Sir Pipsalot's Tuesday Market Update 09-21-2010

Sir Pipsalot

Former FPA Special Consultant
Hey folks,

Yesterday the EUR/USD and GBP/USD picture looked a bit fuzzy, but it's starting to take shape a bit. The odds are tilting a bit more and more to a substantial turn lower. The EUR/USD still needs more confirmation (a break below 1.3018, Friday's low), but GBP/USD has already done this today and is set up to be a decent "sell-on-rally" type opportunity as the medium term trend is showing signs of a downward turn. I would look to short GBP/USD in the 1.5610 to 1.5650 range with a SL around 1.5700. It's a bit of a risk to hold into the FOMC with rumors of QE2, but I actually think the event risk is tilted towards USD strength as I'll mention in the FOMC breakdown below.

AUD has strengthened decently since I entered long AUD/USD and short EUR/AUD Sunday night/Monday morning. At its best (around 11am) both pairs were profitable by 50-80 pips, but now both are back around break even. I plan to hold them at least another day or two to bet the AUD does relatively better than other currencies due to fund and yield demand. I'm looking to exit both at the same time for around 100-300 pips each.

I haven't been mentioning stocks much lately as this retracement higher has repeatedly exceeded my expectations for a top. Significant portions of the rally waveform has shown corrective characteristics though, so I still feel like we're in the process of topping out and moving lower, but it's important to wait for confirmation of that turn rather than betting on resistance holding at a certain point (tried and failed at that already). I'm still short for the long term, but I've closed out all my short to medium term trades for a loss over the last week or two. I'll start covering stocks more frequently either when the bias clearly shifts towards a bull market unfolding, or when I see this corrective rally turns over with confirmation into resuming the downtrend.

In news Tuesday:

0700 CAD Core CPI m/m (0.1% expected) - This isn't the best trade in the world, but if the trigger is hit it's usually good for 20-30 pips on the spike, and as long as the headline numbers agree, it's worth an afterspike trade on a deep retracement in the first 20 minutes. I wouldn't bet the farm on this one, but if you play it conservatively, you're more likely to walk away with a few dollars than to lose them.
If it comes out at 0.3% or higher, USD/CAD should drop about 30 pips.
If it comes out at -0.1% or lower, USD/CAD should rally about 30 pips.

1415 US FOMC Interest Rate Statement (no changes expected) - The issue is not interest rates here, it's the statement accompanying the decision. There's been a sharp uptick in speculation that the FOMC will institute another round of Quantitative Easing (QE2) at some point in the next few months. There's also a strong possibility we'll see the Fed drastically change it's language in the statement today. What it really boils down to one of 3 scenarios:

1) They announce a new QE program or take some new stimulative action or form of easing. If they do so, EUR/USD should rally 50+ pips initially 100+ pips over 15-30 minutes.

2) They do not announce or implement any new QE program, but strongly imply such a program is in the works to help support business confidence in the sustainability of the recovery. If this is the case, we could get volatile 2-way action initially, but as it digests, it should result in a EUR/USD rally good for 50 pips and a solid post-news trade.

3) They do not make any significant changes or implications of further easing and hold the line with their basic statements used over the past several FOMC meetings. I actually believe this to be a more likely scenario than the markets realize, and if nothing juicy comes out of today's FOMC, a LOT of shorter term speculators will be caught short USD and looking to liquidate rather fast. In this scenario, I'd expect a steady 70-100 pips down on EUR/USD over 15-30 minutes. This is also why I feel inclined to hold GBP/USD short (as mentioned above) through this event.

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

To our success!
Sir Pipsalot
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