Trade Team Update

Well if you traded today you were a part of history whether you liked it or not... we had a historical downside move on the euro, one of the biggest defaults and bankruptcies in U.S. history (Freddie and Fannie), and the start of the largest taxpayer-funded government bailouts any market has ever seen.

As far as the euro is concerned, I've never seen anything like today. i was short 1.4406 euro short last night and closed that short on most of my accounts for modest gains because I never saw this violent and extended move happening today. Over 350 pips top to bottom is unprecedented.

But just as the dollar was fast approaching the key resistance level of 80 on the USD Index, the EUR/USD stopped dead in its tracks and did an about face closing the day over the 1.4100 level.

I'm confident that 80 level must be tested again and I see no reason we can't break the 80 level. More on the USD Index in a bit...

Commodities behaved very weird today. With the euro losing that much ground I expected to see gold make a strong extended break of the $800 level and expected to see crude move down to about the $102 level. Didn't happen.

I'm not trying to overthink anything right now but what concerns me is that as the euro continues to lose against the dollar at excellerated pace, if commodities don't keep pace with the dollar's rapid gains, what's going to happen when crude and gold do decide to begin to violently sell-off?

This could easily lead to the euro taking heavy losses against the dollar should we have a perfect storm scenario of dollars being agressively bought and euros being agressively sold along with crude and gold taking heavy losses. Be advised that this potential exists in the short-term while these conditions persist.

The Freddie and Fannie bailout has brought out the crackheads in the markets. I'm not going to waste any time commenting on this issues. What I said yesterday was enough and if you want to learn more I suggest you read up on this at the Financial Times.

As we suspected the bailout would likely give the USD another boost. Sure enough. I won't even try to predict how long the boost will last. These markets are so disjointed and continue to be ill-liquid.

Liquidity has not returned to the market and I believe this is mostly due to the fact there's a considerable amount of risk aversion happening in the markets and the other fact that hedge funds, banks, and financial institution aren't investing or trading because the risk exceeds their pain threshold and lack of liquidity.

USD Index:

The USD Index will not quit and is not being stopped at any resistance points at all whatsoever. 80 is the next resistance point I have for the USD Index. Based on the real time price action and price momentum to push lower, if 80 sustains a break I believe a test of 82 is possible.

I'm sure there's som techs you could throw on a USD Index chart if you're into that sort of thing. But, if you're like the rest of us and looking for signs of a bottom on the EUR/USD you may want to watch the USD Index as a guide. I will be watching it.

Tomorrow:

We have two big fundamental events tomorrow -- Pending Home Sales and Bernanke. I believe we'll see a USD+ print on the home data, but even if it prints at or below expexted I do not see that as a catalyst to slow the dollar down. The market is so thrilled with Paulson and the Treasury that they think the housing market is now at a bottom and that the bailout is going to magically solving the rest of the issues in the housing market.

Well, the bailout is not going to stop foreclosures, it's not going to reduce the supply of unsold homes sitting on the market, it's not going to stop home prices from plunging, and it's not going to solve the sharp decline in home-equity lending which is a vital part of credit and growth expansion.

The other wishful thinking going around the markets right now is some idea about the Fed cutting rates by 25bps this fall. This idea is something I have to laugh at. There are at least two FOMC voting members who not only voted against a rate hold but they wanted a rate hike. Even if the Fed did cut rates the EUR/USD might go up 200 pips and then get slaughtered again. If you're depending on a Fed rate cut to get out of euro longs, you might want to think of plan B.

Bernanke speaks tomorrow but not about the economy. This does not mean he can't use the platform to say something he's not scheduled to speak on, so be aware of that.

EUR/USD:

I really don't have anything special to say about the euro. Nobody is buying it. It cannot sustain any momentum to break through resistance and climb back up. The fundamentals are against it, commodities are against it, the ECB is against it, traders are against it, and banks aren't demanding it.

I see no signs of a bottom forming and I see no reason to take any risks buying it. I'll continue to short rises and hold all my best shorts for more downside.

Today my 1.4188 target was reach and well exceeded. As long as we maintain a sustained break of the 1.4188 level 3983 and 3818 come into view as my next downside targets.

If we can magically move up to sustain a break of the 1.4188 level we will likely struggle above 1.4200 and I may add more shorts there depending on how the market looks when this happens.

Volatility should increase after London opens and when we get data throughout the morning. At this point I see no reason or indication we can't continue to go lower and test USD resistance levels.

Risk and money management is paramount if you are trading under these conditions. It's the best defense.