The Now:
I mentioned yesterday that consumer spending has been the backbone for the dollar support and today’s positive reports in both Retail Sales and Consumer Confidence caused huge gains for the dollar, particularly against the Euro and Yen. The actual retail sales report came in a -0.4%. On the surface that looks like a bad figure, but you have to dig a little deeper to get the real story. Gas prices have been dropping like a rock lately and because of this, gasoline sales have been dropping. This is factored into the entire retail sales report. When gas prices drop, US consumers tend to spend more on other things. So if you take away the gas sales, retail sales actually went up 0.6%. Now the true story is revealed and we can see that consumers are spending more money on other things now since they don’t have to fill up their SUV’s with $70 worth of gas every week!
The other big story was the Michigan Consumer Confidence report. Yesterday I mentioned that this would be an important report to watch because if this number came out positive along with a good retail sales report, we would see a big move for the dollar. Well my friends, the consumer confidence report came out very positive. In fact, it came out higher than forecasted. The forecast was at 86.3 and the actual number was 92.3. Basically this means that consumers are confident in our economy (lower gas prices tend to be their measuring stick) which means higher consumer spending which translates into higher retail sales and a stronger economy.
With the holidays coming up, I expect to see consumer spending continue its growth. It will continue to be the catalyst for the dollar bulls until the end of the year. Regardless of whether or not gas prices go up, I still think consumer spending will rise. Wage growth has been growing faster than retail sales for the past 5 months so even if gas prices do rise, I think the higher salaries will compensate and we’ll see the stores filled with crazy parents rushing to get the last “Tickle Me Elmo” doll for their precious babies. You gotta love the holidays!
For all you Alba enthusiasts, there was finally an Alba trade today. I didn’t take the Retail Sales breakout because it was a news candle, but I did take the breakout at 10:10 (the close of the 10:00 am candle) which closed at 2505. My stop loss was at 2525 and my target was at 2495. My target was hit at 10:30 am and I closed 2 lots and moved my last lot’s stop to breakeven. I trailed my last lot to the high of the next candle which made a new low where I was eventually stopped out at 2492.
Result: +20 +13 -9(spread)= +24 pips
Chart Analysis:
EUR/USD
Despite the positive US news, the dollar will have a tough time breaking 2500. You can see that it’s been a strong support level and it also happens to be where the 200 SMA is on the daily chart. I think we’ll see another test of the 2500 level and then a retracement to around 2550-60. I say 2550-60 because that is where the 50 SMA on the 4hr. chart is headed, making it a short term resistance level.
GBP/USD
I’m still not sure where this pair is going. Daily stochastics is showing oversold but on the 4 hr chart, stochastics is still heading down. My gut is telling me that we’ll see the Cable make a move towards 8500 before bouncing back up. 8500-8600 still seems to be the range for this pair as it can’t seem to move past those levels.
USD/CHF
I drew a new channel on the 4 hr. chart to better fit the new price action that’s been going on. I’m not sure if this pair will hit 2800 because the stochastics on the daily chart is showing extremely overbought and seems to be peaking. I think we will see another push to 2750 before this pair heads down.
USD/JPY
As I said yesterday, 119.00 would be the make or break level for the Yen. It seems that the pair has bounced off of 119.00 and will probably hit 120.00 on Monday before bouncing down. I’m prepared to fade the 120.00 level as this level hasn’t been reached since November 30, 2005. This will be a low risk trade and will play off the fact that people will do some profit taking at this level.
Trade Idea:
Sell at 120.00; Stop Loss=120.15; Initial Target= 119.70
Try to ride this trade out. If it does get down to 119.70 move your stop and go for 119.50. The Yen has a knack for going from 00s to 50s and vice versa.
It’s been an exciting week and I hope you all have had great trading days. Have a great weekend everyone!
-BP
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