another strong payroll report. Durable goods orders climbed +0.2% mom in November but the reading excluding transportation surged +2%, suggesting business investments picked up and companies are more confident about the economic outlook.

    Asia: Asian shares up on economy outlook, dollar hovers SINGAPORE (Reuters) - Asian stocks rose on Monday on increasing optimism about the global economy, with Tokyo shares hitting their highest in four months, while the U.S. dollar gained against the yen and held firm against the euro.

    Europe: Thurs/Fri most EZ, UK, markets closed, Monday UK markets closed. European stocks rose in early trade on Monday following the Christmas break, mirroring a rally in Asian shares, but volumes were expected to be thin as London markets remained closed.

    ASIA- MIXEDN225I -0.40%HS +0.88%SSEC -0.38%FTSTI -0.00%AORD +0.99 %
    EUROPE UPFTSE +0.56%DAX +0.20%CAC +0.05% 
    US- UPS&P +0.53%DJIA +0.51NASDAQ +0.71%  
    THIS MORNING UPN225I +1.33%HS -0.17%SSEC +1.51%FTSTI +0.59%AORD +0.99 %
    UPFTSE +0.56%DAX +0.79%CAC +0.63% 

    Commodities: Energy and precious metals gained last week as the USD consolidated and crude inventories were below forecasts, suggesting increasing demand. See Weekly Outlook for details at: http://fxmarketanalysis.wordpress.com/

    Oil: Crude oil rises for the 4th day to as high as 78.68 as the market view Thursday's US data as signs of economic recovery. The benchmark contract gained +11.7% in the last 2 weeks. However, the black gold needs to stay firmly above 80 to confirm an upside break of recent broad trading range.

    Gold: Finished the week at $1104 up 0.99%. As expected, gold price slid for the 4th consecutive week in the week ended December 24. The February contract lost -0.6% to settle at 1104.8. After plunging to as low as 1075.2, the yellow metal has found a temporary support and rebounded. Currently trading at 1113.3, the benchmark contract climbs as USD pares previous gains. However, there's substantial risk for the dollar to strengthen again as signs of US growth ignite optimism for an early Fed rate hike. This would be negative for gold's outlook. SEE TRADE RECOMMENDATION BELOW FOR DETAILS

    CURRENCIES: Rising stocks means current bias against safe havens (JPY, USD,CHF), as stocks rise USD lower or steady against all. Illiquid trade unlikely to have much meaning, though it may be volatile

    USD: Watch This Week for the # Dollar Drivers: Down or steady against all majors as rising stocks feed risk appetite but no news regarding jobs or consumer spending to lift the USD with stocks and other risk assets. USD Outlook: Neutral/Bearish this week, Bullish Longer Term

    • A fear or optimism inducing event, most likely involving a sovereign debt trouble/resolution announcement

    • A major positive or negative surprise regarding US employment or consumer spending (nothing major scheduled, though Tuesday’s CB Consumer Confidence and Wednesday’s Chicago PMI might offer clues)

    • An event causing significant change in expectations regarding the Euro

    EUR: Moving Opposite the USD: EUR Outlook: Bearish. Moving opposite the USD and thus also responding to the key dollar drivers mentioned above.

    JPY: Pressured by BoJ Stress On Avoiding Deflation: Outlook: Bearish for this week. Gaining relatively little in the general USD retreat, with the USD/JPY BoJ has expressed recent willingness to intervene to weaken the Yen in order to avoid endangering exports.

    GBP- Worst of the West? Outlook: Bearish Disappointing GDP final release and the threat of additional QE coming in February or sooner continue to weigh on the pound, as the UK economy continues to look like the worst of the West. The BoE is currently the only central bank among the major currencies actively considering additional stimulus, putting the GBP at a distinct disadvantage.

    AUD: - AUD/USD: Continuing to Edge Higher On A Softer USD And Rising Gold Sydney The USD is slightly softer across the board as USD longs trim ahead very illiquid market week The AUD/USD trades towards the top of a 0.8763/0.8900 range. No major events this week, expected to follow overall sentiment.

