Dow Jones Industrial Average
close 17,898.84 -140.53 / 0.78%
Today’s Volume 83,764,868
3 month Average Volume 98,175,456
Average P/E 17.5
1 year Change +6.96%
This Week’s Change +0.28%
Dow Jones Transportation Average
close 8,416.80 -34.87 / 0.41%
Today’s Volume 14,216,357
3 Month Average Volume 15,675,265
,Average P/E 20.1
1 Year Change +5.43%
This Week’s Change -1.09%
A shift towards currencies, and a big week pending
We discussed the Dow earlier this week, so as I sit at the start of the weekend, preparing to ignore work for a few days and focus on cutting the grass and giving the motorcycle a much needed bath, I need to first take a Friday-night moment to gather my market thoughts in preparation for next week. So I turn my attention to the currencies, namely the Euro. For decades a Gentleman’s Agreement has existed in Europe. Switzerland severed their tie to this agreement in January. Since this was a while ago, and just a precursor to what I’m talking about, let’s pass on the commentary, but here are a couple articles if interested, a Google search would yield more if you’re interested.
This was a big deal and could have interesting long-term repercussions. You can see the drops that followed on the below chart. However, as is usually the case with “black swan” events, these are surprisingly insignificant against the major market moves already taking place. These types of events either simply add a little nitrous to the gas tank of whatever direction the market is already driving, OR provide a few potholes if it is against the grain, but ultimately tend to be ironed out as statistical anomalies. While media may jump on these events for a few days, realistically they have little to no lasting effect beyond what would have happened in the market anyway. However, they can offer interesting opportunity as we will discuss below.
Short to Medium Term Trading Opportunity
What I’m interested in is what is potentially coming, not what has already happened. The level indicated on the chart above is a 10 year low, which the Euro-Dollar passed earlier this year. Since this pass occurred simultaneously with unexpected Swiss Franc announcement, it is likely to see the market retest those levels, shaking out inexperienced or emotional investors who either jumped on the “dump the Euro” bandwagon, or perhaps thought to play the rebound. My expectation is that buried within the market action which followed during the final two weeks of January lies an excellent short opportunity as the Euro continues its march south. I will likely post my exact entry level once I determine it on my twitter feed, CLICK HERE.
Of all the rules I follow when I am trading, the one overarching requirement I adhere to is this, would an institution see this as an opportunity to extract money from the masses? If so, why? If you play poker you know the saying, “if you don’t know who the fish is at the table, you’re the fish.” Like it or not, talented speculators and traders seek to find ways to extract money from the emotional and uneducated. Unfortunately this is the nature of trading, there is only so much wealth to go around, and all it can do is change hands. I will let you determine your own moral opinion about this concept, but it is a universal truth. In this instance, there are two groups of potential sources for income I mentioned above. First are those that jumped on the bandwagon. If they have not taken profits yet, they likely won’t. There are unfilled stop orders at these levels from those who entered emotionally on the drop. They will see the profits they made dwindle back to nothing and get stopped out. Institutions make substantial sums of money buying out the stops of the uneducated, and most of us who trade have had a lot of stop orders fill just minutes, hours or days before the trade ultimately goes in our direction. The second group of course are those who played the bounce back up and will walk away with some profits. This is how institutions invest, looking for opportunity hidden inside the mania that is retail trading. If you want to make money trading currencies, or any other market, find where the institutions are going to make sure the market moves, and take a seat on their coattails.
The Set Up
But we could be a month or so off from this level, so why do I think this matters now? It is unlikely we see the Euro-Dollar move up enough to touch those levels in 3 days worth of trading. However, institutional currency traders have a phenomenal ability to allow major news events to cause emotional retail-investor panic. This moves a market the last percent or two needed to hit their predetermined entry levels. This may be a discussion to readdress next month, nonetheless, some thoughts.
Next week is our monthly big-week. Not only do we have major Canadian, Euro, Chinese and Great Britain announcements, but here In the States, we have our biggest monthly announcements including the FOMC monetary policy and rate announcements on Wednesday, as well as unemployment, CPI, manufacturing index, and others throughout the week. Relating back to my initial discussion about the Euro-Dollar, whether the trading range surrounding those levels are approached next week or next month is irrelevant, however, it never hurts to be prepared. Bad news in the US could cause the last legs of this corrective run back up, allowing institutional orders to buy out the profit takers and the stop-losses as the Euro continues its methodical crawl back down. On the other side of the coin, we could see the Euro trail up on it’s own, followed by good news in the US, which kicks off the continuation down. Timing is everything, and I’ll be checking in at tradingview.com a couple times each day to see what people are doing to prepare.
All other things remaining in a controlled environment, I easily see the Euro breaching the 0.97 trading range, which could take months, even a year or more, but would be my ultimately target for a long-term hold Realistically, nothing is in a controlled environment, and major changes to other major markets can obviously change that. Either way, I’m interested to see how this shakes out, am expecting a continuation down on the Euro, and probably going to put my money where my mouth is. See chart below.