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17 November 2007: Has the GBPUSD hit a top?

Wow, what a channel. Unfortunately, I doubt the party will continue. It looks as though the pair has a bit more to go before channel support is tested, and last week's sharp decline in the pair suggests it will come sooner rather than later. There are a few factors which have me wondering whether this support will hold. I do believe the highs will be tested again, but as I will explain below, I think the trend has hit a ceiling for now and could in fact turn.

The first and most important factor, of course, is the inflation outlook for both currencies. The second is the outlook for both economies. Related to these are energy prices and the "credit crisis". Rather than get into the details, which are available on virtually every financial information and news portal on the internet, allow me to say that given these factors and the current level of the pair, demand for the base currency will dry up fairly quickly. This is why I'm shifting to a range-trading strategy for the pair going forward.

My view is the pair could extend as high as 2.1600, but it very likely will not. More probable is a stab at 2.1200, where I may short the pair with good confirmation and target 2.0000. There simply isn't any reason for the pair to revisit the highs of 1980/81. I'm not sure how much time is left before the channel breaks and I'm not ready to short the pair yet, but I will certainly not be buying any breaks above 2.0800. I will be looking at this pair more closely for shorter terms trade -- both long and short -- within the current range. JRS

19 November 2007: Potential for a major move in the JPY by year's end?

IMO, a major move in the USDJPY below 109.00 will be the final nail in the coffin for the yen carry trade. Is this stating the obvious? Yep. Am I making a prediction? Yep. Not only are the credit crisis and the lackluster performance of the Asian equities markets in 2007 weighing on the minds of all those "investors", but the actual value of the currency would make it impossible to justify the carry -- because it's not a matter of risk anymore. It's a matter of cascading losses in the counter-currencies. So those exaggerated claims about the end of the carry trade as early as 2005 are finally catching up with the slightly-less-than-exuberant crowd these days.

I think the USDJPY will test 102.00. When is anyone's guess. Some are saying by year's end, which I think is a bit on the crazy side of optimistic. The four hour chart is the most telling, with a current run on 109.00 in the works. The 200 and 50 MAs are serving well in their capacities as dynamic resistance levels. There are also good horizontal and trend line resistance levels, which of course were formerly support. Combined with macro factors, most of which have their origins outside of the Japanese economy, the appreciation of the yen is all but a done deal. The USD isn't the only base currency to give ground to the yen. I think the GBPJPY will test 220.00 and then 215.00 off of a not-quite-right H&S pattern -- the slope of the neckline bothers me, along with some other aspects. Okay, it isn't a real H&S pattern, but I can wish, can't I? I won't paste the chart here, because I'm too embarrassed to expose my tendency to see what I want to see. Instead I humbly submit the USDJPY. JRS

23 November 2007: USDJPY continues its descent

USDJPY has broken lower, as we all expected it would, hitting 107.54/55 before bouncing back to the 108 handle. The analysts are saying it is all about expectations that the Fed will cut rates by 1% at the end of March in 2008. Interest rate futures all seem to be pointing in that direction. The built-in underestimation of US inflation figures will, I think, come back to haunt the Fed, not to mention the Bureau of Labor Statistics. The US economy will continue to under-perform and the Fed will ease rates...all in a very curious environment. The price elasticity between the USD and the euro is stretched pretty thin on the upside given the fundamentals, but the yen has some room to appreciate. I still target 102.00. JRS

24 November 2007: Are we there yet?

There has been a lot of speculation in the media about the risk of an actual downturn in the global economy. Until recently, speculation on this downturn in the markets has been circumspect. While I don't see anyone predicting negative growth yet, slower growth seems slow enough to have many key market makers and players worried.

For a long time I have been a big bear on the housing market. In fact, my wife and I actually held off on buying in 2006 because I was not convinced it was a buyer's market. I was told by all the realtors I talked to that prices would remain where they were. Of course, they were in turn told by their realtor associations to keep on churning those properties because "now the market is ready for buyers". They were wrong. It's not a supply and demand problem. It's a general financial problem...and it's what was at the heart of the credit crunch in the US, which now looks to be affecting European markets, among others. This is particularly the case with the UK and Spain. (Admittedly, Europe has its own issues.) While the credit crisis will more or less be solved in the next year, I don't think the housing market will recover that soon.

