A Word on Trade execution

Yesterday, most of the potential setups from Sunday hit the support or resistance levels that were mentioned on the post. Thus, the question became, should I execute them or not?

I wanted to use to this post to discuss trade execution. As a result, not only will I review the price action of some setups, I will go in-depth into how I think about entering trades. This will be another long post, so get your coffee.

First, we need to discuss support and resistance. The better phrase would be “places where we expect a reversal“. These are levels where we expect buyers or sellers to a) overwhelm the market with bids or offers; and b) step in with more urgency.

The best support or resistance levels are the ones that are hit and the rebound is immediate and strong. Why? a) It means that the bids or offers are there with force; and b)  It means that buyers or sellers (depending on whether we are at support or resistance) are also stepping in front of each other – with haste – to get in (meaning they’re also hitting the bid or lifting the offer). Price is getting away from the level fast because the “level of urgency” to get in is high.

In the world of support and resistance, below “the best support or resistance” level is the “great support or resistance” level. This is when the price lingers at the level before making a move. Why could this happen? Well, it means that the buyers could be absorbing supply at that level and vice-versa. If the level is good though, price will eventually start to move away. It’s still fact that the more aggressive the move from the level, the better the level.

Let’s use an example to convey this “great” support or resistance level. If you trade the futures market and use Market Delta, you can look at the trades going through in either the bid or the offer side of the market. Assume we’re at a support level for a market and a) the average trade in this market is 80-100 lots and b) big trades are 200-300 lots. You then start seeing 200-300 lots go through at the bid. You also see some 500 lot trades go through at the bid. Imagine if all of this is happening and the price is not moving lower. This means that there are some big buyers here. While price did not move immediately from the level, you better believe it that this level is probably good – at least for a period of time.

Brett Steenbarger of the TraderFeed blog (i.e. one of the best trading blogs on the internet, if not the best) wrote about this in 2006. (see his post explaining this example).

The point here is the following: if we specify a support or resistance level, price should at least hold there because there are solid bids or offers. The faster we move away from the level, the more trust we can have in that level.

So, this may seem obvious but I think it sometimes goes unnoticed: if we slice through a level, it means that we’re probably wrong!

Here is another obvious statement (which you’ve probably seen discussed in the trading world): the best trades will leave you behind if you don’t enter them immediately. When you think about the best type of support or resistance, it makes sense, right?

Great trades will give you a chance to get in. Price will either linger for a bit and possibly do a small retracement (probably in a smaller timeframe) somewhere close to that level again and you can jump on board.

Bad trades, as you might expect, will give you all the time in the world. Heck, if you’re looking to buy, it will probably give you a cheaper price! (i.e. you’re support level gets broken).

Okay, now that we got that out of the way, let’s look at some of the trade setups. Let’s start with Trade setup #2 (original post link) because this was almost a “best support level” setup.

As we can see on the 15-min chart of the EUR/USD, the pair hit the 1.1150s level, lingered for just a bit, and then took off for 100 pips. No pullbacks for those who didn’t just jump in. Thus, unless we had faith in the setup or got in as it started to go, we missed out.

Now let’s think about stop losses because people will usually ask me that question. Considering the discussion above about support and resistance and the fact that I was looking for 1.1150s to hold, where do you think my stop-loss would be? If the 1.1150s level is good, my stop-loss should not be below 1.1120/30 at best. You give 20-30 pips in case we get some type of spike due to a short-term imbalance or large trade that goes through.

EURUSD complete


Now let’s move to a setup that worked and kind of gave you a second chance to get in. I posted this GBP/AUD one on Twitter yesterday:



This is how it turned out:



We got a pullback (circled) to the 15-min block (or very close) that we would have expected to hold. This was a great trade but it was not a “best trade”. The best trade was long EUR/AUD! The EUR/GBP was flying to new highs and the Cable kind of fizzed out as the day went by (we’ll get to the Cable setup in just a bit).

Nevertheless, note that GBP/AUD a) immediately rejected the original order block I had + moved fast away from it; and b) went to break the market structure off that order block. This “b” factor is very important. Not only did price move away from the OB, the momentum was enough to take out the previous swing highs on the 15-min chart.

Note: the best order blocks are those where the price action is sharp and it breaks market structure.

Alright, now let’s move to a setup that worked at first but then didn’t. I was looking to buy Cable targeting 1.5220s and possibly 1.5280s. We got a high of 1.5212 before it gave back everything.

GBP Complete

So, we hit the order block (went pretty deep into it), rebounded, and broke minor structure. All in all, this looked good. It went a few pips from the primary target.

I’m using this example and the next to underline the following: while we may be right about a level, the bigger picture doesn’t always help us – and should we stick around if we see that? European markets were selling off hard yesterday and the general sentiment was risk-off. The Pound has been under-performing in risk-off environments.

