Top of the Range in USD/CAD

Tuesday, May 8, 2012

Good  Morning,

I am not going to go into it in depth, but for the most part, for 2 months, economic data has bee horrific. I can't stress it enough, horrific. Add to that a market that goes to the moon day after day after day when the Federal Reserve speaks - but that is the only time the equity markets go up. Add to that the mess that Europe is becoming. Yes, I said becoming, not became.
It all equates to the perfect storm. Overbought markets that are only supported by Federal Reserve moves, terrible economic data and an entire continent that has the possibility to fall apart.

It seems like Groundhog Day - the last 2 summers were pretty painful for investors as they provided higher volatility for traders. Will this summer be the same? If so, all hands and feet inside the ride at all times as some traders may have forgotten what volatility feels like. All I have to say is it is a welcome return and I am looking forward to new relationships that open up to a trader with well rounded skills who can read multiple markets.

First up, the VIX. Volatility as at the top of its range. If SPX goes through 1350, expect VIX to go to the low 20's:

Past performance is not indicative of future results
Next up, the SPX , sitting on support. But look at this chart. All of you Fibonacci fans out there know that a 23% retracemnt is miniscule. And this is just the most recent upmove. Remember, we have been trending up from 660!!!!!!

Past performance is not indicative of future results
I repeat, we can go lower - a LOT lower. No matter what you trading plan is, that is exactly what it is, a plan. Part of that plan is to manage the trade. If you thought prices were fair, please know, they can go lower - a LOT lower. You can always get out of a trade and take a loss (traders are good at taking losers) and get back in at another level with another trading plan. Management and constant analysis is key to a trader navigating these markets.

Sorry for the tangent, but as I said, volatiltiy can really hurt a trader who doesn't have a plan. So, I ask you, if equities are going down, where is the money going? We call this flight to quality. Sell equities, buy bonds (safe haven). So if bonds go up, yields go down. TBT follows a longer term yield curve and so the yield is dropping, which drops TBT. Could buying bond yields at new lows be attractive? If equities go through the 1350 level in SPX, yields should go lower:

Past performance is not indicative of future results
Finally, the forex markets. USD/CAD is back at the top of its range as oil prices (and other commodities such as gold) go lower. I thought Gold was a hedge - HA! As I said, new relationships will emerge and this is one that has been around and I think will be one that traders can use. Think about supply and demand. Higher unemployment, slower economy, less oil. Oil prices down, the CAD which exports lots of energy goes down. Inter-market relationships people! But with any trading idea (plan), there are no guarantees, so stops and targets are a must.

Past performance is not indicative of future results
Oh yeah, Bernanke on Thursday along with claims. Welcome back volatility!
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.