Oil prices have risen well beyond what the fundamentals support. If I had any balls, I would short oil now and target $80. I won't short oil, because I know that commodities can get carried away in strong trends. That is just what oil has already done and I expect that momentum to at least support current price levels. Although I highly doubt oil will hit $120 before it hits $80, I'm not going to jump into a short play just yet. The danger is that in the current environment, high oil prices may reinforce themselves. If I went short now, I could be drifting around at current price levels for at least a month while opportunities in other instruments could have been better. And God forbid a situation where the current US administration starts a war with Iran. I hope the President at least has the decency to let oil fall a bit lower before doing that. Anyway, the point is that this market has to fall to refresh.

Some perverse part of me thinks the US deserves higher oil prices. We are so damn arrogant that we think we are entitled to cheap energy and gas, having no idea about what it takes politically and economically to get it. But this isn't a soap box. And the part of me that takes perverse pleasure in seeing the US squirm a little is also the part that keeps me from shorting oil. JRS

27 November 2007: JPY under pressure as Abu Dhabi fund extends the rope (just a little) for carry traders

But am I giving up on my trade? Not a chance. I have pared my position a little more since the announcement early this morning because now analysts are calling for a bottom at 107.50 for the remainder of the year. That could potentially shake me out of my trade. The line is drawn at 109.00, the middle of what will likely be the range if the bottom holds. The reason I'm not willing to give up on this trade is that Citigroup is only one company among dozens of large banks and corporations that were affected by the sub-prime fallout, which Jeremy Grantham described as a slow motion train wreck...and it's not just about the credit crunch, either. There are real macroeconomic factors at work underpinning the shift in the reserve currency balance, pushing the USD into decline, and which have been rehashed over and over again in the media. I may be stopped out of this trade altogether, but I am convinced this pair will go to 102.00, or at least get close.

Despite my disappointment in the market's lack of follow-through on the USDJPY trade so far, I was excited to see the e-miNY crude price approach to within two points of my intermediate target, with the final target of course being $80. Of course, I am not trading this...because as mentioned above, I don't have the stones. Since May of this year, I've been watching Tuesdays and Wednesdays in particular for reversals in the currency spot markets. So let's see what happens.

04 December 2007: One of my favorite setups on the USDJPY

Every pair has its own personality and I like this pair mainly because of the players who drive price in ways suitable to my trading style. The USDJPY trends more than other pairs, with less backing and filling as found on the EURUSD charts. It is also liquid enough that I rarely experience slippage. In fact, since I began trading in 2001, I can't remember when I've ever experienced slippage on this pair during normal market conditions. I also like this pair because of its sensitivity to political events and comments from government officials. Finally, this pair is a proxy for the renminby and the Chinese economy, which allows me to consider more trading opportunities as they present themselves on the charts. But all of this has hinged on the fact that the yen is the currency underpinning the carry trade strategy. So all of this could change when the factors supporting the carry strategy evaporate...which will be sooner rather than later.

The flag occurs on all currency pairs...and in fact, on all liquid instruments that I've encountered. In case you're wondering what the heck a flag is, you can find a good description of it and how it is traded here. This particular setup occurred last week, when I was away from the charts. I believe some of the best swing and intraday trading opportunities can be found on the USDJPY spot charts. The example above is perhaps one of the best trading signals one can find -- and all the supporting technical factors came together like a beautiful gift. Of course, this is all in retrospect....

In conventional technical analysis discussions, the flag forms on daily charts and the commonly accepted period of consolidation is 8 to 12 weeks. On the hourlies, I am not concerned with time series counts as much as I'm concerned with price action. My mainstay indicators in any technical decision off of a price pattern are, of course, the moving averages and the stochastic. This is just the way I do things. But I also look for supporting factors, such as support and resistance, fib retracement levels, and whole number levels. With futures, commodities and indices, I also look at volume and order flow. One or more of these factors can be present, but I'm primarily concerned with the pattern itself and the mainstay indicators to define my trade idea.

On this chart, I likely would have entered as price retraced to the MAs after the initial pattern breakout. (Shown as a pink circle on the 20 SMA on Friday morning.) My target typically would have been twice my risk or a little less than the pattern suggested as the most probable excursion. While I won't bother with defining those in this example, I will say that this trade had a higher probability of succeeding and so I would have loosened my rules on stop placement and position sizing -- but just a bit.

Okay, hopefully you've read about how to trade flags. Now you can spend a few more minutes admiring this beautiful setup. JRS