Step 4: Get Educated So You Can Devise a Trading Strategy!

Up until this point, you have a live, funded account that you are NOT using yet.

You have a demo account that you’ve used to learn the mechanics of trading.

Now, BEFORE you place your first live trade – this is important — it’s time to start reading.

I see people “wing it” first, and it ends up costing them a lot. Then they back up and do it right.

It’s like trying to build something without reading the instructions first. Bad idea.

You also want to get a forex education, because it helps you to devise a strategy that could involve charting techniques called “technical analysis.”

Part of your strategy can include fundamental analysis. This might involve watching the economic calendars for clues as to how an economy is doing.

OK, so now you have a live, funded account. You know the mechanics of the trading station and you’ve just completed a quick, online course over the past few days. Here’s what to do next.

Step 5: Just Before You Place Your First Live Currency Trade…

Don’t start off trading multiple lots. Start off trading 1 micro lot in your micro account OR 1 mini lot in your mini account. This way, when you have losses at first (and we all do), they won’t be compounded by multiple lots.

Trade with the daily chart’s trend and never take counter-trend trades. This way you’ll have an edge over time.

Use wide stops because your trades will need some breathing room. If you set your stop-losses too close, they are bound to get hit and will cause you more unnecessary losses.

Focus at first on buying the country with the strongest fundamentals if you use a fundamental approach. Or focus on buying the most distinct upward trending chart if you are a technical “chart” trader. If the trend isn’t obvious, scroll through the charts until you find a trend that you could see from across the room.

I’ll visit you tomorrow with Part 3 of this mini-series on “Your Quick-Start Guide to Currencies.”

Now that we’ve covered what forex is, and how to get a running start in understanding the FX markets, tomorrow going to talk about something called “pips” … and how they translate into big gains.

Even better, we’ll take a look at an actual currency opportunity that, judging by the looks of its chart, is about to make a big move.

Harmony on the Euro

In his Ultimate Gann Course, David Bowden compares this to Elliott Wave breaking the market down into three sections. While Elliott would describe the pattern as “5 Waves”, being three impulse waves and two corrective waves, Gann would call it three equal sections, with the impulse waves and the sections being labelled the same.

There are a few things to note about this chart. Firstly, the second and third sections are very similar in terms of price, with both being larger than the first section. Also, with the second and third sections being almost equal in price, there is also a relationship in terms of time, with the third section taking four times longer to complete than the third section.

As a sidenote, those students who attended Safety in the Market’s Master Forecasting Summit in September 2009 might like to review the homework I set them on the Euro based on the work we did on the last day of the summit. The homework led you to forecast a major top on the Euro on November 27th. The actual high of the year came one trading day earlier, on November 25. Now to wait for the Dollar/Yen forecast!

But for now, back to the Euro! From the November top, we have seen the Euro decline. I am looking for the Euro to start its next bull campaign towards the end of the first quarter of 2009 and then move on to a strong 2010. But first it needs to make a strong low. Chart 2 below shows the important percentage levels of the 2009 bull market range. The most important level, the 50% milestone, is highlighted in red.

The 50% level is worth watching for two reasons (other than the fact that WD Gann said you could make a fortune trading this one rule alone!).

Firstly, it gives us a potential price support target to watch for, and secondly because it allows us to rate whether the move on the Euro is strong or weak. If the Euro can find support and make a bottom – possibly in mid-March – above the 50% level, it will show it is a stronger market. If it can’t hold the 50% milestone, it will show that it is in a weaker position.

Click to enlarge

We’ve already had a false break of either edge of the range and have now powered through the midpoint or ‘Point of Control’ of the structure (Slipstream Trader members will know what I’m referring to here).

The short term trend has also turned up so there’s a chance now that the AUD is on the verge of heading for another leg up. The points to be wary of on the way up would be around 95.5c which is 50% outside of the current range and is an area where it could fall over.

If it can burst through there the next stop is the 2008 high of 98.5c and then parity.

All bets are off if we see a sell off beneath the recent low of 87.3c. This would confirm the failure of the last four months distribution and we could see a more sustained selloff if this were to occur.

The most accurate dollar forecasters –– predict the U.S. dollar will continue to fall in 2010. That prediction is based primarily on the historical relationship between interest rates and the dollar.

