Trade Team Update

Yesterday was certainly the calm before the storm! We've got a ton of stuff to cover in today's update...

First, we're going to look at what brought us to the doorstep of 1.5000 during the NY session, then we're going to look at what took us up and over 1.5000 right after NY closed and we'll accomplish this via a lesson I'd like to call "Stop Hunting 101," then we'll close with a brief interesting look at the euro/Dow correlation...

We moved a historic amount of pips bottom to top -- around 275 pips today, which is well above the average the euro would ever move in a single day... but the big push was fueled by the Fed and by the banks/brokers triggering stops, which we'll get to in a minute...

PPI and the Fed:

As we forecasted in yesterday's update, PPI came in very USD+, with a headline print of 1.0%, which far exceeded market expectations. Now, we did caution against taking any knee-jerk trades in reaction to the PPI number and I believe most heeded our advice...

There's a common trading "technique" to trade news events based on deviations of forecasted and actual numbers and I absolutely do not agree with that style of trading and honestly I think it's idiotic to trade that way as there are so many variables that cause the market to move and react and a single piece of data is no valid indicator to trade from... but, maybe we'll cover this more in detail another time...

So, the reason we cautioned against making a knee-jerk trade on PPI was the fact we had several Fed speakers today and we had tons more data due out which was forecasted to be USD-. Sure enough, both the Fed's Kohn and Poole completely ignored today's hot inflation data...

I have to be honest, there was a little part of me that truly thought the Fed would address today's PPI and throw at least a little bit of hawkish inflation rhetoric into the markets... we got no such rhetoric, in fact, the Fed ignored PPI and even went as far as to basically say there was no inflation issue and that there's no focus on inflation!

The market knows the Fed is flatout ignoring inflation and is likely going to cut rates another 50bps in March, so again, we have all the more reason to see the euro continue its bull run against the dollar...

What that did was just give the market the greenlight to hammer the dollar and boost the euro up and away towards the 1.5000 level, but failing before the market "closed" at 5:00 p.m. EST

And from stage left, enter the banks and brokers...

Stop Hunting 101:

Today in the chat and over the past few weeks, we indicated that should the market take the euro to 1.5000, that it would not stop there and turn around, but would likely move to 1.5050 to give the banks and brokers the opportunity to trigger stops and cause major stoplosses acrossed the board...

That is precisely what happened when we touched 1.5000... the banks and brokers triggered stops and this fueled the exaggerated move towards the 1.5050 level, before falling back...

Now to this day I still get traders that want to argue with me or don't want to believe that there's such a thing as stop hunting and stoploss triggering. I'm not going to use this post to discuss the value or stupidity of using stops, but rather to explain how this whole thing works with the hopes that more traders can eliminate getting stop hunted and can keep more of their profits...

Basically, all the brokers shove it down your throat that you must set tight stoplosses of 20 or 30 pips or at 00 and 50 levels, plus most tech traders use stops because they have no clue how this market really works and why it moves the way it does, plus all the big "gurus" beat traders over the head about placing tight stops, plus if you go into any FX chat room or message board (except ours) and you tell them you don't use stops you'll get ridiculed, beaten-up and bullied for not using stops... it's really ridiculous...

With the vast majority of retail traders using tech indicators, the same tech indicators, the vast majority are all setting stop losses within a few pips of each other all on the same key tech levels, so right off the bat, they are sitting ducks, in addition, the brokers can see those stops and they have computer algorithms to hunt those stops...

So, during times of low liquidity and during times when the big market players are out of the market, the banks and brokers work together to manipulate the market to move against those traders and to trigger those stops, it's very simple and easy for them to do...

Have you ever set a stop? Have you ever seen your stop get hit only to watch the market turn right around and go the opposite direction? If you answered yes to that, you were the victim of a stop hunt.

The other way traders get easily stop hunted is for the fact most set stops on round-number levels like 00, 20, 40, 50, etc. For example, suppose a trader uses some techs and they decide to set a stop 30 pips below a key Fib line (which is tremendously common) well, the brokers and banks know what those levels are and they know the mentality of the tech traders so they use low-liquidity opportunities to push the market past those key tech levels to knockout stops and then the market turns around and goes the opposite direction...

I could go into much more depth on this, but I think you should get the idea...

Stoploss triggering is similar to stophunting, but slightly different... lets use today's move from 1.5000 to 1.5049 as our example because that was a classic, textbook, run-of-the-mill stoploss trigger by the banks and brokers...

How did I know that the banks would trigger stops if we were to break the 1.5000 level? I can't see any stops and I'm not a broker, and I'm not psychic, but I knew this and warned about this way in advance because I know the mentality of traders and I knew there would be tons and tons of stops all over the place between 1.5010 and 1.5050...

On a stoploss triggering situation, when there are big stops placed with big money on the line, this just fuels the stoploss fire and that's when we see the kind of exaggerated and violent moves we saw today...

And surprise, surprise, when did this take place? Almost as soon as the NY traders went home, when the European and UK traders were sleeping, and before the Tokyo traders turned their computers on... it started right after 5:10 p.m. EST when the market was completely flat and there was almost zero liquidity...

That is the time of day that the banks and brokers will hunt stops and trigger stoplosses... it's tremendously easy for them to do, as we saw today right before our eyes... and just as we said, the market would return to the point from where it took off -- the market will almost always return to the point it takes off from because those moves are 100% stoploss triggers and 0% buying... if it was a move caused by buying, the market would not fall right back down again and return to point of take-off, but it did...

