SPY Breaks Out and USD/CAD Holds the Dollar/Equity Relationship

Wednesday, Aug 31, 2011

After yesterday's Fed meeting minutes, the threat of QE3 is more present than ever. So regardless of good or bad news, the markets want to go higher. Maybe, if it is bad news, we rally farther than if it is good news. We live in a sick world!!

Again, throw out yesterday's Consumer Confidence number. As Rick Santelli put it so well: "the downmove that we had will be reflected in August numbers, not July's". Today's CHIPM was for July and it was basically on the numbers. The unemployment component was as well. Tomorrow, when we get ISM, that may give us some more recent data.

And oh yeah, you see that I don't mention ADP Payrolls. It isn't a government number and its history of forecasting the real data is pretty bad.

To switch things up, let's go with the technicals in forex first. We had pretty muted ranges - again, notice the dollar. It is holding its strength against most currencies. Does that mean if equities fall, the dollar is ready to take off? Overall, yes the dollar is weak, but I am just stating the facts. And overall, as I mentioned, pretty muted today with VIX declining a bit (30ish), but there was one pair that I would like to highlight. It was nice to see the equity/USD relationship back in place - giving us (if you stuck with it) a DOUBLE FALL LINE TRADE. The USD/CAD, rallying when equities went from 120 to 30 and sold off (and triple topped) when equities bottomed out and went back towards highs:

Past performance is not indicative of future results

Moving to the SPY, as I mentioned yesterday, whether it goes up on bad or good news, who cares, cause technically, the SPY broke through its trendline and is the 125-130 area next? Please, please get there so I can add on some monthly protection. Please!

Past performance is not indicative of future results

Remember to think in percentages folks. The SPY is up 10.7 percent from its lows earlier last week. Again, if you are nervous about downdrafts, here is your chance to put on some cheap protection. Trade appropriately as the threat of intervention is still there. What does that mean? It means, pick your level, have an exit strategy for a loss already in place in case the intervening continues if you are playing a defensive position.

What about playing the upside breakout? Think about percentages!! Is the risk to reward still there to get long? For a day trader, maybe not. For someone playing the next few months and you are bullish, well, maybe, because you can risk more than the day trader (and not get shaken out by one or two down days).

Happy Trading!

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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.