Those analysts seem to ignore the strong inverse correlation between the dollar and equities. They’re either assuming equities will continue to rise next year or that correlation will no longer exist.

You see, the scenario of continued dollar decline can only occur if the current environment of ample liquidity and overall positive sentiment continues unabated. The problem is that 2010 presents some serious headwinds for both liquidity and sentiment.

Personally, I’d be surprised if the stock market doesn’t go through a correction next year. I also don’t expect the correlation between dollar and risky assets to fade any time soon.

That correlation will only fade once dollar fundamentals improve and uncertainties about recovery dissipate. At that point, good economic news in the U.S. will be good for the dollar, instead of supporting more risk-taking outside U.S.

Without emergency levels of liquidity, the equity market can only sustain its recent gains if fundamentals are stronger. The problem is that the recovery – if there really is one to speak of – is still weak. Unemployment is still on the rise, foreclosures and delinquencies are reaching record levels, credit is not easily available, and consumers are still deleveraging. So there’s not much reason to be optimistic.

The idea that the dollar will continue to fall assumes that global assets will continue to rise with no correction. And current fundamentals don’t support that brand of optimism in any way.

So are bonds a “Sell” and the dollar a “Buy?”

Judging by historical recoveries after a deep recession, the economy has tended to recover quite forcefully. This was the case in 1992-93 and in 1983-84. Investors are starting to wager that 2010 will result in a big year for GDP and along with that forecast a higher dollar and higher rates.

The market has started to discount a high possibility of a Fed rate hike in June 2010 and traders are dumping Treasury bonds in anticipation of this move. And the dollar is responding. Traders point to the steeping yield-curve or the difference between 2-year and 10-year Treasury bond yields – now at its highest spread in years. Historically, a large spread has resulted in good returns for stock investors.

To be clear; the market, not the Fed, is taking interest rates higher. If it continues, the Fed will be forced to act and raise the Federal Funds rate. Yet I think we’re seeing a replay of the April to July price action in Treasury bonds earlier this year, which ultimately resulted in a rally for bonds.

The great post-1981 bond bull market is not far from the cliff.

We are certainly closer to the edge than at any period since 1980. But I’m still wagering that bond yields will witness another rally over the next several months as a severe global correction unfolds in risk-based assets causing a growth panic and taking government bond yields down sharply as fears of a double-dip recession begin to surface by the second half of 2010.

Until then, T-bond yields above 4% or even 4.5% over the next few months look attractive in an environment of renewed “bubbles,” which might get pricked if long-term rates run too far to the upside

 Markets are living things?

Well we know humans are living things and we know animals are and of course plants are too. But are markets really living things?

Most of you will have heard the expression ‘markets have memories’ and I am inclined to believe so. Because markets are made up of ‘humans’ and ‘humans’ have memories. And you may ask ‘what about the Instos?’ Well at times investors may have other adjectives for them but yes they are human too and their views are a part of the mass of opinion.

So if we as individuals have memories, can we collectively have a memory? Well I do not see why not and whilst many of you may not put too much store in that I am inclined to think the market memory is made up of collective human memories and this is a major subliminal driver of markets.

Our individual memories take many different forms. Some of us are painfully rational others can be totally subjective. Some of us have short memories – we forgive and forget easily. Some just never forget even the smallest of misdemeanours. I am sure we all can recall examples at both extremes. And of course there are a myriad of variations in between. We may also have biases about certain stocks because of past experiences – good and bad. We may have biases about types of markets and instruments and so on.

Our memories are multi dimensional and what may be important to you may not be important to me. Our memories can maintain a bias and sometimes I think to myself when it comes to trading I need to erase certain files in my memory or even defrag the brain or even format the memory space.

Of course that is really what technical analysis should be. It is supposed to strip away – lay bare if you like all our biases, subjectivities and emotions. And when I talk about emotions I include all within the range from ecstasy through to anger. And as an analysts and a writer I am aiming to provide each week something of value in all I do. And in this process I am on the receiving end of emails that cover the full range of emotions. That is part and parcel of a job that I enjoy enormously. In fact it is not a job and there is a blur between my job and fun. I digress. But I see your emotions in your emails. I am not talking about anyone in particular and please keep those emails coming! But there are very few emails that don’t show some degree of emotion. Some of it is well controlled some out of control!