Thus, at that point where the Pound is back to the critical level again, the best option is to get out. Sometimes I’ll jump out of trades and people don’t quite get it. Why not stick around? The pair rebounded off the original level, did it not?

Well, it did, but the follow through was weak. The S&P mini also broke key support (1900). We also had lower highs on the Cable chart. Had we taken out the day’s high off the first rebound of 1.5160s, then the story might have been different.

Now let’s look at a setup that also failed but I stuck around. The USD/CAD did almost everything I wanted at first – it jumped above 1.3350, hit the 1.3370s order block, and then went as low as 1.3330.

What did it not do? It never broke the market structure by taking out that swing low (15-min chart; dotted line shown below) at 1.3319.

USDCAD complete

So why did I stick around? I was thinking that oil would do the trick. I shared this chart of WTI with a colleague yesterday.


My thesis was: as long as oil holds that order block, I’ll give this USD/CAD a chance. Guess what happened? Oil held the order block and is up 2% today!!! However, that didn’t help me and I still lost out on the trade. The correlation didn’t hold.

There are a few points on this trade: first, I’ll sometimes stick around if the inter-market analysis is compelling. Of course, it doesn’t always work.

Second, we can see that USD/CAD could not break the market structure (and if you look closely, it held a bullish order block on the 15-min timeframe). If you look at both the GBP/AUD and EUR/USD examples, they both managed to break structure off the order block. Additionally, and this can be important, they managed to make new highs for the day on that push. That’s another thing to look at – when we break structure and make new highs for the day – that’s a good sign. That’s another tally for “this may work” column.

Water break.

Now let’s look at a setup that just completely failed – CAD/JPY. This was also my “favorite” setup on Sunday.

I was expecting the beige order block to hold. Did I buy?

Well, price sliced through the thing as if it was hot butter. If we go back to the whole support discussion, you would know that I was dead wrong on the level. No buyers whatsoever and we immediately sold off on the re-test from the bottom. This is when you immediately crumble up the paper you wrote the setup on and try to do a swoosh on the closest garbage can.

CADJPY complete

This applies to most of the setups on the JPY crosses. It didn’t even stop for a water break at the specified level. Look at NZDJPY – straight butter.

NZDJPY complete


Now that we went from top to bottom quality in terms of setups, let’s take it back to the middle again. The Cable setup situation was also seen in a few other pairs. Aussie rebounded off .6990s for 40 pips and EUR/CHF rebounded nicely off the specified support.

I wanted to bring it back to these setups because these are the hardest ones to deal with (at least for me). I think this is also the place where most people get screwed. It’s as if the market is evil and wants to really stick the knife to you.

What happens is that your setup starts out perfectly – you get the reaction you want. You’re in the money just long enough so you get attached. Then, instead of either getting out or letting your stop-loss get hit when things turn sour, people move their stop-loss or something along those lines. The fact that it worked at first messes up the mind – you still want the trade to be a winner. It worked at first, so it has to be right, right? We know the true answer to that one. Even if you don’t change a stop-loss, these losses are the hardest. The “why didn’t I get out earlier” ghost hunts you with great enthusiasm.

At the end of the day, I think it’s always important to keep in mind what trade you’re in: is it the best trade, the great trade, or potentially the bad trade? I’ll finish it off with an example from today because it’s common for the “great trade” to become the bad trade (that’s where the Cable, Aussie, and EUR/CHF fit if you ask me).

During the European session, the AUD/JPY, the NZD/JPY, and the CAD/JPY crosses moved up sharply. Thus, all the commodity currency JPY crosses caught a bid. The AUD and NZD crosses never came back to the original order block. The CAD/JPY though, came back to the hourly block and gave you a “second chance” to get in. It then rallied 80 pips.


Of course, if you didn’t book those gains, they were completely wiped out. Maybe the CAD/JPY rallies from here, maybe it doesn’t. However, I know one thing for sure, the CAD/JPY was not the “best” trade out of the three. That pullback was a good opportunity for a day trade, yes it was. However, that pullback tells you something about the type of trade it is: It was a great trade (at best) that may potentially become a bad trade pretty fast.

I hope this post is helpful and adds some clarity on how I do things. And maybe this will give an additional way to think about trade entries.






Trade Setups for Week of Sep 28th

Before every trading day, I make a list of all the potential trades that I see in the market. This is usually done during the weekend and then updated as the days go by. Of course, if I see an interesting pattern intraday, I jump on that too. The goal is to be fully prepared and mostly just execute during the day (otherwise how would I ever tweet ?! :p). Today I wanted to share a bunch of potential trades I see for the upcoming week.