    NZD: - NZD/USD opened at 0.7080 Early Monday in Asia and trades towards the top of its declining channel at this level No major news this week, expected to move opposite the USD, as with all the commodity dollars.

    CAD: Despite disappointing retail sales data and GDP growth, continuing to gain on the USD with rising oil and a now consolidating USD rally., the 61.8% Fib retracement level at CAD 1.0441 still providing support. However, the uptrend line from October on the day chart is now officially broken.

    CHF: Gaining vs. USD, and more importantly, vs. the EUR, which is the bigger concern for the SNB and the currency likely to provoke intervention if it falls too much vs. the CHF. Following the USD.

    CONCLUSIONS: S&P 500 remains in tight range continuing its slow low volume drift to new highs. Low liquidity makes markets potentially unpredictable and volatile, thus, in order to guard our clients against being scammed by illiquidity, AVA FX urges caution about opening new positions at this time. See Trading Opportunities section below. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, USDCAD, USDCHF, GBPUSD

    BIG PICTURE TRADE STRATEGY: Profit Taking on USD Rally Spurs Bounce In All Anti Dollar Positions on Pre-Holiday Thin liquidity trade. Because we suspect that the Euro-zone's debt travails are far from over, and that some key commodities are still overpriced, our bias is to believe the USD trend up still has room to run, so we view the current USD reversal as a reaction bounce and opportunity for traders to position to re-enter USD long positions or short position on crude oil, gold, the euro, Australian dollar, New Zealand dollar, Canadian dollar, and, Swiss Franc. Timing when the current reversal will end is tricky, so new positions should not be attempted until the trend at least begins to resume. Those attempting to play the current trend should use tight stops given the potential volatility of very illiquid markets

    IN SUM: DON'T BE SCAMMED BY ILLIQUID MARKETS: Given the dangerously low liquidity levels prevailing until next week, traders should be cautious, using small positions and tight stops if trading at all, and should stick with the prevailing pro USD trend by WAITING FOR THE REVERSAL of the current USD pullback and rise in its crosses and commodities, and enter near a strong support levels as shown in prior days' charts to catch the continuation of the current pro USD trend vs. other higher risk currencies and commodities.

    SPECIFIC TRADE RECOMMENDATIONS: Big Theme: Treacherous though it may be, if you must trade in the coming days, the current trend is long risk assets and FX, short the USD. Again, we'd prefer to wait for the pro-USD trend to resume, but if you insist, consider the below.

    S&P 500 & Risk Assets In General: Still in Long Term Uptrend, but in a flat trading range since mid November. Despite struggles and concerns ahead, uptrend line clearly intact, suggesting we retain our ambivalent long bias until the trend tells us otherwise, though the trend is still flattening out despite recent small moves higher, the lack of liquidity makes it hard to take these moves seriously.

    The overall bullish picture of risk assets as per the S&P 500 suggests slight rise/flat range trading into year-end: The S&P 500 back at 12 mo highs of 1123 after great consumer data Friday, and has also regained its rising channel, suggesting more upside coming for risk assets. It's been in a horizontal trading range of 1090-1112 since early November. We need to see if it can make a sustained break above 1100, recent moves up this week are hard to take seriously given the low liquidity pre holiday trade, so we wait until after New Year's to form an opinion. As noted in prior articles, we remain deeply skeptical of the rally given the numerous threats to international credit markets and uncertainty whether economies will be able to sustain themselves without continued stimulus.

    Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at around the1090 (23.6% Fib retracement +20 day MA + some price support from mid-October + rising trend line) and at 1080 (38.2% Fib retracement + rising channel line + lower Bollinger Band + 50 day MA) or a decisive break over 1100. Given the fear reflected in the S&P, traders should be very cautious opening long positions in ANY risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions. They should also have some short positions planned, complete with initial and confirming indicators, and planned entry/ exit points.