It is not for me to see your emotions but. It is for you to see them, analyse them, understand them, and manage them. Because, unless you can do that I am not sure you can be a great investor.

Technical analysis can be like reformatting the disk, purging the soul – but only if we allow it to be. But many won’t allow the ‘technical’ process to be purely objective. They allow internal feelings and external information to interfere. We can all be guilty of seeing what we want to see sometimes – even unwittingly

I know pretty much all of the sins of investing. I am human. And you name it I have made all the mistakes at some point – including allowing emotion to get in the way.

Memory biases – whether short or long term – can create market mismatches and this is where the shrewd market players can take advantage of those who are allowing biases to rule their day.

When Stocks and Currencies Rise Together

Not all foreign stock markets offer this feature.

China, for instance, is up 102% this year in local terms and the same exact amount in dollar terms. That’s because China pegs its currency to the dollar. This phenomenon only applies to markets where currencies float.

But, of course, a currency that floats can also sink. So you could suffer currency depreciation from your foreign shares as well. That’s why it’s best to invest in economies that are rapidly improving. In this situation, stocks and the currency tend to rise at the same time because the forces that are bullish for stocks are often bullish for the currency as well.

Here’s a typical scenario…

A consistently rising GDP translates into rising earnings. At the same time, a rapidly growing economy may require higher interest rates to keep inflation in check. (For developing economies, this is even more pronounced since they must compensate for perceived higher risk, even when the perception is inaccurate.)

The net result is higher earnings and yields that attract a growing tide of foreign capital. And the money that flows in to buy local stocks, bonds and real estate constitutes more demand for the currency, pushing its exchange rate higher.

This combination of higher growth, higher yields and higher inflows creates the double windfall of higher share prices and currency appreciation for foreign investors.

There are many places where this is happening right now. The Economist tracks 42 stock markets with floating currencies. No fewer than 42 of these are up more in dollar terms than in local terms this year.

That’s mostly because the dollar has been in a general downtrend. And this trend could very well reverse if the dollar stages a rally. That is a real possibility, particularly if stocks crash and there is a general flight to safety. In that case, foreign stocks that fall 20% or 30% in local terms may fall 40% or 50% in dollar terms.

Yet in the long-term, there are markets that have very good potential for appreciation of both the stocks and currencies. Chief among these is India, a country that my colleague Ashish Advani and I have written about in detail over the past week.

US Dollar and Dow on the Verge of Opposing Breaks

British Pound Comforted by Bank of England’s Steady Hand
•    Euro Looks like it May End up a Laggard in the Rate Game Given the ECB’s Stance
•    Australian Dollar Sees Another Dramatic Stretch to New Highs on Employment
•    Canadian Dollar has a Busy Day Ahead of it with Employment, Trade and Business Activity Data

US Dollar and Dow on the Verge of Opposing Breaks
The markets are once again toeing the line. Market sentiment is threatening to revive momentum in the steady advance in optimism that began back in March; and the various asset classes are showing the effects. For the maligned US dollar, the revival of confidence over the past week has pulled the currency down (on a trade weighted basis) to tag lows not seen in 14 months before bouncing and setting a ominous double bottom with the September 23rd low. Setting up its own mark-or-break scenario, the Dow Jones Industrial Average has quickly climbed back up to eye the September range of highs around 9,850. Looking ahead, we could very well stall at these highs and build pressure for a breakout in the process (a likely scenario considering the weekend is fast approaching and we are running thin on critical fundamental drivers); but a genuine break will have to develop eventually. The question we should be asking is not when the markets will break; but will we have the momentum to sustain a trend after the decision on direction has been made.

