Cable: Is the Retracement Another Shot to Short? – Trade Closed

Trade Closed: 2011-07-14 00:10

It was a quick and very eventful trade for me as UK employment surprised and Fed Chairman Ben Bernanke’s testimony to Congress rocked the markets.

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

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First, we had a weaker-than-expected claimant count change in the UK as unemployment claims came in higher than forecast (24.5K vs. 15K forecast). The market’s reaction wasn’t as extreme as this report tends to be as Cable usually moves 100+ pips after the event. This should have been an alarm that conditions were going to be a little bit different than the past few releases, but I felt with this report showing the fastest rise in unemployment claims in two years, GBP would have a bearish bias on it for the day.

After that, we had Big Ben speaking to the House financial services committee where he confirmed that the Fed is open and ready with more stimulus if needed. By the market’s reaction, it’s as if he said, “QE3 is on suckas!” and the Greenback was slammed across the board. Needless to say, my short Pound/long US Dollar position was quickly closed at a loss.

Total: -70 pips/ -1.0% loss

All I gotta say after that is, “thank goodness for stops” because Cable rallied another 160 pips beyond my stop, almost testing 1.6200 before the rally stalled out.

In retrospect, the setup was good, but what I could have taken into further account was that the FOMC minutes–which stated that the Fed was divided on further stimulus–came out before the weak US jobs data last Friday. Given this, the idea that Ben may publicly confirm more stimulus at today’s hearing should have been taken more seriously.

So, a small loss this week but overall a good trade. This idea of further stimulus should continue to bring on higher volatility, so I’ll probably look for day trades to close out the week. Hit me up on Twitter and Facebook to stay tuned, chat about the markets, or just say hello!

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Trade Idea: 2011-07-13 01:30

Good morning to my Asia session forex friends! I’m jumping on a technical setup to hop on the current downtrend in Cable. Will sellers take over after yesterday’s bounce higher?

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On the one hour chart above of GBP/USD, we can see the pair has been in a downtrend since topping out around 1.6141 last week. The current swing low has retraced up to the broken PWL (1.5931), where the market is now consolidating. I believe the area between PWL and the major psychological level (1.6000) will attract sellers as “risk aversion” sentiment continues to drive price action in the short to mid-term. We can see bearish divergence form as well (lower price “highs” and higher stochastic “highs), indicating a turn back lower may be at hand.

Sovereign debt and global growth continue to drive sentiment, and on the forex calendar there are plenty of events that may serve as a catalyst for a strong move. The potential big mover for Cable today will be jobs data from the UK (you can find articles on the UK at FreshPips.com). Expectations are for slightly better numbers than last month, so we may see a pop in Cable but I’m skeptical for positive numbers in the current environment. But if a pop does happen, that’s when I’ll jump in short.

Besides that report, the US has a slew of reports set to be released through out the rest of the week, most notably: CPI, PPI, and Retail Sales data. On top of that, Federal Reserve Chairman Ben Bernanke will report to the House financial services committee on the state of the US economy. Should be rockin’ and rollin’ week!

So, given price action, sentiment, and the upcoming news events, I have decided to short GBP/USD if it pops higher. My stop will be a fraction of the weekly ATR of 273 pips, and my target will be around this week’s lows just above 1.5800. Here’s what I am going to do:

Short GBP/USD at 1.5965, stop at 1.6035, pt at 1.5825

Remember to never risk more than 1% of an account on any single trade. Adjust position sizes accordingly.

This trade structure gives me a potential return-on-risk of 2:1–3:1 if I scale in another position if it goes my way. I’ll make that decision on the fly. As always, conditions do change, so be sure to follow me on Twitter and Facebook for quick updates!