    S&P 500 Daily Chart as of Dec 1 08:47 GMT (03 Dec 22) AVAFX CHART

    ** GOLD: Rising with other anti-dollar assets to resistance at the 61.8% resistance level at just above 1102.

    Trade Suggestion: Currently around $1110, with a break above the $1104 and 61.8% Fib retracement level, traders can consider long gold entries at this level, with no major resistance until about $1126, where there is resistance from the price level itself, the rising trend line, and the 50% Fib level. Thus: Target: $1126, Stop Loss: $1104. Not a great risk reward ratio, but if you must trade, go with the current trend up. We prefer to wait for the USD to reassert itself next week if there is pro USD news and re-enter the down trend for safer profits.

    As noted recently, any decisive break below around 1103 suggests a good short entry – but currently gold is slowly rising along with the USD's slow pullback into the year end, with no major news on jobs or spending due until next week that could boost the USD. Caution with any attempts to go long, given the narrow range allowed by the sharp descending channel, growing establishment of the USD uptrend and gold downtrend. At this point, gold is moving opposite the dollar, so watch the EURUSD and S&P 500 for indications of gold's near term moves. Also watch the S&P 500 and other major stock indexes to see if risk appetite gets a lift from the Dubai bailout. If so, that suggests upward movement for gold.

    Gold Daily Chart (11 Dec 28) AVAFX CHART

    Crude Oil: Too close to its recent high to attempt going long unless we get a decisive break above $82. Given the ease with which oil price can and are manipulated, we don't recommend crude trades unless they show us very compelling reasons. None at this time, because it's too late to go long, and too early to go short – we wait for signs of reversal before entering. However if the current USD uptrend reasserts and oil stalls, consider shorting oil as close to one of the Fib or price levels as possible.

    Watch the EUR/USD chart for USD movements, and the S&P 500 chart for overall risk sentiment.

    WTI Crude Oil Daily Chart (12 Dec 28) AVAFX CHART

    EURUSD: Given that the 50% Fib Retracement level at 1.4450 has not proven to be any real support or resistance, those wishing to attempt a short term long play could consider entering at current levels (1.4384) with a target of around 1.4600, where there is resistance from both price and the 38.2% Fib retracement. Stop loss around 1.4350, sooner if any really anti EUR or pro USD news.

    Watch the S&P for overall risk appetite, and the EURUSD for a quick gauge of the USD to judge if oil is ready to stabilize.

    EURUSD DAILY CHART (14 Dec 28) AVAFX CHART

    SEE THE LATEST WEEKLY OUTLOOK FOR FULL ANALYSIS OF THE EUR AND USD, AND WHY WE SEE MORE EURUSD DOWNSIDE AS THE MORE LIKELY POSSIBILITY.

    NZDUSD: Trade Suggestion: Moving opposite the USD, testing dual resistance of the 38.2% Fib level and descending channel. Consider going long if it can make a decisive break above prior strong support turned resistance at 0.7100, with target up to the 23.6% Fib level and price resistance at 0.7242. Stop loss around 0.7080 – a 10:1 reward : risk ratio. I like.

    Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Much will depend on further news on US economic fundamentals and Euro zone sovereign debt issues.

    NZDUSD Daily Chart (15 Dec 28) AVAFX CHART

    USDCAD: Awaiting clarification

    As we've noted before, the CAD is perhaps the most vulnerable of the commodity dollars to a USD rise because it lacks the yield appeal of the NZD and AUD.

    USDCAD DAILY CHART (image: 06 Dec. 22) AVAFX CHART

    USD/CHF: Support at 1.0352 still holding.

    Trade Idea: We are skeptical about getting into trends this strong before a test of support, we got one Thursday, which is already proving itself as the pair reversed back up, then down this morning. Wait for trend to clarify. Next support at 1.0300 (38.2 Fib level) if the pair breaks downward. If the pair resumes its uptrend, next real resistance is not until 1.0500, the recent high.

    USD/CHF DAILY CHART (image 16 dec 28) AVA FX CHART

    (Seekingalpha.com)

    Global Markets Outlook: 3 Events that Could Shake the Markets During a Quiet Week

    Global Markets Overview: Beware Illiquid, Pre-Holiday Trading

    Where's Gold Going from Here? Part 3

    Debt Fears Rattle Europe (WSJ)

    DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

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