It is easy to simply link the greenback’s future to risk appetite and play the correlation between equities and the majors. However, there are other concerns that will eventually supplant this pure balance between fear and greed. The dollar’s status as the world’s reserve is an issue that is stealing the headlines at a more frequent pace. This morning, the Financial Times reported that Asian central banks (Korea, Thailand, Malaysia, Taiwan and Singapore) were coordinating heavily on the dollar’s behalf. Not only is the low level of world’s most liquid currency stunting exports; but the pace of its descent has brought uncertainty and financial problems of its own. The blatant dependency on Fed policy and the government’s ability to manage its debts is clearly driving global leaders to start planning for a timely diversification. On the other hand, the dollar could take the helm on its own fate. Depending on officials’ ability to handle a recovery, deficits and the currency; they could still manage to maintain the status of reserve (though there seems little chance that the greenback will ever regain the prominence it has maintained over the past generation). Data released this morning suggests the recovery is on track and perhaps ahead many of its counterparts. Initial jobless claims through the end of last week dropped to a ten-month low of 521,000, suggesting the crippling trend in unemployment is improving. Ultimately, growth rides on consumer spending; and on this front, the biggest month-over-month jump in ICSC chain store sales in 13 months through September sets the trend. Along with a near record low in the average 30-year FRM mortgage, the pieces for a recovery are falling into place.

British Pound Comforted by Bank of England’s Steady Hand
Among the two central bank rate decision scheduled for Thursday morning, the Bank of England’s announcement was considered to hold the more potential. Ever since Governor Mervyn King sided with the minority to vote for an expansion of their quantitative easing program and his suggestion that a cut to the deposit rate could be economically “useful,” the market has priced in the possibility that the Monetary Policy Committee (MPC) could take the next expansionary step in its stance. However, the central bank once again deferred such an effort when it announced its benchmark would remain at 0.50 percent and they planned to spend the rest of the 175 billion allotted for their bond purchasing program. Weighing in just after the decision, former MPC member David Blanchflower said in an interview that the bank should both increase its bond purchases and cut the rate at which banks earn on their reserves. His comments bear consideration as we have heard musings from active members that follow the same path and considering the economy has shown signs that its recovery is flagging. With a government spending in the pipeline, there is deadline for officials to do as much as they can to jump start and establish financial stability. We will have to look at the minutes of today’s meeting (due Oct. 21st) do see if there was dissention among the voters and further suggest more dramatic measures can be taken at the next meeting (on Nov. 5th) when officials have new forecasts to work with.

Euro Looks like it May End up a Laggard in the Rate Game Given the ECB’s Stance
The euro is still being treated as one of the strongest currencies amongst the majors; but is this potency really coming from the outlook for growth and interest rates? Today the European Central Bank (ECB) delivered no surprises in its decision to maintain its benchmark lending rate at 1.00 percent. Comments to follow this pass noted that the current level of the region’s target rate was “appropriate,” and the future would likely hold an “uneven” recovery and “subdued” inflation. So, even though loan demand has diminished and the Euro Zone’s largest economies have already returned to growth, there seems little desire to rollback stimulus anytime soon. Overnight index swaps from Credit Suisse are pricing in 85.6 bps of hikes over the next 12 months; but this is likely to be come from firming well into next year. If the central bank continues to rest on its laurels, the euro will likely lose bullishness provided by its yield. If that is the case, the currency will increasingly fill a role as the counterpart of the US dollar – for better or worse. 

Australian Dollar Sees another Dramatic Stretch to New Highs on Employment
All the fundamental lights seem to be turning green for the Australian dollar at the same time. Following the ‘surprise’ rate hike from the RBA Tuesday morning, the economy reported unexpected job growth through September. According to the Australian Bureau of Statistics, 40,600 net jobs were added last month and the unemployment rate ticked down from its than six-year high to 5.7 percent. After this positive round of data, the modest doubt for a follow up rate hike that had developed over the past few days was completely banished. The market is now pricing in a 99 percent probability of a 25bps hike on November 2nd. However, the Aussie currency has covered a lot of ground and quickly these past few weeks considering it has already been deemed the strongest performer among the majors. It is now running the risk of overextending itself.

Canadian Dollar has a Busy Day Ahead of it with Employment, Trade and Business Activity Data
The Canadian dollar will get the chance to top the list for fundamental event risk Friday. A heavy round of releases will be paced by the September employment data. A modest increase in net jobs is expected but the unemployment rate is also expected to tick higher to a fresh 11-year high of 8.8 percent. In the same breach, the 3Q sales from the BoC is expected to step back from its sudden surge last quarter; and the senior loan officer survey for the same time and from the same group is likely to produce equally limited results. Today, BoC member Paul Jenkins tried to say Canada is very different than Australia despite the currencies correlation; but will the market head this bit of wisdom?