I will attempt to mention as many of the factors that I’m looking at; however, many will go unspoken (such as, do we have a daily swing high or low on the daily that supports direction, is there a fib on a larger timeframe that I’m thinking will be hit, etc). If I was to write out everything, this post would be, ala Donald Trump, HUGE.

Trade 1: Long USD/JPY at 120.00/20.

USD/JPY has been in a range as it trades inside a daily triangle. On Friday, it pierced the triangle to the upside. We have a breaker order block at 120 (also a big level for the pair) which also coincides with the 61% fib of this last upswing from 119.20s. I don’t expect much here, but I could see a long targeting ~121 again or a bit more. Structure on the smaller time frames is also bullish.


  • Bullish structure, breaker block support, fib support,

Trade 1 USDJPY

Trade 2: Long EUR/USD at 1.1150s/60s (or 70/80s)

The Euro was resilient on Friday and managed to retrace most of the losses that came after the Yellen speech. The US GDP release also left a nice buying tail (beige oval on the chart) as it re-tested the order block at 1.1100/20s. On Friday, I had mentioned that the pair had to hold 1.1122, which it did almost to the pip. Any retracement to the 1.1150s and I would be looking to buy for the 1.1230s order block up top. This 1.1150s is a key level for the pair and also coincides with the 61% fib of this last upswing. The 200 daily MA is also giving support at 1.1140s.

Note that I could see the pair not quite making it to the 1.1150s – If Monday is to be an up day, it may stop at 1.1170s (this is based on stats). Thus, if we get a reversal pattern at this level (swing low on the 15-min chart, pin bar, etc), it may be the time to buy.

Factors: critical level, fib support, 200 DMA support, bullish structure on 1H and 4H, buying tail, respecting bullish order blocks

Trade 2 - EURUSD

Trade 3: Long EUR/JPY at 134.60s or 134.40s

The pair is above the 134.50s/60s zone which has been a pivot point in the last few trading days. I would expect this pivot area to be re-tested as we have some equal lows on the 15-min chart (red box). Additionally, if you see trades 1 and 2, I expect a little pullback on both USD/JPY and EUR/USD, which would mean that EUR/JPY also pulls back.

My ideal buying location is the 134.40s hourly order block, which also means that the minor trendline gets tested. A USD/JPY of 120.20 and EUR/USD of 1.1180 also equals a EUR/JPY of 134.38 (ta-da!). I would be targeting the 136 level which has an order block that has been respected and is also the 70% fib o the downswing from the 137 handle.

Factors: Bullish structure on 1H and 4H, equal lows/liquidity pool for pullback, trendline support, pivot level support, hourly order block support

(As a side note, I would probably sell that 136.00/20s on the first hit for back to 135.20s)

Trade 3 - EURJPY

Trade 4: Buy 1.5170s on GBP/USD

On Friday, we saw a nice stop raid on Cable. I’m generally bearish Cable, as you will see with trade 5, however, I think there’s a long potential on Monday. On the second attempt below 1.5160s, the pair left a buying tail (oval; 15-min chart) and now we have some equal highs at 1.5205. I’m looking to buy any retracement to that key 1.5169 level, targeting 1.5220s and possibly Thursday’s high (1.5280s).

Factors: Buying tail, equal highs. mean-reversion, liquidity pool at 1.5280s, pain-trade for all the breakout sell stops below 1.5160s

Trade 5 - Cable 1

Trade 5: Sell GBP/USD at 1.5329

Assuming we see some upside on Cable, I’m looking to sell the 1.5320s/30s zone. As the daily chart below shows, this is a key level for the pair. It also coincides with the 38% fib of this last down move. I’m also monitoring 1.5450s as a potential sell area, but I think that may be too far from market for this week. I would be targeting the 1.5080s level – a swing low on the daily and also the 61% fib of the move from the 1.45 cycle lows. 1.4950s is also a possibility.

Factors: key level on daily chart, 38% fib, bearish daily structure

Trade 5 - Cable 2

Trade 6: Buy GBP/JPY at 182.30s

First target would be 184.40s, max target 185. Thinking about the other crosses, you’ll see that a 121 on USD/JPY and a 1.5300 n GBP/USD equals 185.13 on GBP/JPY.

Factors: Bullish structure on 1H, hourly OB, 61%-78% fib zone of recent upswing

Trade 6- GBJPY

Trade 7: Sell USD/CAD at 1.3370s/80s

The Loonie has not done much lately. However, we have a nice selling tail above 1.3382, which also coincides with the 161% fib extension of the 1.28-1.19 move. The hourly order block up top is also pretty solid (we can see that it managed to create a shift in structure on the 1H to bearish). I like selling any spikes here. There will also be some liquidity above the 1.3350s given the consolidation on Friday. I would be looking for 1.3230s, max 1.3150s (which is a big pivot level for the pair right now and the 61% fib of the last upswing).

