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Close Open Orders: 2010-05-06 23:23 ET

It’s really a rare occasion nowadays where a missed trade opportunity really eats at my core….and today happens to be one of those days!! A near 700 point drop in USDJPY? Seriously??

PoD Chart

As we can see in the chart above, risk aversion did hit the global markets as the fear of what’s happening in Greece, European debt issues, and the potential global implications sparked panic selling across all financial assets. Investors and traders moved capital from riskier assets (like equities, commodities, and higher-yielding currencies) to safe havens (i.e. US Treasuries, Gold) and unwound carry trades.

The Japanese Yen benefited against the majors as the pair fell, nearly touching 88.00 on USDJPY before finding support. Yup, it fell almost 700 pips since my trade idea yesterday…doh!!

Needless to say, I am a bit perturbed as I had–and I don’t mean to sound arrogant on this–the bomb fundamental and technical setup!!! My error (which I seem to make often) was to try and get in at a better price.

The difference in entry between the market at the time and 95.00 was only about 35 pips. So, to save about 35 pips I missed out in what have been a nice 2:1 reward-to-risk play and potentially more. Not a good idea and something to think about from now on when setting my entry points.

So, after missing the nice move and with US NFP coming up tomorrow, I have decided to close out my open orders to short USDJPY at 95.00.

I wanted to mention is that I did miss an alternative trade setup. As marked in the chart above, I failed to see the rising wedged. This tends to be a bearish chart pattern and I could have played the break of the lower blue trendline. Hopefully, I won’t miss it next time.

Last thing I wanted to talk about is how this event reiterates the importance of stops. I bet today’s moves shocked a lot of Asia and European session traders who were short JPY or USD and woke up to their positions rocked hard! Events like these are rare, but when they do happen they can blow out your account in the blink of an eye without the proper risk measures in place. Use stops folks…it could save your life!

Well, the pair has bounced higher but as I said in my original trade idea, the risk aversion may not end today as I feel we are just at the beginning of the sovereign debt crisis sorting itself out. Could the market fall again? Probably. How far would it fall? I don’t know, but as a discretionary trader its probably time to switch gears into trend mode and see if I can ride this sentiment out as far as I can.

Thanks for checking out my blog everyone and I’ll see ya at my next trade idea. Good luck!

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Trade Idea: 2010-05-05 07:39 ET

PoD Chart

Good morning fellow forex friends! I’ve been checking out USDJPY on multiple timeframes and it appears there are quite a few technical signals pointing towards a possible top to the recent rally. Time for some short orders?

Technically, the weekly chart shows potential bearish divergence as it tests the 61.8% Fibonacci retracement level and psychologically significant area around 95.00. Resistance maybe? Also, stochastics are in overbought territory, potentially signaling that buyers may be losing steam.

PoD Chart

Zooming into the four hour chart above, we can see a lot of the same technical setups of bearish divergence and stochastics signaling overbought conditions. Will 95.00 hold?

Finally, there is a sentiment indicator signaling a potential Yen rally – the commitment of traders report! The most recent CFTC report of Japanese Yen futures shows that Non-Commercial traders are net short over 49k contracts. These are levels the market hasn’t seen since July 2007–right before the Yen rallied almost non-stop for the next 8 months.

Fundamentally, do I think Japan is better off than the US? Nope, I think they’re both in weak situations when you look at each country’s economic health and growth outlook. So, what’s the next fundamental catalyst you may ask? Well, we’re looking at it as the outcome of easy money and regulation come to fruition.

Before I go into the reason why this is significant, let’s go into a quick review of recent history. The global economy has grown on easy money and lax regulation for the past 30 years…and the world got really comfortable with it. Then the financial crisis hit in 2008 and kicked off a freeze of credit bringing about a major global recession, asset de-leveraging, and changing the lives and living standards of people everywhere.

To combat the recession and bring economic conditions back to pre-crisis levels, governments around the world have brought back easy credit and money in the form of bailouts, low interest rates, quantitative easing, government subsidies, etc.

Now, let’s jump to the present to see where the government’s efforts have led us. In many major economies, unemployment is still at high levels, housing markets are still depressed, and credit is still difficult to obtain. Sure we’re seeing better economic data, but nothing near the growth trends before the crisis. Countries like the US and Japan have gone into record debt situations, and soon it will come time to pay the piper on that debt. This is the situation Greece is in right now.

Greece is unable to make its debt payments, creating the situation of a default on their debt or the need for a major bailout. Luckily, they got the latter, but it comes at a major cost in the form of austerity measures (major cuts to social programs and wages) and Greek citizens aren’t taking to it kindly.

Unfortunately, the bailout may not be enough and these chain of events may not stop at Greece as it may happen in other parts of Europe, the UK, Japan, or even the US.

Long story short is that it is evident that this repeated cycle of easy money only supported the global economy just enough to prevent what may be inevitable–a global depression–and possibly made things worse in the long run.

And before I come to my conclusion of things to come, let me touch on another point: tax and regulation. What happens when you clamp down on free markets with regulation and higher taxes? If you said, “stifle innovation and growth” then you are correct! With the coming financial oversight bill and proposed taxes to alleviate government debt, it doesn’t look like the business sector will provide much boost to overall growth.

In the end, I don’t believe that we will see a return to pre-crisis levels anytime soon and I think the Greece story is the tip of the iceberg and catalyst to a return of risk aversion. Because the Yen is a funding currency for the Greenback, if we see another round of carry trade sell off, then USDJPY may fall once again.

So, based on the technicals, the most recent COT data, and my expectations for a near term change in sentiment towards risk aversion, I look to short on a retest of 95.00. My stop will be a bit more than the daily average true range of 80 pips, and I will target just above the week’s opening price around 93.70 and ultimately, just above the previous week low around 92.81. Who knows…I may go for that 85.00 handle! Haha…for now, this is what I am going to do:

Short USDJPY at 95.00, stop at 96.00, pt1 at 94.00, pt2 at 93.00

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

We do have the mother-of-all news reports coming out this week in the form of the US Non-Farm Payrolls report. I may close my orders before then or if I am in a trade I may adjust my position before its release. Stay tuned!

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