USD/SGD Lower On Econ Outlook; 1.4375 Support

USD/SGD lower at 1.4421 vs 1.4436 in Asia late yesterday, with traders saying MAS survey of economists showing GDP expected to contract 3.6% in 2009 (vs 6.5% in previous forecast) providing support to local currency, although risks remain. “The outlook for Singapore seems brighter, but of course the health of the U.S. economy will have an impact on the pair. With some data overnight showing job losses aren’t stabilizing, it is likely the SGD won’t rise much today.” Support tipped at 1.4375, resistance 1.4460

FOREX-Yen gains on profit taking, dollar losses pause

forex markets news,forex markets ,forex trading

Yen gains broadly on profit taking after risk rally

Euro little changed, hovers hear year’s high vs dollar

* European July services PMI show economies nearing recovery

By Naomi Tajitsu

LONDON, Aug 5 - The yen gained broadly on Wednesday as traders locked in profits from a rally in currencies perceived to be higher risk, while the euro consolidated just under its highest level of 2009 hit against the dollar earlier in the week.

The dollar was little changed against a currency basket as the safe-haven U.S. currency found its footing after plumbing its weakest level of 2009 early this week due to escalating risk demand, but risks were seen tilted in favour of more selling.

Analysts said the market was taking a breather following the rally in currencies perceived to be higher-risk, while investors awaited policy announcements by the European Central Bank and the Bank of England on Thursday for more clues into their outlook for interest rates and quantitative easing.

“A lot of objectives in cross/yen have been reached,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London, noting that the Australian dollar had breached 80 yen, while sterling/yen has rallied above 160 yen.

“As a result we’re seeing some profit taking,” he said, adding that much of the flows seen on Wednesday were being driven by speculators.

At 0800 GMT, the euro <EUR=> was unchanged around $1.4400, recovering slightly from early losses after purchasing managers’ indices for services sectors in the euro zone generally showed improvement in July. [ID:nLAG003648] The pair hovered below $1.4445 hit on Monday, its strongest since mid-December.

IFR reported that around 250 million euros’ worth of options at $1.44 were due to expire later in the day, which analysts said may result in whippy trade.

Against the yen, the common currency <EURJPY=R> fell 0.3 percent to 136.73 yen, retreating from around 137.70 yen touched on Tuesday, its highest in nearly two months.

The yen rose broadly, pushing the dollar <JPY=> down 0.3 percent to 94.95 yen. Options worth around $450 million parked at 95.00 yen were also due to expire during New York trade, IFR reported, which market participants said may likewise cause some volatility around that level.

The higher-risk Australian and New Zealand currencies each fell roughly 0.7 percent against their Japanese counterpart.

The New Zealand dollar retreated from 64.35 yen <NZDJPY=R> hit earlier in the day, its highest level of the year.

Sterling <GBPJPY=R> fell 0.4 percent to 160.62 yen, after rallying to a two-month high above 162 yen on Tuesday.

Despite the pullback in riskier currencies, analysts said the trend for higher stocks and oil prices would keep risk appetite buoyant on the view the global economy is improving. This would keep the dollar vulnerable to more losses, they said.

“It’s still so much about risk appetite,” said Carl Hammer, currency strategist at SEB Bank in Stockholm. “In the coming week or two we may see another bout of dollar weakness.”

Technical analysts at the bank said euro/dollar was finding support in the lower $1.43 region, and that the next target for the pair was around $1.47, roughly around a record high hit in December

(Gold is the December contract on the NY Mercantile Exchange. Silver, copper and oil are the September contracts.)

NEW YORK - The Standard & Poor’s 500 index is four digits again. The widely used stock market measure broke above 1000 on Monday for the first time in nine months as reports on manufacturing, housing and banking sent investors more signals that the economy is gathering strength.
The index is used as a benchmark for many mutual funds.
Indices all rose more than one per cent, including the Dow Jones industrial average, which climbed 115 points.
The market’s July rally blew into August on the type of news that might have seemed unthinkable when stocks cratered to 12-year lows in early March.
A report predicted US manufacturing activity will grow next month, the government said construction spending rose in June, and Ford Motor Co said its sales rose last month for the first time in nearly two years.
The day’s reports were the latest indications that the recession that began in December 2007 could be retreating.
Hope of a recovery, based on better corporate earnings reports and economic data, propelled the Dow Jones industrial average 725 points in July to its best month in nearly seven years, restarting a spring rally that had stalled in June.
The Dow rose 114.95, or 1.25 per cent, to 9286.56. The S&P 500 index rose 15.15, or 1.53 per cent, to 1002.63. It was the first finish above 1000 since early November.
The Nasdaq composite index rose 30.11, or 1.52 per cent, to 2008.61, its first close above 2,000 since October.

