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Sir Pipsalot's Thursday Market Update 07-01-2010

Discussion in 'Commercial Trade Journals' started by Sir Pipsalot, Jul 1, 2010.

  1. Sir Pipsalot

    Sir Pipsalot Former FPA Special Consultant

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    Hey folks,

    EUR/USD saw some good upside during the European session based on the much lower than expected demand for 3 month ECB liquidity as I previewed in yesterdays signal. While we did have some modest upside off of support early on, the dramatic shift towards risk aversion finally pulled a lot of technicals clearly into the bearish realm on some other markets.

    What does this mean? Well, it means I'd no longer look to play a bounce on EUR/USD. With the very significant break of support on stocks today, it's very likely that we'll be headed for a lot more risk aversion in coming weeks. While that should mean downside for EUR/USD, since the RBA rate decision where they described rates as "normalized," the AUD has lost a lot of attractiveness and has functioned as a good short during times of risk aversion. USD/JPY also performs quite well short in this environment. Put them together and you have a good reason to short AUD/JPY.

    AUD/JPY also recently broke daily chart support at 73.84 (currently 73.80), and is likely to follow stocks down through its May lows around 72.00 and continue much lower. At this point I think a short between 73.00 and 74.00 makes good sense for a position trade with about a 220-320 pip SL. You could wait for a bounce to 74 resistance to initiate a short there ideally, but you never know if we may or may not get that bounce, so a short anywhere in this region is still valid for a position trade. I would look to take some minor profits around 72.00, with various other incremental TP's on the way to a final TP around 63.00.

    Stocks as I mentioned closed below it's major 1035-1040 support to close at 1031 with some further accelleration lower after the close on futures (now at 1019). This is THE major piece of confirmation I have been looking for to start legging into a very long term short on the stock market that should take us down to 400 on the S&P 500 (you read that right). More medium term, we should sell off over the next 3-5 weeks most likely to around 890, but at least to 950 support.

    There are multiple ways to take advantage of a long term stock market short, but there are advantages and disadvantages to each that unfortunately I don't have time to deliniate in tonight's daily signal. Essentially you can:
    1) Get short on futures and roll it over every month.
    2) Get short on your retail forex or spread betting account that may have S&P 500 tradable.
    3) Get short by buying index option puts slightly out of the money 3-6 months out and roll them over to a contract 3 months back every time they get within 3 months of expiration.
    4) Get short in a stock or sector that you believe will perform even worse than the overall market either by shorting the stock or buying puts.
    5) Place a trade in a more accessible market that should correllate well with stocks (see AUD/JPY trade above).

    I plan to use a combination of buying puts and shorting via futures. I plan to enter long term short on any small bounce back up to the 1035-1040 range on the index (1031-1035 on futures) and use essentially a 100 point SL. My first partial TP will be around 890, and my final TP will be around 600. Why not milk it down to 400 you ask? Well, amidst a selloff that strong, many brokers may start going out of business and various forms of shorting may even become illegal, so I'd rather cash out early and put my profits somewhere safer.

    In news Wednesday, we saw US ADP come in low, but not low enough to signal a clear short. The ECB 3 month bond offer as I mentioned early, showed a lot less demand than expected, so EUR/USD rallied mightily for about 80 pips over the following hour after the 0515 EST announcement. AU Retail Sales came in very close to expectetions, so there was no trade there. In news Thursday:

    1000 US ISM Manufacturing (59.0 expected) - We haven't seen a big surprise here in awhile, but should we get one, we'll likely see a good reaction on EUR/USD, USD/JPY and EUR/JPY.
    If it comes out at 60.1 or higher, EUR/JPY should rally 50 pips.
    If it comes out at 58.9 or lower, EUR/JPY should fall 50 pips.

    That's all for today's update. If you'd like to learn more about trading or trade along with myself and my collegues, come join us at Profit Mongers. Our subscription is very reasonable at $179 per month, and right now you can sign up for a 2 week trial to get started for only $29. This offer is for new customers only. If you have any questions, you can also email me at sirpipsalot@profitmongers.com

    To our success!
    Sir Pipsalot
     

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