Forex and Overstretching

One of the most reliable features of the FX market is the fact that it rarely stretches too far in any one direction before snapping back. And at the same time there are estimates that say of all the time the market moves, it is only in a trend about 35% of the time. That of course depends on the length of time that you choose to measure. If you look at a current hourly chart of the euro or sterling, you'd swear they are in an uptrend. But a zoom out of a daily chart shows that they are just in a retracement from recent lows in May, to a fairly common Fibonacci retracement area in the 60% range. Also, as we've seen the sterling recently "blow-out" of its' trading channel, one has to wonder if a top isn't being put into place here. It sure feels like it to me. Especially as we reach toward the psychologically important 1.60 level.

But as the currencies stretch themselves, it is essential to remember 2 things. First, that they can continue in one direction mush longer than would be expected, and two, that they can't continue in one direction forever. Trading is the essence of these two things. We endeavor to catch a move going in the direction of the overall trend, but don't want to get into a move too late. Determining this is what makes the profitable traders different from the losers. Always remembering that there is no magic bullet or perfect set-up to make such a determination. Even profitable traders aren't right all the time. sometimes they are only right half of the time. What makes them stand out? They have bigger winners than they do losers, and they are willing to average their trading our over time. Even if we are down the last two months, the previous months were stellar (with he exception of March), and we are still sitting very pretty. The point is, trading requires patience. It requires a mindset that acknowledges losing trades and losing seasons. But it still is able to carry out the game plan.

In the overnight London Session we saw bad news coming out of Switzerland, Europe and London. But that didn't stop the mighty Euro and sterling train. Some of that appears to have settled in today, but the initial reaction was one of sending the currencies higher. Even though the sterling has been pushing the envelope, I am still very bearish on the currency. The amount of Quantitative Easing that they have pushed into their economy is frightening. At some point, everybody has to pay the fiddler. Their day will come, too.

From the fundamental side, oil has pushed into 5 month high territory. While this helped certain of the oil producing currencies like Norway, it did very little for Canada. We can however look to see it have an effect should the price continue to March higher.

Personal spending was up today, just as Big Ben Bernanke hinted at earlier this week. However, I'm not sure where he is getting his data. Unemployment is still a major risk factor for the US, and it is not improving very quickly, if at all. That translates into no rising wages, and no additional spending. Housing is continuing to suffer, meaning that the refinance money folks once spent on themselves has yet to reappear since the credit collapse. This explains why the US GDP missed its' mark. The consumer is credited with being roughly 70 percent of the weight of the GDP measurement. If such a large percentage is faltering, you can be sure that the whole thing will be looking pretty unsteady.

Later this week we will get the "official" numbers of jobs from the US. It is hard to imagine that they will be anything encouraging. We will see if this will continue the US dollar sell-off. or if it sparks a fresh round of fear driven risk aversion.

Happy trading,
Bill

bill@thefxtradingmasters.com
www.thefxtradingmasters.com