Buffalo Bounces, Fibonacci's and Trends, Oh My!

Thursday, Apr 12, 2012

Good Afternoon,

A very busy day today. Let's start with the fundamentals. Due to continued bad economic news on the jobs front, equities are rallying. Why are they rallying? Because the Fed is always in play. The Fed said if economic data worsens, we are still here Mr. Equity Market. So we never know how bad the economic data has to be to get them back involved. Obviously a 25 point move to the upside in SPX on bad data has some other reason behind the scenes.

Speaking fo SPX, I mentioned earlier this week that I would be looking for two scenarios. A drop towards 1350 to maybe look at long equity positions. And a rally back up and then using Fibonacci's, I may be interested in stocks that I thought were overvalued. Here is the chart with those Fibonacci's:

Past performance is not indicative of future results

So the question becomes, can we use the dip from 1420 to 1360 and the current rally to go ahead and play the downside again as the SPX approaches Fibonacci levels such as 50% and 61.8%? Also, will the blue horizontal support lines become new resistance? It is always nice when you have multiple indicators lining up to give you reasons to enter a trade.

But remember, as with any indicator and with any trading plan, there are no guarantees, so use pre-determined stops and targets based on the fundamental and technical analysis for your trading timeframe.

Moving into forex, we had trends continue. As I have been mentioning, as equities weakened earlier this week, the USD stayed weak. Now with equities rallying, the USD has gotten hammered. So for now, it seems that any rally in the USD gets it into an overbought area and it is seen as "too rich" and then it starts to weaken again. The first chart is the GBP/USD over the past few days and followed by the AUD/USD on a longer term timeframe:

Past performance is not indicative of future results

Past performance is not indicative of future results

These charts, one on a shorter term timeframe and one on a longer term timeframe show us that the USD is a very weak currency as the US interest rates are well below other currencies. As of late, when the equity markets rally, the USD has been getting weaker.

Let's now see if equity markets become overvalued, will the USD be just a bit undervalued and it may be a bit of an oversold condition. Again, I am not saying that the USD will strengthen greatly, but is the move down in the USD and the move up in equities over the past few days over-exaggerated?

These are the types of trading stories we put together that help us stay out of the markets in "so-so locations" and with patience, we can look for overbought and oversold locations. But again, and you know it is coming. TRADING PLANS. Stops and targets that are pre-determined using the charts.

Oh Yeah! I almost forgot. We talked abou the AUD/USD near that long term support line in last night's webinar. Hopefully you used that longer term analysis to keep you from getting run over as it bounced off that strong support/trendline.

Oh Yeah! Part Two! We had a BUFFALO BOUNCE TODAY:

Past performance is not indicative of future results

Tomorrow is Friday. Let's all be on the lookout for the "LUNCH RUN TRADE".

Happy Trading and Be Environmentally Cool

Coach Brian

Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.

Posted By: 

Brian Kahn

Brian provides regular commentary focusing on the relationships between various financial markets. An experienced trader and portfolio manager with over 15 years in the markets, Brian relies on fundamental and technical analysis to create trading plans for each and every market entry.