Factors: Selling tail, strong hourly order block, bearish structure on 1H, 161% extension resistance

Trade 7 - USDCAD

Trade 8: Buy CAD/JPY at 90.00/10s

We have a big V-reversal on the 1H and 4H charts. This push also cleared massive stops on the daily chart. I would like to buy the breaker order block which will also coincides with that broken trendline and the 50% retracement of the last upswing. I’m targeting 90.90s (equal highs) followed by 91.50s (critical level).

This is one of my current favorite setups. **

Factors: massive buying tail, cleared stops, breaker block support, 50% fib support, trendline support, equal highs

Trade 8 - CADJPY

Trade 9: Buy 122.80s on CHF/JPY

Market structure shifted to bullish on the 1H and 4H on Friday. It’s currently at the hourly order block which I’m expecting to hold (also coincides with 61-78% fib from recent lows). I would like to buy at 122.80s, targeting 123.90s (Friday’s high) and possibly the key level 124.50.

Factors: Buying tail below consolidation, broke consolidation to the upside, hourly order block, 61-78% fib from recent lows.

Trade 9 - CHFJPY

Trade 10: Buy .6980s/90s on AUD/USD

The Aussie is facing some tough resistance at .7137. I’m thinking it will sweep the liquidity below .7000 before making an attempt for .7130s (which is the 61% fib of the move from .7260s-.6930s). It held up well after the Yellen speech and the US GDP revision.

This has to happen between Monday and Tuesday. I think the Chinese data on Wednesday may start to weigh on any upside as it gets closer. (Thus, if we do get above .7150s, it could also create a nice scalping opportunity to do the downside).

Factors: Bullish structure on 1H and 4H, hourly order block, solid buying from .6930s, V-reversal

Trade 10 AUDUSD


Trade 11: Buy AUD/JPY at 84.20s

I prefer AUD/JPY over AUD/USD. We have a clear liquidity pool below 84.50s and the order block at 84.20s (also 38-50% fib zone of last upswing). I would be targeting 86.

Factors: bullish structure, liquidity pool above order block, fib support, solid buying from 83, V-reversal

Trade 11- AUDJPY

Trade 12: Buy NZD/USD at .6340s

The Kiwi ended last Friday on a high note. .6400 is strong resistance, but I think any pullback will just be an opportunity to buy for the challenge of .6450s (possibly .6500). The .6340s has an hourly order block, the 50-61% fib zone from the lows post the Yellen speech, and a consolidation zone.

Factors: bullish structure, hourly order block, fib support, buying tail, consolidation/value support

Trade 12 - NZDUSD

Trade 13: Buy NZD/JPY at 76.10s or 75.80s

If I like buying NZD/USD, the JPY cross probably makes the cut too. Ideally, I would like to buy the broken resistance at 75.80s (also 61% fib of last upswing from lows). However, I think all we may get is 76.00/10s. There’s a good order block at that zone. Target would be 77.50s

Factors: Bullish structure, consolidation support, fib support, hourly order block

Trade 13 - NZDJPY

Trade 14: Buy EUR/CHF at 1.0920s

Factors: Hourly order block, buying tail below 1.0900, 61% fib of last upswing, bullish structure

Looking for liquidity above 1.1000. This is a continuation trade as we held the 1.08 zone.

Trade 14- ERUCHF

Trade 15: Sell USD/ZAR at 13.90s or 1.14 big figure

This pair is near cycle highs. We had a swing failure last Thursday but the follow through on Friday was weak. Nevertheless, I like selling at market (hourly order block and broken trendline) or at the 1.14 big figure. I would be targeting 1.1360s or 1.1350s.

Factors: Bearish structure, swing failure, hourly order block, broken trendline

Trade 15 - USDZAR


Trade 16…Actually, break time. I have some setups on the EUR/XXX and GBP/XXX crosses vs. AUD and NZD, but will leave those for later.


Why did the US Dollar Reverse on Friday?

The New York session was a head scratcher in regard to the US dollar. Not only did the buck reverse for the day, it also moved half a point at 3PM Eastern time. It’s extremely rare (and I checked the stats on this one, so the word extreme is not being used lightly) for the USD Index to move more than half a percent on a late Friday afternoon. Granted, it was a quadruple witching day, which could have affected flows; however, it still doesn’t add up.

Non FX traders usually despise forex because of these types of movements. If you take a look at US treasuries, they rallied after the FOMC statement and continued to inch up all the way until the end of Friday. Equities failed to break upwards after the FOMC and then continued a steady decline. The USD did the same until the NY session where it retraced all of the initial movement against a lot of currencies. Hard not to say, WTF?

