Wednesday, October 25, 2006

Wednesday, October 25, 2006

The Now:

So the Fed kept interest rates unchanged which was pretty much expected. However, their tone was relatively flat. It seems like most traders were expecting them to sound a little more hawkish but instead, the Fed was pretty moderate in their statements. Basically they still mentioned their inflation worries but they said it with a cool and calm voice.

“Inflation pressures seem likely to moderate over time.”

“Going forward, the economy seems likely to expand at a moderate pace.''

“Some inflation risks remain.”

So the vibe that people are getting is that the Fed is going to keep rates unchanged. What is getting under everyones skin however is that the Fed isn’t really giving any strong clues as to what they are going to do after this pause.

Existing Home Sales fell to 6.18M which was lower than the forecasted 6.25M. This just adds confirmation that the housing market is really cooling off. The median house prices fell from $225,000 to $220,000 in September. This was stated as the biggest year-over-year drop since 1968. While month-over-month declines aren’t uncommon, year-over-year drops are more serious. The housing market has been a big factor for the slowing economy and today’s report just adds confirmation that the economy will still continue to be sluggish.

On the other side of things, the German IFO index came in at 105.3 which is higher than the previous number at 104.9. This provided support for the Euro and is the cause for some of that Euro rally we saw today. I realized I made a mistake in my post yesterday because I said if the number was lower than 103 it would cause a Euro rally. I meant to say that it would cause a dollar rally. It doesn’t matter now anyways since the number came out higher than the forecast but I just wanted to clarify so that no one gets confused.

Coming Up:

US Durable Goods Orders
8:30 am ET; 12:30 GMT
Previous= -0.5%; Forecast= 2.0%
With the balanced Fed statement today, pay close attention for any surprises because traders will be looking for some sort of direction.

US Jobless Claims
8:30 am ET; 12:30 GMT
Previous= 199k; Forecast= 305k
I don’t think this will have much effect on the market unless there is a huge surprise.

US New Home Sales
10:00 am EST; 14:00 GMT
Previous= 4.1% Forecast -0.1%
I think this will be the most closely watched report because of all the press the housing market is getting. Once again, look for any surprises because it would put the market in a frenzy.

Chart Analysis:


All technical indicators are showing signs for a short term dollar rally. Currently the Euro is right around 2600 with stochastics showing overbought on the 4hr. chart. An aggressive play would be to short now and target 2550 with a stop at around 2650. However, a good conservative play would be to short at 2650 because that is where the 200 SMA is on the 4hr chart is as well as the 50 SMA on the daily chart. What this means is that this is a good resistance point so if price gets up that high, we’ll probably see a drop in the Euro. Daily stochastics is still headed up and is not overbought yet so this trade looks like it could happen. However it’s still not 100% certain that the price will get that high before dropping because the 4hr stochastics is already showing overbought and looks to be heading down now. Either way, the conservative play looks to be the safest option if the trade actually triggers.


The Cable is looking pretty bland as there really hasn’t been a clear direction the past few days. Only trade idea I see is to short at 8800 and target somewhere between 8730-8740. The reason is that stochastics is showing overbought on the 4hr. chart and 00 levels always make for a good support/resistance level. The reason I target 8730-8740 is because that is where the 50 SMA on the 4hr. chart will probably be if this trade triggers.


I really don’t have a clue where this pair is going right now. The Swissy is currently at 2649 and my gut is saying that in the short term the pair will reach 2700 because the 100 SMA on the 4hr. chart is at 2631 which makes for an ok support area and stochastics on the 4hr. chart is showing oversold. However on the daily chart, stochastics looks like it is moving down and there are no support or resistance levels nearby. I’m not 100% confident in this pair as of now but a short term rally to 2700 seems like the most probable scenario.


I said yesterday that 119.00 would provide good support and so far it has been holding up. Now that stochastics on the 4hr. chart is showing oversold, a long trade seems like the best bet. A low risk trade would be to go long now and target 119.50 with a stop at 118.80 (which is right below the 100 SMA). On the flip side, if price moves below 118.80, look for a drop to around 118.20 which is where the 200 SMA is on the 4hr chart. Stochastics on the daily chart looks like it could be headed down so this short trade might be another possibility.


With the balanced statement from the Fed, it seems like traders are once again playing a guessing game with the dollar. Look for any extreme surprises on any US economic reports coming out soon because they will probably cause any dollar related pair to move quite nicely.

Happy trading everyone!


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