Aug 5, 2008

Follow Up ForexGen Steps For Better Trading - Part1

Contrarian Signs in Dollar Sentiment - Forex Trading

The market rewards those on the side of surprise. Traders, particularly in Forex, try to avoid surprises. This is not in itself surprising because joining the crowd, is a defensive action that occurs everywhere in nature. A swarm of bees, a flock of birds, and a herd of sheep, provide individual members protection by being part of the larger group. As we enter the last month of 2005 the Forex crowd around the US Dollar is large- but is it stable? Perhaps it's time to look beyond the comfort of the crowd.
Here are the contrarian signs of the beginning of the end of the US Dollar bull crowd.
1) Gold patterns - Gold is reaching new highs and while profit taking will occur what is significant is not the price point but how it is getting there. In the current scenario Gold's move is not a flight to safety from the dollar, but one that reflects investment demand for alternative assets and a reallocation away from currencies. The precious metals have been attracting significant fund and commodity-related purchases. Buying Gold is a way of shorting currencies. The following Gold vs. Yen chart demonstrates this inverse relationship.
The current bull sentiment for Gold may very well be a fundamental source of non-dollar sentiment. It may be the early sign of a non-dollar assets becoming more attractive.
2) US Dollar Index``. The USDX, after reaching highs of this year, just over 92, is now retracing toward its 50 day moving average. A direct probe of this Moving Average may be a precursor to a further retracement of the dollar.
3) Price Sensitivity to Weak Dollar News
If the USD bull is getting tired, the first sign we will see is when economic news comes out and the immediate reaction to that news. On Monday we saw the dollar decline to a 4 week low on news that existing home sales fell 2.7% to a slower-than-expected annual rate of 7.09 million in October. The reaction was a flow of funds away from the dollar to move the EURUSD nearly 200 pips. Of course, much of this move has been given back. This is showing increase in the volatility of sentiment focused on these news releases and that the crowd around the dollar bull is becoming looser.
4) Wall Street Journal vs. Financial Times
In the past week we have had two contrasting editorials. The Wall Street Journal printed an editorial "The Go-Go Greenback" in honor of the bullish dollar. The editorial remarks that the "US prospers with a dollar that has surprised the markets with its relative strength". But the Financial Times, just yesterday entitled its editorial- Entering the neutral interest rate zone. "It is not the end, but it is the beginning of the end. The latest minutes show that the Federal Reserve has entered what it expects to be the final phase of the interest rate tightening cycle that began in June 2004."
There are elements of value in each editorial. But they contrast each other in another respect. The Wall Street Journal's editorial is looking backward, while the FT is looking ahead. Yes, it has been a great year for the dollar. It can be argued, however, whether the markets were "surprised". Basic trend analysis of USDX confirmed in April that the dollar was in a Bullish sentiment. After the April FOMC rate increase, the USDX bounced off its 50 day Moving Average and proceeded to form this great bull trend that defined this year. But of greater interest to us now is why this editorial appears at all. Perhaps it's an indicator that the dollar is peaking when its praises can be sung on the editorial pages. The very fact that this editorial appeared may be a sign that the Wall Street Journal may be too late to the party.
5) Thirty Minute Ranges are tradable.
What should the Forex Trader conclude? How can we tactically benefit from the current turbulence on dollar sentiment? During periods of transition, where fundamental forces such as interest rate differentials are changing, shorter time frames to judge sentiment provide adequate opportunities to trade. The Forex Trader should be ready to take on moments of opportunity. In the Forex markets the 30 min patterns are demonstrating wider ranges and trading opportunities. It is worth looking at as a trading platform.