What caught my eye on Friday was that all the majors hit critical support and then reversed (these are all very visible levels on the weekly and daily charts): 119 on USD/JPY, .7250 on AUD/USD, .1.3000 on USD/CAD, .6450 on NZD/USD, 1.1460 on EUR/USD, 1.5660 on GBP/USD, and .9540 on USD/CHF. Same applies for the TRY, MXN, ZAR, and a few other currencies. This all coincided with the /DX also hitting support at 94 per the weekly chart below. This “confluence” of all major pairs along with the USD Index and EM currencies hitting resistance (or support depending on the cross) is not that common.

USDX Support

It’s expected to see some kind of bounce at these types of levels. These are the spots where you would look to get in if you held the belief that the USD would continue to outperform.

Thus, I’m attributing half the story of Friday as a perfect timing factor where the USD got a boost from several channels all at once. At the 11 AM hour New York time, the USD was back to flat and even a USD bear like me saw the risk of a snowball effect – clearly visible on the /DX chart. Here is my side convo with Pauly at the time:

Convo with


And so it happened. The USD squeezed any short-term weak hand who jumped on board after the FOMC announcement. The proxy for a “squeeze”” that I’m using is the volume on the USD Index, which was also replicated on other FX futures contracts.

USDX Index Volume

The volume at 3PM was some 8-10X the normal amount. And that’s being generous, because depending on the numbers you use, the ratio is much higher as there’s usually no volume at that time of day. The run for the exits left its footprint.

So some expected USD flows that moved just enough to start a squeeze is my story.

There’s plenty of people peddling your usual USD bull stories and linking it to the reversal, but I don’t quite buy it. Maybe for the Euro you can argue that the potential of more stimulus – after what happened at the last ECB meeting – is a narrative that will cap the EUR/USD. However, Friday’s reversal was universal. I mean, the USD/JPY rebounded 100 pips to end flat while bonds continued to rally and the SPX was falling off a cliff. So please don’t tell me the ECB caused the reversal. :p

And we can’t forget how the week as a whole went:

Week perfomance

As a result, my bias is still generally bearish on the US dollar.

For this upcoming week, we’ll have to pick the right pairs though The Aussie is my favorite followed by the New Zealand Dollar and some of the EM currencies (ZAR and TRY). The Caixin China Manufacturing PMI comes out mid-week and is expected to rebound to 47.5. If it doesn’t, bad news for Asian currencies.

Also, having a bearish bias does not mean I’m jumping on the USD short bandwagon at the Sunday open. The candlesticks we got on Friday are very bullish for the USD. Maybe we’ll need a day or two for that to wear off. I’ll also need to see some reversal signs that confirm Friday’s move as a false one.

And if the USD rallies, no worries, we’ll jump on that too. As per all the charts posted last week, most of my trades are intraday anyway (not a surprise to anyone who’s been around). My “bias”, which can change any day of the week, is only a filter I use when looking for trades.

What we’re really looking for is the same old stuff: consolidation, break of market structure, followed by a key level or order block that holds. All this is mostly done during the London and New York sessions. Below are some of the trades I had this week and it’s what I’ll be looking for next week. One was short Cable and the other was long Cable – meaning, who cares on direction.

Most people lose money because they have a bias and trade it until their death. It’s fine to have a bias. Truth be told, it’s fun and you can talk trash on Twitter. However, as a technical trader, it pays to follow the flows and trade accordingly.


Cable final
Cable hold

GBP precision



FOMC Game Plan

Given my position for this week (i.e. Senior Federal Reserve Correspondent at Twitter Finance, as stated on my bio…duh :p), I was going to share some thoughts on the FOMC meeting.

However, I arrived late at the party. Brannigan from Futex (@bjb_FutexLive) had this amazing piece on the FOMC that everyone should read. Pauly (@spz_trader) also did a great job covering a bunch of items in his interview with Anthony Crudele.

All in all, it left me as a jobless correspondent. Nevertheless, I’ll share one feeling just because.

There’s a notion out there that no matter what the Fed does, it will hedge itself (if it hikes, it will deliver a dovish statement. If it stays on hold, it will be hawkish). In between the lines, I’ve noticed the idea that not much will happen given this “strategy”. I happen to think that no matter what goes down, we’ll likely get some substantial moves. If the Fed hikes, I think no dovish statement is going to hold the flows that will erupt like a volcano. If they stay on hold, while the volatility may not be as sustained, I still think we could see some solid multi-day or multi-week moves. If the Fed does not hedge itself – welcome to Vegas because it’s going to be wild ride.

Money is already moving. Volatility in equities has increased. We saw some big moves in bonds yesterday (and it was a global thing). I don’t think that this is all just going to stop on a dime. The moral of the story: regardless of direction, this will probably be something you don’t want to fade the next day.

May the market lords bless you on this fine Thursday, September the 17th in the year 2015 A.D.