Simply look at a chart at 5:10 p.m. EST, follow the spike up to 1.5049, then follow its fall back to where it was at 5:10 p.m. EST -- I'm not into candlepatterns, but that is a straightup stoploss trigger pattern on your chart!

Again, I could go into more depth on the stop thing, but hopefully I've made my points clear and this is information you'll take into consideration if you decide to use stops in the future...

Tomorrow's Fundamentals:

Once again, we have a huge day tomorrow... will we move 275 pips? I can almost guarantee you that's not going to happen, but it doesn't mean we can't see some heightened volatility and price swings tomorrow...

I'm going to try to sum tomorrow up as quick as possible:

Durables and Core Durables: suck
New Home Sales: suck
Bernanke: suck, lies, dovish, suck
USD: suck

One thing I want to mention before we wrap up -- as you know, one of the market correlated variables we watch is the Dow. This doesn't make much sense to the bulk of the FX trading world, but it makes sense to me because it's a great indicator... check this out... the last time the euro made an all-time high, the Dow had made 3 straight days of higher highs and higher closes... well, the Dow has just made 3 straight days of higher highs and higher closes and once again the euro makes an all-time high... coincidence? Maybe, but I think otherwise...

Lastly, on Sunday's update we talked about the USD Index... well, support gave away and hit the next support level of 74.50 before bouncing back... there was a reason we urged you to watch the USD Index this week and that reason played out before our eyes today... I encourage you to watch it closely the rest of this week as it's another great indicator for the EUR/USD...

Trade Team Update

Today was what we call the calm before the storm... not a whole lot of volatility or liquidity in the market as the banks are likely waiting for bigger data tomorrow and throughout the rest of the week...

Just a few things to re-cap... the Dow made some more weird moves today which also helped keep the EUR/USD in standstill mode, plus the 10-year yield made a 12-point move to the topside, which was USD supportive against the EUR.

This morning's housing data came as no surprise at all -- some of the worst data since 1999... and the only reason we slightly beat expectations was because median home prices dropped from $207,000 to $201,000 month-over-month.

Homeowners are slashing prices to move inventories, and for reasons like that the dollar will not be able to gain on the euro with better than expected headline numbers -- and this is a valuable lesson of why we do not typically "trade the news" or trade a specific data number... we have to do things how the banks do them, which is dissect the data, break it down, look at all data points, and come to a proper conclusion and evalutation on a bigger picture scale...

Making a knee-jerk reaction to a number and making a knee-jerk trade based on a number or a deviation of a number is about one of the stupidest things you could do in this market... it's not always about the headline number and taking a trade off of that will just get you stuck in a dumb trade most of the time...

Some people who don't understand how we do things and how we trade the market accuse of just being "news traders." That couldn't be further from the truth -- being a fundamental trader is not the same thing as being a news trader -- not even remotely close, not even in the same ballpark or in the same universe...

Tomorrow's Fundamentals:

In case you hadn't noticed, tomorrow is a mega, massive fundamental day... lets take a look at the most important stuff for tomorrow...

First up to bat is German IFO -- IFO is incredibly important tomorrow because this data will show the overal sentiment and views from various businesses, manufacturers, retailers, construction companies, wholesalers, etc. in the Eurozone's largest and most important economy. We'll get to see if those firms are concerned about economic conditions in the Eurozone or if they have a peachy outlook on the future...

Based on some data we've seen the past few weeks, I believe we could see a bit of downside surprise with this IFO... specifically, Industrial production and output has slipped this year. Plus, German workers are demanding wage hikes. But what would be positive for the euro is if those firms are still freaking out about inflation, which is normally the case in Germany...

I can't predict exactly how the data will print, but based on my research, we should see the data come in softer than the previous month...

Next up to bat is PPI -- with inflation now just starting to come back into focus in the U.S., PPI will be incredibly important tomorrow... if producers and manufacturers are paying more for the materials they need to produce, those prices get based on to the consumer, and this price instability causes inflation, and inflation is GREAT for a currency!

It's my belief we could see USD+ PPI number print and possibly even a USD+ upward revision to last month's PPI number... again, I'm not in the business of making predictions, but based on my research of the markets and inflation specifically, if the truth is to be told tomorrow, PPI has to come in as expected or hotter than expected...

Next up to bat is Case-Shiller Price Index -- this is not so much of a market mover and will not come under too much scrutiny tomorrow, but it's a respected piece of data, so of course we need to watch it and analyze it... bottomline, it should show what we and the markets already know about the housing situation -- I do not expect any upside surprises on that one.

Next up to bat is Consumer Confidence -- is the consumer confident? Heck no. The consumer is not borrowing money and not putting goods on credit -- they are either maxed out or freaked out or put out...

Once again, based on what I see happening in the consumer and retail sector, there's really not much optimism or hope -- that being said, if we see something like an upside surprise with this data and a hot PPI print, I believe the USD could certainly get some love tomorrow...

Batting at the bottom of the order -- House Price Index, Richmond Fed, and Fed Kohn speaking... but, who really cares, we got PPI tomorrow!!!

Seriously though, Kohn is going to talk about economic conditions and possibly about monetary policy... so, prepare accordingly... the Fed has been bi-polar on growth and inflation...

EUR/USD Trading:

There's no real price action to gauge the market with, we're in too tight of a range... I'm headed into tomorrow's cavalcade of news by not taking on any new trades I can't get out of by the time Europe opens... practicing strict risk and money management for tomorrow...

I urge you not to get yourself into an overleveraged situation tomorrow -- there's a higher probability we could see heightened volatility and price swings, so trade smart should this play out in the markets...