Rhody Trader

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OK. So I’m not maybe as amazing as I suggested yesterday. But then you knew that already.

The Aussie set up still looks to be playing out like I expected and gold is bouncing from support just like I thought. That long play in USD/JPY didn’t come through, though. Oh well. It happens.

I’m still happy. The group went out for dinner and drinks last night. The alarm hit hard this morning, but the vibe in the office is quite chipper, which makes for a nice work environment.

Now let’s see if I can make a few bucks!

After yesterday’s (and Tuesday’s) long thin distributions, a balancing day was inevitable and that’s exactly what happened today. The 1396 level represent last Wednesday’s point of control, with 1406/07 being the upper reference point (Monday’s point of control) and 1387 (rejection area from last Thursday).

The 1396 level ended up being the central point. Today was about playing the edges of the balancing day and nothing more.

Strictly on a short-term basis I’ve done a position flip. I’ve closed out my short EUR/JPY position because it’s looking like that pair is ready to take a break. It’s near important support and very stretched on a near-term basis. I’ll be looking for a good opportunity to get short again either on a rally, or a break through the support.

I’ve also taken a long position in USD/JPY. It’s pulled back from the recent highs, but today put in a rejection low. The daily chart trend is clearly higher, so I put on a trade that gets me in at a very nice risk/reward point. I’m risking about 50 pips to make 200 pips, and potentially more, in a swing trade type of timeframe. USD/JPY could easily rally to 106 in the next few days. If it gets up into the area of the mid-late January range (about 106-108) it could even run right up through.

I still like the AUD/USD trade I’ve mentioned, but obviously doing it would require ensuring I don’t get over exposed to the USD.

Sometimes I’m so good I amaze even myself!

The other day I wrote about what looked to me like a fake-out breakout situation setting up in AUD/USD (AUD/USD: Look for Some Action Soon). It was based on what I was seeing in terms of a likely volatility expansion in the offing and what the price distribution was showing in terms of likely price actraction. Tuesday the breakout started to show. The Bollingers moved wider by a bit, but that was it. Yesterday things turned completely around. 

It’s too early to say I’m right yet, though. For that I want to see a close back below .9350 again as a starting point. If that happens, the fake break and reverse scenario I outlined will start looking really good.

As for my other recent forex call (EUR/JPY), I mentioned locking in 3R by taking a bit off the other day, but I’m still well positioned for a big gainer. From my entry I’m up something like 500 pips, which means another 4R on what I have left open on the trade. I’m expecting another 400 pips out of this one (or more) before the play runs its course. Unless that happens in a straight line (which I’ll admit it’s threatening to do), I should fine some places to add to the position once more.

And where did GLD find support? Right in the range where I said it would.

I should do this professionally or something. Wait! I do!

Today was definitely and interesting trading day. It was a bit nervy at first, but then developed nicely eventually.

The market opened up at about 1420, which was where it closed yesterday. All fine and good. There were a couple of very important reference points nearby, though. Above the market the 1423 level goes back to January as a point of rejection on a couple of occassions. The market was unable to even get there Tuesday. Below the market the 1418 level was yesterday’s point of control. My view going into the day was either the market was going to break out through 1423 (and probably run to the mid-1430s) or it was going to reverse. In the latter case, the pace of yesterday’s advance made a quick return a decided possibility.

The key was 1418 in my mind. If the market dipped down and held there early on a rally through the 1423 level became very likely. If 1418 failed, though, watch out below! Things were choppy in that first 90 minutes, but the market eventually shifted into trend day lower mode (it was very obvious in E period when 1412 was broken) at which point I got on and just rode it down for a nice pick-up.

I know I complained before about having to be on earnings release conference calls. I’m not changing my view. For the most part they are pretty dull - at least to me. Yesterday, though, I was sitting in on Fannie Mae’s (FNM) call, and it was pretty interesting. Well, parts of it were, anyway.