Oh and if you missed this cheat sheet for Fed-related conversations, get a copy.






Eurozilla hungry for 1.15

Last Saturday, I dropped this tweet below which prompted a few colleagues to ask me how I got there. Today I wanted to share my rationale with everyone as I still believe it to be relevant.

Get some coffee as this may be a long one.


First, let’s be sincere and acknowledge that we’ve been here before. Back in May, I thought that we might probe 1.15 (see The Battle of 1.15). As noted on the post though, I had been trading the Euro long up to the 1.14 handle (remember those annoying “Bill Gross is on my side” tweets?) but did not see the risk/reward in going long at those levels. After that weekend, the ECB dropped some comments about front-loading asset purchases and the Euro started a down trend to 1.08. For those following me on Twitter, I had a failed trade at the 1.11 zone and then joked that I would be buying Euros at 1.0750, 1.05, etc. As we rallied off 1.08 (I was there chirping longs again, see Third Update on the Euro) and later in June I had another post looking for 1.1420 and 1.1490 (see Is this how we get to 1.1490 on Euro?). Per this last noted post, I was also very bullish on Cable and thought that oil might break $63 to the upside. We got 1.1420 on Euro, Cable hit the targets, but oil went nowhere (and eventually we know what happened).

Why am I repeating all of this? So people who haven’t read my stuff can have perspective on my thinking for the last few months. Have I been bearish the Euro and just turned bullish? Have I been beating on the same dead horse for months? What was my thinking last time we were around these levels?

Now that we’re back to the top of the range, everyone is asking the same question: is the third time the charm? Try to say that question 5 times really fast…. :).

Do we have what it takes to break 1.15, or at least challenge it?

I dropped the 1.15 tweet last week because of the following (and all of these still apply):


Stan Druckenmiller went huge on gold. No matter how you slice it, this is a bet against the US dollar too. My new motto: “Bill Gross Stan Druckenmiller is on my side“. I could just stop here…


Oil and commodities (ex gold and silver) had continued to decline with oil likely to test $40. First, while it is true that lower oil likely dampens inflation expectations in both the US and the Eurozone, a lot of people have been missing out on the proper way to look at this paradigm. The ECB has set monetary policy until September of 2016. Thus, short-term lower oil movements will not spur changes in their policy anytime soon. Draghi fired the bazooka and will be at the sidelines for many months. Additionally, their currency is down over 20% versus the USD (think positioning). The Fed’s situation is a completely different story. The Fed’s policy direction is up in the air with the possibility of changes in the next 30 days – with a monster bias for rate hikes.

Thus, this means that oil’s effect on the USD (i.e. elasticity) is much greater than on the Euro. For every dollar that oil drops, the effect on the expectation of the Fed’s decision is much greater than on the ECB’s decision (which is nowhere in the near future). And if you think about it, most of the other major central banks have current policies that could change in the near future (e.g. Bank of England, People’s Bank of China, Reserve Bank of New Zealand, Bank of Canada, Swiss Central Bank, and to a lesser extent the Reserve Bank of Australia). Any surprise that the Euro is winning big time against all of these guys?


Note that the point above deals with oil’s effect on inflation expectations, not inflation itself, which is the third point (probably the most important one).

As we know, US ECI was horrendous a few weeks ago, PCE continues to be at 1.3%, and headline inflation continues to be near zero. Year-over-year final demand PPI also came in at -0.8% last week.

Going into the FOMC minutes, I saw it as obvious that the inflation talk would not be USD positive – there was no way for it to be so (assuming the Fed is truly “data dependent”). This is a big reason why I dropped the tweet on Saturday – this was one of the possible catalysts for a jump higher. This is true especially if you take into account the continued slump in commodities and the fact that the Fed had removed its comment about energy prices having stabilized. Given the change in language on the last FOMC statement, how would the minutes show positive comments toward inflation? Well, unless they said something like “energy prices are no longer stable but we somehow think that is positive for inflation?”…which makes no sense.

This is why I had a bid out right before the minutes and quickly went long EUR/USD as they were released and the EUR/USD held ground.


In my opinion, the second catalyst could be the Jackson Hole conference this upcoming week. Even last week, we already knew that inflation was going to be the main topic. You tell me how any of the points made on this conference will be that inflation is about to roar? And if you’re thinking about rent inflation in the US, it’s a supply problem and the Fed is likely well aware of that. Raising rates will not slow rent inflation, increasing supply will.


Euro core inflation (year-over-year) had come in at 1.0% and year-over-year growth had come in at 1.2%. Seriously,it’s amazing to me that some people saw this growth number as bearish. The year-over-year number was better than last quarter and continued its uptrend. Sure, the market was looking for 1.3%, but that “miss” is the most meaningless thing in the world. The number was still 1.2%.