LONDON - European stock markets rallied after upbeat data from the United States and the 16-nation eurozone raised hopes about the prospects for a recovery.
London’s FTSE 100 index ended the day up 74.1 points, 1.61 per cent, at 4682.46 points, after hitting its highest point so far this year.

FRANKFURT - The Dax rose 94.71 points, or 1.78 per cent to end at 5426.85.

PARIS - The CAC 40 gained 51.53 points, or 1.5 per cent, to 3477.8.

TOKYO - Japanese share prices ended mixed as investors took a breather after the market ended last week at a near 10-month high on growing optimism about the global economy.
The benchmark Nikkei-225 index slipped 4.36 points, or 0.04 per cent, to 10,352.47.

HONG KONG - Hong Kong stocks rose 1.14 per cent to a near 11-month high, boosted by another surge on the mainland despite some dealers staying on the sidelines ahead of first-half corporate results.
The Hang Seng Index rose 233.93 points to 20,807.26, its third consecutive gain.

WELLINGTON - The New Zealand sharemarket made moderate gains on sustained confidence even though eftpos company ProvencoCadmus was placed in receivership.
The benchmark NZSX-50 index closed up 31.6 points, or one per cent, at 3047.85. Turnover was worth $NZ78.45 million ($A62.12 million).

SYDNEY - The Australian sharemarket is expected to open higher on Monday, after US markets rose to a nine-month high overnight as manufacturing, housing and banking reports suggesting that the economy is gaining strength.
At 0716 AEST on the Sydney Futures Exchange, the September share price index contract was 56 points higher at 4266.
In economic news, the Commonwealth Bank and the Australian Chamber of Commerce and Industry release their business expectations survey covering the June quarter.
The Australian Bureau of Statistics releases retail trade data for June and the June quarter, and the house price index data for the June quarter.
The Reserve Bank of Australia holds its August board meeting to consider interest rates, inter alia.
The second day of the 2009 Diggers and Dealers mining forum will be held in Kalgoorlie, Western Australia.
The Australian share market closed moderately stronger on Monday, led by the banks amid quiet trading on a bank holiday in NSW and the ACT.
The S&P/ASX 200 index was 19.4 points higher, or by 0.46 per cent, at 4263.4 while the broader All Ordinaries index rose 21 points, or 0.49 per cent, to 4270.5.

NYMEX

Oil and natural gas prices rose sharply on the weakening dollar and on new signs of life from manufacturers that suggest the recession may be loosening its grip.
Benchmark crude for September delivery rose three per cent, or $US2.13 to settle at $US71.58 a barrel on the New York Mercantile Exchange. It was the third straight day of substantial increases on the energy futures markets and the first time in a month that crude traded above $US70.
Natural gas, a major source of power generation, spiked by more than nine per cent on a day when both China and the United States reported stronger manufacturing activity.
Production from US manufacturers jumped to its highest level in more than two years last month with new orders to restock businesses that had cleared inventories as the economy slumped.
The decline in manufacturing has been slowing since December and officials with the Institute for Supply Management, a trade group of purchasing executives, said Monday that signs of growth in the sector could emerge as early as next month.
Manufacturing in China expanded at its fastest clip in a year, according to a survey by Hong Kong brokerage CLSA Asia-Pacific Markets.
In other Nymex trading, gasoline for August delivery rose 5.67 cents to settle at $US2.0693 a gallon and heating oil gained 3.88 cents to settle at $US1.8713.
Natural gas for August delivery jumped 37.8 cents to settle at $US4.031 per 1,000 cubic feet.
In London, Brent crude prices rose $US1.85 to settle at $US73.55 a barrel on the ICE Futures exchange.

