Tuesday, October 31, 2006

Tuesday, October 31, 2006

The Now:

Trick or Treat! The dollar’s getting weak!

Yesterday I said that if we saw an agreement of the US reports, whether it be positive or negative, we would see a good move for the dollar. Today both the Chicago PMI and Consumer Confidence report came in negative and as a result, the dollar took a tumble.

Chicago PMI came in at 53.5 which was much lower than the forecasted 58.0. This means that the slowdown of the US economy is trickling down to the businesses and as a result we are seeing less business activity.

The big story of the day was the weaker than expected Consumer Confidence report which came in at 105.4 compared to the forecasted 108.0. Even with lower energy prices, it seems that consumers are starting to get weary of the US economy. Remember, this report affects consumer spending and consumer spending makes up 2/3 of the US GDP (the measure of the overall economy). You can see how this weak number has put traders in a frenzy as now it seems that not only the housing market is slowing down, but consumer spending (which has been holding the economy up) might also be losing its steam. This is very bad for the dollar.

As a result of the news, my Euro trade has now been stopped out at breakeven, but we still may have another opportunity as our charts still show signs of a dollar reversal.

Because of the big negative dollar move, my Swissy trade idea has been triggered. This trade still looks good so I will continue to hold. I’ll explain more in the chart analysis below.

Coming Up:

ISM Manufacturing Index
11:00 am ET; 15:00 GMT
Previous= 52.9; Forecast= 53
With the weak Chicago PMI numbers that came out today, this report will be watched closely. If the report comes out around 50 or lower, then look for another day of dollar dropping.

Also watch out for what Mr. Bernanke has to say. He is due to speak at 2:00 pm ET, 18:00 GMT.

Chart Analysis:


After moving down as low as 2677, the Euro has shot back up and is currently around 2762. The bearish hidden divergence is still in tact on the daily chart and we may have another opportunity to short this pair around 2800 and target 2750 and 2700.


This pair also followed the technicals up until the negative US news reports came out. Now the Cable is hovering around 9100. The last time the Cable was this high was on August 8th so this is a pretty key level right now. We’ve seen the pair go around this level 4 times and each time, the price has backed down so this will be an important level to watch. Unless there is another big negative surprise in the US news reports the rest of this week, look for this pair to bounce back down again.


So our trade is now active from yesterday’s post. The Swissy broke through the 61% Fib line on the daily chart after the news reports and got down as low as 2412. You can still clearly see the bullish hidden divergence so this trade still looks like it can work in our favor provided that we don’t see any drastic US news reports tomorrow.


Like I stated yesterday, the Yen had been showing oversold for quite some time on the 4hr chart and made its way back up to 118.00 overnight. However, because of the news, the pair dropped back down and is now hovering around 117.00 again. In fact it got as low as 116.60 earlier today. The pair bounced off of 100 SMA on the daily chart and stochastics is currently showing oversold. However, by looking at the stochastics on both the 4hr and daily chart, I think we will see a move down to 116.50 before we see the pair reverse back up.


I stated yesterday that fundamentals would ultimately decide the markets’ direction and now you see why. Even though the technicals did predict the near term movement, nothing is stronger than the power of the news! If nothing drastic happens tomorrow (i.e. ISM comes out around forecast & Bernanke doesn’t say anything too crazy), I think we’ll see some reversals from today’s movement.



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