It’s a bad  number because a bunch of economists got together and their medium forecast was 1.3%?

In my opinion,  this is one of the biggest crimes in financial news media – they put people’s focus on the  small beat/miss relative to the “consensus” instead of focusing on the actual number relative to the past numbers and the trend.

Moral of the story: Euro inflation continued to tick up (and the ECB is a single-mandate central bank focusing on inflation) and growth was coming along once again. While this may not affect your day trades, it should likely affect one thing: it puts the idea of EUR/USD 1.05 further out of question.

EUro growth


The market has been caught up in the “China story” lately. Greece out, China in. The Greece snap elections did not even take out 10 pips from the Euro.

For anyone watching the economic calendar last week, you knew that the China Manufacturing number was to be released and we were looking for a lower number relative to the last month. If you thought equities might sell-off on this, it was a Euro positive given the current correlation we have.


Well, the number was worse than expected. We all know what happened on Friday and it’s not like that number is going to change on Monday.

It’s funny how the USD/JPY did not react violently to the number, it moved some 10 pips. For anyone up during the Asian session, it was essentially free money, which does not happen often in FX.




Now we get to some technicals.

First, lets start with some bigger picture stuff. I haven’t seen anyone talk about this pattern below (well, I haven’t really been around either :p). The EUR/USD has been forming a bigger mirror picture of what it did from March to the beginning of April. I’m not a big fractals type of person, but this double-top attempt thingy with an extension is something I’ve been watching for a while. It points to above 1.15

Euro Daily Chart


Before last week, the EUR/USD held the 1.08 level and then broke market structure (i.e. took out the recent swing high) on the daily chart. With this mind, the daily was bullish and we had the possibility of a flag assuming we got some squaring of positions into the FOMC minutes release.

The pair had also left two equal highs that were very suspicious (1.1187 and 1.1220s). Given all of the points above, I saw it unlikely that the Euro was about to break down and go to 1.08 or 1.05 – an opinion held by many EUR/USD bears.

Before the FOMC release, I put this out:



Thus, if this flag was to happen (note that this is my thinking before last week), we would potentially be in the high 1.13s or 1.14 handle.

If got up there again, given the fundamental and expectation factors noted, the probability of challenging 1.15 had likely reached a tipping point.


The US Dollar Index (/DX) had a double top  that corresponds to the EUR/USD reaching the 1.14 handle. Again, this would bring us to the question above: Are we going to just top out at 1.1450 again?

Note that per technical analysis, you would buy the DX when it reaches those targets on the double top and bearish flag. Thus, this is a reason why we could see a retracement on EUR/USD (and thus why maybe we get that 1.12 as mentioned further down). I’m not sure chartists can outweigh positions traders trying to get out though…



Summing it all up, we haven’t reached 1.1450 but we’re pretty close. The Euro had its best 3-day move since I don’t know when. Positioning is still very long USD versus the Euro. As Aurelija notes, shocks don’t favor the USD.



Markets are not forgiving. To think that the USD bulls will be saved on the third strike of the resistance level seems highly unlikely to me – especially because US inflation has not ticked up, US growth estimates have been continuously revised downwards, and Euro inflation and growth has gone up. Oh yea, the Greece thing is kind of resolved too. Thus, the Euro is in a better situation versus the USD relative to the last time it got up here.

Right now, I think the “best” location to buy EUR/USD is probably on a challenge of 1.12, assuming we get it as we go into the Jackson Hole conference (think about the same type of price action we saw pre-FOMC minutes….a big spike the week before with some position squaring in the first half of the week). If not, we’ll just have to hit the offers that are available.

While we could fail at 1.15, it’s important to note that a hold will likely be explosive. Literally every single sell-side bank has been bearish EUR/USD . After the Greece thing was over, most banks were like “we think short EUR/USD is the best way to express USD longs“. We all remember that line in every research piece, right?

If these banks (and their clients) are truthfully positioned for such downward price action, I say no more.

And none of them have raised their EUR/USD forecasts yet. Sorry, Normura just raised its forecast. How many more discussions are happening over the weekend?

So, why challenge 1.15 this upcoming week?

This week is probably as good as it gets given the Jackson Hole conference (i.e. catalyst). As always, manage risk and try to find good entry points that offer good risk-reward. No one can foresee the future, but we can definitely position appropriately for what may happen.

What are imminent signs that we’re about to challenge 1.15?

If the EUR/USD starts to consolidate above 1.1380 and the 1.14 handle. This means that the market has found value at these levels. The last two times around, sellers stepped in as we hit the 1.14 handle. If no one steps in fast as we reach those elevated levels, it means that they’re probably not there anymore.

And it does not seem like we’ll have a lot of option-related action at these levels trying to hold price down. There’s only one option strike of 1.1379 hanging out there.

