Brilliant market selling to end the week and month
The rollercoaster market that we forexers crave returned this week and the putrid whiff of fear is again wafting through both Wall Street and Main Street. The big news of the week was released yesterday with the US Gross Domestic Product release at 0830am, spawning a fresh load of buying and pushing the Dow up 199 points, the GDP data did slightly surprise to the upside to 3.5%. This after three days of a moderate slide in stocks, and continued dollar weakness. After yesterday, traders were excited that price action would likely continue up and up, at least for a time. Friday brought in the sellers. The important level to watch is 2712 on the Dow, which was September’s close. But with the -250ish point fall, the monthly Dow candle will be quite a nice wick and doji. Why all the selling today? Could be the consumer data today showing spending fell in September now that Cash for Clunkers in finished. This may be the beginning of truth coming out in the numbers as the economic stimulus wears, afterall jobless rate continues high and people here just cannot sustain the go-go-go spending that kept the US humming for so long. The jobless data next Friday will be big, either way. Question is, was today’s selling only end of month profit taking or the beginning of something much bigger? Meanwhile, I was happy to snag about 100 pips on the GBPJPY today, selling. Here is something to consider: The daily GBPJPY certainly points to further downside, but even with today’s action the weekly GBPJPY is still neutral to buy. Check it out: The 5ema has crossed the 8sma back down on the daily chart, indicating further selling. But the 5ema crossed the 8sma upward last week on the weekly chart and will close this week firmly in control. Lets see if we can get a drop to the 146 region to begin buying this pair again, near the 61% retracement, looking for a return to 155.00 and maybe even 162.00 level. Good luck.
Weekly GBPJPY chart
All markets are connected
Today’s market action could be signaling a changing in the guard after the Federal Open Market Committee’s rate decision and accompanying statement. It is such a perfect example of how all markets are connected in some fashion: whether it is oil, gold, EURUSD, the Dow, or the Hang Seng. It is also a perfect example of why intraday traders need more than one screen to trade from, there’s so much going on to pay attention to. First I’d like to say, I never trade an FOMC statement. But it was spectacular to watch the reversal today after this bit of news, or non news, came out. Today’s price action in most markets were quietly awaiting the FOMC decision, minus crude oil prices. Oil had already dropped nearly $3 this morning when I turned on my computer. Consequently, the US dollar was showing signs of resilience against the euro, yen, and aussie, after reaching new highs in the euro and aussie during Asia last night. That spike last night certainly caught my eye, creating some serious negative divergences in those pairs today. Putting all this together I was starting to guess that the dollar was starting to reach some sort of bottom, if only temporary. So after the 2:15pm FOMC decision and price spike, (look how beautiful the double tops in EURUSD and AUDUSD!) it was not too surprising to watch the Dow also spike up, but all of these stalled after just 20-30 minutes and the US dollar came back strong to lead the EURUSD, AUDUSD, and the Dow down in a big way. The Dow made a 160 point swing to close -81 points down. Nice volatility, just like the old days. There has been quite alot of talk about the US dollar being the new carry trade, and that is probably why we have not seen “normal” market correlation with the dollar and the yen, and oil, in respect to the Dow. My good old trading strategy of Dow/yen correlation has not worked for many months now, but just selling the greenback against anything has been the trade of the year. Wouldn’t it be interesting now if we see more dollar strength, ushering in some risk aversion? Did the Dow get close enough to the magical 10,000 level (she hit 9906 today during the FOMC spike) for sellers to get in the game? Are the institutional traders back and in the swing of moving this market?? So many questions, so many pips. Good trading.
The fundamentals, the technicals of JPY
As quoted from BBCnews: “Japan has come out of recession after its economy grew by 0.9% in the April-to-June quarter.
The growth comes after four consecutive quarters of contraction.
Correspondents say the rise is due to a huge government stimulus package and it is unclear whether the momentum will be sustained when this is concluded.
Recent figures show other economies coming out of recession, including Germany, France and Hong Kong, a sign the global slowdown is easing.”
Another green shoot from Japan? Though a very good point that it may be only the government stimulus that is working over there, and maybe in other parts of the world too. Meanwhile, the JPY has been strengthening against all odds most of the summer, against most major currencies. This strong JPY has created quite a large divergence with the Dow, normally the Dow and USDJPY run in very similar lines. But not for some months now have we seen any such typical correlation between these two, which is making traders scratch their heads, and making it a bit more difficult to trade because of it. I had recently written an article about this type of divergence in the past and how divergence with the USDJPY has signaled major reversals in the Dow and S&P 500. Could this summer’s price action be another such sign? After exhaustively looking around the usual places on the net for a reason for the JPY strength, I still have no good reason for why this divergence is occurring. Key price levels to watch on the USDJPY are 93.70, and then 92.50 which is the 61% retracement on the weekly chart. Below there could be something. Also of note: the USDJPY remains in the bear channel on the weekly chart, despite that spike above it just two weeks ago during that NFP spike. So, I must remain a USDJPY bear until price can truly break out of that channel. Good trading!
Follow up on the Dow and Yen pairs
I have mentioned before in this blog about watching the dow chart in order to trade the GBPJPY and the EURJPY currency pairs. This method works great, it really shows how the market, US stock market and the forex market, is feeling about risk aversion at any given time. As soon as I turn on my computer at 5am NYT, I am checking the dow futures chart. This gives me an idea of where the yens pairs are going: up or down. If dow futures up, then yen pairs most likely will go up. Now, today was the interest rate decision, the Fed again cut the rate by .25%. All morning long the dow was heading up and I continued to buy GBPJPY for about +110 pips. I closed my trades prior to the news coming out, too risky. After the news, the dow came back to close below 0 for the day. I am thinking that this was partly due to profit taking as this was the end of the month, and amazingly the US stock market has made a nice retrace back up for the past month and a half. So now I am wondering: will the Dow continue up, marking its low in March as THE LOW, or will the market consolidate or possibly head back down? Of course, I do not care that much which way it goes, as a forex trader, but it helps to have an overview to put some direction to the yen pairs. Lately I have been trading the yen pairs exclusively, partly due to being able to use the dow futures as an added indicator. Let’s see how May pans out. Good trading.
Jennifer Shotts
Casey Stubbs has been trading for 14 years. He started trading in the stock market and moved to Forex. 
Richard draws from his extensive experience trading to write insightful trading articles for both fundamental and technical analysis.
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