COMEX

Commodities traders placed more bets on an economic recovery on Monday, adding copper and aluminium to their portfolios as the dollar sank to fresh lows.
Upbeat reports on manufacturing activity around the world moved investors to dump traditionally safe-haven assets like the dollar and government bonds in favor of riskier assets that stand to benefit more as the economy improves.
Copper was the standout among metals, soaring 4.4 per cent to close at a 10-month high after the Institute for Supply Management said US manufacturing activity declined during July at the slowest pace in nearly a year. The private trade group said its manufacturing index rose more than expected in June.
Reports showing similar improvements in the manufacturing sectors in China, Britain and the euro zone added to the market’s optimism. Particularly encouraging was a survey of China’s manufacturing sector, which hit a 12-month high.
Copper prices have nearly doubled this year due mainly to solid demand from China. On Monday, prices rose 11.5 cents to settle at $US2.7385 a pound on the New York Mercantile Exchange. Aluminum prices jumped 4.2 per cent.
Among precious metals, September silver rose 31.2 cents, or 2.2 per cent, to $US14.2520 an ounce, while October platinum gained $US25.50, or 2.1 percent, to $US1239.70 an ounce.
Gold for December delivery added $US3 to $US958.80 an ounce.

US Dollar Preparing to Fight Back

What’s new on the FX markets? What is the current US Dollar direction? The US Dollar index is a good synthesis and gives a pretty good snapshot of the current trends.

Let’s take the daily chart. The index has just reached a key level. This level is a support line around 78.5 and is the last Fibonacci retracement ratio (the 61.8%) of the rise occurred between points A and B on the chart. Point A is the inflection point where the Greenback started bouncing firmly last year at mid-July. From this low of 72.11, the index rebounded to a high of 89.71, posted in last March (point B). This 24% uptrend was backed by an ascending support line (green line) that was eventually cleared in late April this year.

Click to enlarge

This triggered a bearish signal that drove the price lower very quickly. As a result, the index fell to a low of 78.37 in early June (point C), the 61.8% Fibonacci retracement level. The index found some support there and bounced to 81.8 two weeks later, before it eventually fell back to the Fibonacci support (point D).

Points C and D may create then a “double bottom” chartist pattern. As this pattern appears on a support line, it is likely to strengthen its accuracy. That’s why a new rebound from the current level is probable. However there is an immediate resistance line that could prevent the price to move higher on the near-term: it’s the descending line that comes from point B and goes through lower highs (points E and F).

The MACD has indicated a bullish divergence. It did not confirm the new low posted by the price action on point D. The current price is 79.31 and the resistance is just above, around 79.50. A cross above this resistance line would turn the technical indicators bullish. The next target would probably become the level of 83, which is the 38.2% retracement ratio.

Of course, on the downside, a break below the support of 78.30 would be a clear new bearish signal, with probably no important new support before 74.75 (a previous high posted in June 2008).

Fundamental Forecast for Japanese Yen: Neutral

Direction from the Japanese yen is often the product of risk appetite; and the fundamental outlook for next week doesn’t suggest this essential correlation will break any time soon. However, this connection may actually complicate the future for speculators rather than make it more straightforward. The primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.

Often in trading we will analyse a market using our Gann analysis, make some calculations and determine a price level that looks like it will provide support or resistance in the market.

Sometimes the market pulls up exactly on these levels, sometimes it will pass through by a few points, and sometimes it will ignore our levels altogether!

In previous Trading Tutors Newsletter articles I have quoted WD Gann from page 36 of How to Make Profits in Commodities regarding the all important “50% rule” but I will write it again here: “you can make a fortune by following this one rule alone.”

Let’s take a look at two recent 50% levels on the US Dollar / Japanese Yen Currency Pair (FXUSJY in ProfitSource). In Chart 1 below, we have the 50% level of the range from the January Double Bottoms up to the April top coming in at 94.29.

About the DFX Trend Index

The DFX Trend Index ranges from -100 to +100 and is updated everyday at 5 pm eastern US time.  The numbers correspond to specific trend conditions.

50 to 100: uptrend / potential for a top increases the closer the index is to 100 (high readings during trends)
25 to 50: in a range / bullish potential
-25 to 25: price has reversed to the mean
-50 to -25: in a range / bearish potential
-100 to -50: downtrend / potential for a bottom increases the closer the index is to -100 (high readings during trends)