FX options



Greek debt don’t matter

One last post on Greece.

I think it’s pretty clear that Greece is not Lehman Brothers – so I won’t go there again. For that kind of talk, see this previous post.

Here’s a quick roundup of the Greek debt done by The Guardian

That article points these crucial items:

  • Greek debt is about EUR320 Billion
  • 75% of the Greek debt is held by “the institutions” and such
  • They mention the ELA loans- however, this number is deceiving. Greek banks have had to put up good collateral for these loans (with Greek bonds not being accepted since the ECB dropped the special exemption). Even in a default situation, these collateralized loans would be in a relatively comfortable situation.
  • All of this Greek exposure equals about 3.3% of the Eurozone GDP per Barclays.

On this last point, I’ve seen people use it in what I consider to be a deceiving manner – saying “look, this much will disappear and we’ll be in deep trouble”. First, if Greece defaults, I doubt they’ll escape with paying nothing. They can be slick but not that slick.

However, the most important thing is that the Greek debt was never expected to be repaid tomorrow. That number extends for some 50 years with an average maturity of 16.4 years. Thus, nobody was looking to see that money at time soon. At the end of the day, the direct and immediate impact on the Eurozone economy is a fraction of the numbers that people throw around – I would extrapolate that for these reasons the market is like – screw it.

Lastly, the money used for Greece came mostly from governments that put funds into special programs and things of that sort. Let’s be serious, if that money goes poof, it’s not the end of the world. “The institutions” will be just fine if they don’t get the money.

I think of it like a cool Kickstarter project that you pledge $25 – it would be nice if you got the product and it worked, but you won’t be crying a river if it doesn’t work out (you may post an angry comment online,but that’s about it).

I promised not to mention Lehman, but I lied. Here are some things that Lehman was or did that Greece is not or does not do:

  • Be a  counterparty in trillions (notional amount) of derivative instruments.
    • Think about this one. That CDS where Lehman was on the other size, who was going to pay you on that daily mark to market?
  • An active creditor or counterparty in various loan markets
  • A larger debt load and a sizeable amount of commercial paper (i.e. short term loans that people expected to be paid pretty soon)
    • And when a guy like this doesn’t pay, everyone looks around and says “uh oh, what about if Merrill or Morgan Stanley doesn’t pay me?”
    • If Greece does not pay up, everyone will be like “dammit, why did I do that”. Very different market extrapolations.
  • Held very large amounts of other people’s money. How do you know those are not compromised?
  • And so on

Moral of the story: the Greek numbers really don’t matter. I agree with The Guardian – longer-term political and societal issues within the country could be the real problem. Those usually take time to develop though.


Euro trickery

What a day it’s been today. The Euro pulled the rug on everyone – first taking out any weak longs and then squeezing anyone who was late to the party.

The market had all weekend to think about the Greece thing. The net result was the Euro gapping some 200 pips, but that was it – nobody left to sell. As mentioned on yesterday’s post, the key was to solely watch price. Anyone who held positions based on a belief either saw their profits evaporate or lost money.

The US Dollar was initially up but is looking to finish down almost 1%. The EUR/JPY was the talk of the town. I went long during the London open and it worked out (out of it now). This is the chart I had posted at the time:

June 29 - EURJPY

We made a pop and then retraced 61% to a buy zone which also coincided with a 15-min order block. That was all I needed, especially given time of day. It was easy to define a 50 pip stop and see what happens.

There was also another thing that happened in the beginning of the Asian session that was in the back of my mind. Key “stop” zones in most pairs were hit. I say key because these were “continuation” areas where you would expect a lot of buy and sell stops. As these areas were hit and instantly rejected (while trapping a bunch of people), you knew something smelled funky (ala swing failure pattern). Based on this, I also took some other trades like this long NZD/USD. Chart from European session:

June 29 - NZDUSD

I missed an entry on this NZD/CAD and it’s up over 100 pips!! (current .8507). Same scenario.

June 29 - NZDCAD

The same applied for Aussie, GBP/AUD, AUD/CAD, EUR/CAD and a few others.

Going forward, we still have to be cautious this week. If price on the Euro and other risk assets turn, one must adjust accordingly or get crushed. However, 24 hours ago, the EUR/USD and EUR/JPY were end-of-the-world bearish. Now, it’s looks ultra bullish. It’s food for thought. This is also the type of environment where the “unthinkable” happens, such as EUR/USD 1.15.

I still haven’t forgotten about that 93.30 on /DX either (see post Reviewing the SFP on USD). If we get close enough, it’s a high probability event that we at least clear stops below 93.00/10.

Trades I still have on deck:



June 29 EURZD


June 29 - USDCHF



June 29 - GBPJPY


June 29 - GBPNZD