Forex Trading Signal 07/16/09

Crazy Cat

Former FPA Special Consultant
Hey folks,

Well, we got much more of a rally in stocks today than I expected, and I think it's enough to force us out of our "sell on rallies" type of bias. Chances are we will see a dip on Thursday into the 900-920 range on the S&P, and I'm likely going to bail on my shorts there and potentially look for a long. The extent, breadth and technical structure of this week's rally is very consistent with an initial leg of a multiple leg push higher to new highs. We saw this coming over the medium term, but it seemed we had further to dip and sell off before this next rally leg. Since the big 875-878 support never really faltered, it seems the decline from 955 has found its bottom and this next advance will take us to 1000-1100 on the S&P 500. The situation is still a bit up in the air and uncertain, but things usually are at the beginning of a move, so I'll let you know how the odds develop. Essentially though, the odds have whipsawed around from further downside to further upside very quickly and a lot of things I look at in the markets are clearing up and pointing towards the upside. We still have that over-hyped head and shoulders pattern now with a 2nd double shoulder, but the neckline has to break for that pattern to confirm, and unless that happens, it's ended up being a big sucker play.

The good thing about this clear whipsaw towards risk appetite, is that it clears things up on the currency front, and I think the odds are now strongly in favor of a EUR/USD and GBP/USD long to watch both pairs rally to and likely through their June highs in the 1.4300's and 1.6700's respectively. While we may get a short term risk aversion dip on the fresh bad news that CIT will not be getting a bailout, I think buying on a dip is a good move for both pairs. I would say further selling towards 1.4000 and 1.6300 would be good opportunities to start a long position or swing trade.

On gold and silver, we look to be pulling up a bit along with this broad risk appetite as well. My recommendation is to initiate a short on silver sometime soon as this bounce develops, or wait for it to top out and me to give the all clear that we're turning around for more downside. If stocks really do mount a large 1 month or longer rally here, the bounce on silver may be larger than expected, so it might be better to wait for it to top out and clearly turn lower before entering or adding more short.

There's no economic news worth trading scheduled for Thursday, and all of Wednesday's news came out too close to expectations, so there weren't any clear trades. We've got a couple of things coming out Friday though, so we'll cover those with tomorrow's signal and give an update on this medium term shift back into risk appetite and how best to play it, maybe with some more specific trade calls.

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Sir Pipsalot


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