Trade Team Update

Yet another odd day in the markets, but one that saw the EUR show continued upside strength...

Apparently the euro's move caught several traders off-guard today... allow me to cut and paste and excerpt from yesterday's update:

Once the news about the Iranian missle test hit the market last night the risk shifted off the EUR and back on the USD.

We didn't make a major move today but based on what the price action is telling me there's a higher probability that we see more euro gains tomorrow, but we'll get into this later in the update.

The spotlight was on Trichet and Bernanke today. Trichet had nothing new or nothing shocking to reveal to the markets. Bernanke was a different story. He was on Capitol Hill answering questions from politicians about the credit markets, housing, economic conditions, equities, etc.

The highlight of the event was when our favorite freedom-fighter, Texas congressman Ron Paul took the floor to hammer both Bernanke and Paulson on their brain-dead monetary policies and their destruction of the dollar. It was a beautiful thing...

Bernanke was speechless while Paulson repeated his "I believe in a strong dollar" mantra which he followed up with a lot of mindless drivel that made zero sense. Finally, the committee chair had to step in and end Paulson's reply to Paul as it was just making Paulson look like the idiot he is.

I have to say that I thoroughly enjoy these events when Ron Paul gets a shot at making the Fed and Treasury look like fools... Paul hands them the rope and they slip it around their necks and hang themselves... it's almost too perfect. We have nothing but love and respect for Ron Paul here in the FXI community.

Needless to say, neither Bernanke nor Paulson said anything to help the dollar and we pushed up to the 1.5800 level, knocked out stops, and then pulled back.

Tomorrow:

We have two key fundamental events tomorrow: Trade Balance and Michigan Sentiment.

The abysmal Trade Balance is one of the main causes of the years-long USD weakness and why the USD Index has dropped so dramatically. Even with the devalued dollar the Trade Balance has not made any USD+ gains and is falling further to the downside.

I haven't done my normal amount of research on this report because I believe it will remain in USD- negative territory even if prints slightly USD+ tomorrow. Same thing with the Michigan Sentiment. I'm forecasting a USD- print on this piece of data and I really only see nothing but sour times for the consumer.

EUR/USD:

Oil made a strong resurrgence as it gained over $5 today. Gold was also strong to the upside and this certainly gave the euro a boost. For most of the day the Dow was under the gun but made a late day rally and this pretty much capped any further EUR/USD upside gains.

Geo-political events are very much the flavor of the week. I would like to mention this aspect of the market... many traders ask me why I'm so against using candle charts and using technical analysis...

I have a laundry list of reasons why I can't trade with those things. I won't go through them all here but I do want to talk about the geo-political aspect to the FX market.

We trade in a complex market as you very well know. As complex as the market is it still comes down to a bunch of humans pulling the trigger, pushing the buttons, calling the shots, and whoever has the most liquidity at any given moment are the ones that hold the power to push the market one way or the other.

And those humans that decide to flood the market with liquidity or decide to drain the market of liquidity are driven by two distinct sets of human emotions:

1. Greed
2. Fear

Both of those sets of human emotions dictate how the vast majority of market participants decide when to get in and when to get out. Greed and fear are more on a subconcious level for the average trader but those two emotions keep most traders in their grips.

What does this have to do with geo-political events and candle charts? Everything...

There's no chart on earth and no candle pattern on earth that can forecast a geo-political event nor can they forecast how the market will respond to a geo-political event. At any given second a geo-political event can hit the markets.

Not all events are responded to the same because not all traders will have the same emotional reaction to a geo-political event. A few weeks ago I warned to be on the lookout for a rise in geo-political events and for the market to respond to them.

What have we seen the past few weeks? Oil pipelines have been attacked, tensions between the U.S., Israel, and Iran have escalated, etc. Most of these events have not benefited the USD even when a candle pattern or technical set-up may have been pointing to USD strength at that given moment in time the event hit the markets.

So for me and my trading style, I shun the charts, I shun the techs and I keep my eyes and ears focused on catching those geo-political events as they hit the market and trade them accordingly.

This is also another reason why proper risk and money management is imperative. A geo-political event that catches the market off guard can easily move the euro 200+ pips, it can widen spreads to a vast degree, and cause intense up and down volatility. Having an account over exposed during a voltile geo-political event driven move will only further toy with your emotions as a trader and cause you to do really stupid things. Is it worth it?

Now as far as trading goes, I will be looking to buy dips and head into tomorrow with some fresh euro longs. This is purely my opinion and my own analysis but I see a higher potential and probability for upside gains tomorrow as opposed to downside losses for the euro.

On most accounts I've got tons of free margin to buy the euro and this is my plan. I do believe we'll see a pullback from these levels and this will just present me with a buying opportunity.

If price action causes me to change my plan I will post but for now I think we do more upside testing tomorrow. If I'm wrong, so be it. I have to trade according to what I see in the market and according to my own gameplan. I don't care what anybody has to say.

That being said, the euro will face a battle beyond the 1.5820 level. 1.5800 was quickly rejected but with enough liquidity and momentum we should be able to breach 1.5800 and move on to test the 1.5820 level.

There will be a bull vs. bear battle between 1.5820 and 1.5850. A break of 1.5850 should take us up to the 1.5890 level to knock out more stops. With all the techies talking about the dollar recovery, the euro weakness, blah blah blah you can be assured there's heavy stops sitting at 1.5805 and above.

Liquidity has been severly lacking so I can't forecast a mega market move tomorrow but I do believe the euro will win the day overall. Again, just my opinion... there's a lot of time between now and then. Later on this evening I'll get a better read on the market.

The first two hours of London will be critical as this can give an even better view of the market. After midnight I will post my key levels.

As always, be smart, trade smart, and do not overleverage.