The thing that really grabbed my attention was the forecast for the eventual decline in housing prices. Firstly, they said that US home prices have a long-term price trend which basically matches GDP growth. When you think about it, that seems quite reasonable.

Having first made that statement, the Fannie officers then outlined their forecast that when the dust finally settles, housing prices will likely have dropped 15%-19% peak to trough. This is a revision after things accelerated in Q1. That would translate to more than 25% on the Case-Shiller index. Right now Case-Shiller is down just about 15% from it’s peak, so it look’s like we’ve got a ways to go yet if the Fannie folks are right. And of course there could be an overshoot to go below the GDP trendline.

A 25% drop in home prices means even traditional 20% down mortgages could start going into negative equity.

That no doubt plays into why Fannie has raised it’s loss provisions for 2008 and expects them to be even higher in 2009. In other words, the folks who know the US housing and mortgage market as well as anyone see a lot of ugly water ahead.

Sorry I didn’t post this last night. My neck was bothering me sitting in front of the computer.

The market opened the day around 1400, which put it right between the 1396 point of control from Wednesday and the 1406 point of control from Thursday. That provided a great opening balance range expectation, and it’s basically what happened.

As you can see, A/B/C periods filled out the 1396-1406 area, after which the market broke out into a trend day higher. I’ll admit, I didn’t really see that coming. I figured that value would probably continue down, but clearly it didn’t.

GBP/USD has been moving sideways in a range of only a few hundred pips for about the last month now. This has been part of a wider consolidation which has developed since the February lows put in below $1.95. As you can see, the Bollinger Bands have gotten quite narrow.

But the Bands haven’t gotten quite as narrow as they could be just yet. The VRI line is still declining, though it’s getting close to it’s lows. That means we may yet have to suffer a little more consolidation, but it won’t be too long before something interesting starts to develop.

Today wasn’t much to talk about. Value slid lower, which was to be expected after the moves late last week. I’ve plotted on the chart lines for Thursday’s 1406 point of control and Friday’s at 1412. Notice how the market spent most of the day right between them.

The rally higher was always going to be something to fade, which is what I told my subscribers this morning. There was the chance for a go with trade to develop later on when 1406 was broken, but the sellers just coul

I was just flipping through the charts and spotted an interesting development for daily AUD/USD. As you can see from the chart, the Bollinger Bands have gotten very narrow. In fact, they have not been this narrow on a relative basis in quite some time. That tells me the market is ready to make it’s next big move. (click the image to see the full sized view)

Alas, while narrow Bands can tell us that the market is likely to soon start a major directional move (volatility expansion), they don’t do much for us in terms of providing directional clues. For that we need to employ other analytic methods.

Actually, a go with strategy is generally the best approach. Sometimes, though, you can get a view on which way the break might go and how far it probably would run. I include the monthly version of the AUD/USD price distribution chart to help in that effort.

The daily candle chart shows that AUD/USD has really failed to continue to make progress higher of late. Intraday new highs have been made, but no new closing highs have been put in since the late February peak. That shows up on the distribution chart too. The .9550 area was rejected in April.

This month so far the action has been mostly within the limits of April’s primary value zone, as highlighted by the green lines. In all likelihood it is going to be a daily close beyond the limits of that range which starts the Bollinger Bands widening out once more. Given the fact that the highs were rejected recently, while the lows from April were rejected at the very start of the month, it seems likely that a trip lower is in the offing. Not that it’s a sure thing by any stretch.

The other thing that draws me toward playing the downside rather than the up is the potential gain. There is very clear and not too far off resistance if the market attempts a break higher. As such, a breakout might only have about 100 pips in it, whereas the downside could have 200+.

What would be a really interesting play would be a fake-out breakout where AUD/USD rallies out of this band, but then fails and reverses out the bottom. Those types of moves are often the most powerful.

Hmmm. I think I’m feeling a breakout fade trade coming on - if we get the breakout, of course. It could be done with a very good risk/reward.