Going to Extremes


The dollar and EURUSD have both reached short-term extremes and should bounce back strongly — if not today then very soon. Here’s the action as of the NFP print:

And, here’s DX’s action since then — falling out of the channel it’s been in since July 6. Does the dismal NFP report guarantee QE3?  The market is certainly acting like it.  Perhaps a case of buying the rumor, selling the news?

At this rate, the next natural stopping point is the 79.90 level, which is both a 1.618 and a .786 target.  But, this feels very overextended to me already.

The daily RSI is already at its lowest value since May 2, 2011, when the SPX topped out at 1370.58.  There is a potential landing spot down at Point X, which probably correlates with the 79.90 level.

I expect SPX to top out somewhere between 1435 and 1445. Note the long term RSI TL just above current levels on the chart below.  I’ll play along on the upside, but am watching for the first signs of petering out.

UPDATE:  10:15

SPX is also very overextended, with the 60-min RSI nearing a critical overbought level.  Note the market’s reaction each time RSI tagged the highest TL (red, dashed.)

EURUSD’s daily RSI has tagged a TL coming off the highest point in the past 15 years — March 17, 2008.

If it is expanding to a new channel (red, dashed) to the right (chart below) it is obviously very overdue for a back test of the previous one.  Such a move would potentially take it to the 1.2933 level in mid-October — the .618 of the move down from 1.3485 in February.

UPDATE:  11:00 AM

Just saw an interesting blurb from Dow Jones.  Over the past 28 years, the August NFP stats have missed expectations 3/4 of the time.  For the past 10 years, the average adjustment after the fact is 62K.  I imagine the Fed is also aware of these statistics.

What would happen to this market if the Fed didn’t pull the QE3 trigger next week?  Or, how about a “Nein!” to ESM from the German Constitutional Court?  To my eyes, QE is very much baked into the dollar, the euro and the stock markets.

More in a few.

UPDATE:  12:00

A reminder, EURUSD is still back testing a 12 year old channel line.  It might get all the way there, and then again, it might not.  The diagonal purple trend line that cuts through the 1.272/.618 Fib lines dates back to the all-time low (.8227 in Oct 2000) for the pair.

Zooming in, we can see the recent channel action a little better.  If we measure the quick drops by adding the purple channels, we can see that this drop has already taken longer than the last two.

The pair went from its high to its low in only six months in 2008, bounced hard, and made another higher low five months after that.  Total time for the move:  11 months.  In 2009, it took only 7 months from the high to the low.  This time, we’re still working down from the high in May 2011 — 14 months so far.

Why?  The two previous drops benefited from a flight to safety (the dollar) that wasn’t hampered by $16 trillion in debt.  As bad as things are for the euro, the dollar is determined to give it a run for its money.  Whether we reach 1.10-1.12 or not will depend completely on the dollar’s ability to remain the cleanest shirt in the hamper/tallest jockey in the stable/most honest politician in the race.

More in a few.

UPDATE:  1:50 PM

I’m concerned that if/when this market cracks, it’ll go fast.  I’m setting stops at 1432 and will go short on any move lower.  My top scenario is a quick, but contained drop to 1425-1426, then a possible move higher into the German court decision on the 12th and FOMC on the 13th.

I’m not an EW fan per se, but I count an obvious five waves up from 1396 on the 4th.  I’m watching the channel setting on up on the 15-min RSI.  The asterisk marks a critical support point.


UPDATE:  3:15 PM

Apparently someone accidentally pulled the extension cord that powers the stock exchange; it’s been down for the past five hours and they just now noticed.  Just kidding, of course, but it sure feels that way.  Normally, this means big moves ahead, and I think this is no exception.

Here’s some charts I’ve been playing with.



McClellan Oscillator (NYSE) vs SPX:


UPDATE:  3:45 PM

Unbelievably orderly descent of the 15-min RSI on SPX.  Almost as though it was being orchestrated…

Prices, meanwhile, have made a perfect little pennant.  Ordinarily, these break upwards.

My inclination is to close out my long positions prior to the close.  Again, not thrilled with the idea of spending the weekend wondering whether someone is going to say the right thing or the wrong thing and send the market up/down 30 points on Monday’s open.

UPDATE:  3:57

Putting stop in here at 1437, will see if there’s a last minute spike.  Otherwise, selling on the close.

UPDATE:  3:00 PM

Back to cash for the weekend.  Done at 1437.80 for 5 pts and change on the day.

That was a heck of a lot of work for a whopping 3.24% the past four days.  SPX was up 2.2%. Definitely one of those weeks where the reward wasn’t quite worth the effort.  I’m pooped.

What’s more, my 13 year-old daughter leaves tomorrow for a week on the East Coast  — seeing historical sites from Boston to D.C. with her schoolmates.

I’ve been on the other side of the world from her many times, but this is the first time she’ll be the one far from home.  Not sure how I’ll handle it…but, she’ll be fine.  She makes friends everywhere she goes.


Hey, how about a contest around FOMC day just to liven things up?  How about a free 6 months membership for whoever gets closest to the close on the 13th?  I’ll put up a page this weekend with the details.



Going to Extremes — 8 Comments

  1. Hello PW, when you have the contest around FOMC day, please make sure BB does not participate in it.   It won’t be fair.  

    Meanwhile, it is a daring task to do day trade like you do.  For the rest of us, we would probably be better off with a longer time frame such as a few days. 

    I am not against day trade.  However, there is a finding.  Since in many cases, the market is ramped up before its open.   Consider in this scenario for a big ramp up day:  Suppose an investor does day trade with no position in the morning.  By the time the market open, he/she already misses the ramp up.   So, to go long,  he/she has to buy on top of the already ramped up price.   Maybe he/she can go short, after the ramp up.   But for short, there is the danger with the follow through of the ramp up.   It can go higher after a big ramp up.

    On the other hand, an investor can have positions for a few days in advance to anticipate some ramp up days.  Once the market open, the investor can sell with huge profit.  Of course, you can say what if the market tanks pre market.   That’s true but the chance for ramp up  is higher than market tank these days.

    Recently, two thought of investing hit me really hard.
    1.  Someone said it is stupid to trade.  He recommends buying blue chips such as MCD, HD, MO, PM to earn the dividends and the big stock increase over time.   I can’t argue with that.  The dividends and stock price increase are great and they don’t require any effort. 

    2.  Someone said the economy did not really recover.  He said the ramp up in stock market is not real.  The big sharks try to get your money eventually.   However, it may be true that the economy is not that great.   But the wealth in the stock market is real for those who make it.   To add insult to the injury, the stock market is ramped up so much, but I can’t seem to benefit from it.   Just because I believe the economy is not great, I don’t have much risk appetite.  That’s why I did not profit from the ramp up.   My belief is holding me back from taking risks.   So, I am thinking if we can ignore reality and fundamental (assuming the economy is great) , and take greater risks. 


    • Day trading isn’t my preference — far from it.  You’ve been reading this blog for a while, so you know I much prefer directiona;/swing trading based on fundamentals and harmonics.  Just making a little money until later this week when the German court and FOMC event risk is past.  Right now, that’s the ONLY thing affecting markets.

      As far as technique, a pre-market ramp is reason for caution, for sure.  That’s why I always recommend stops — no fun going long when it gaps and craps, or vice versa.  Having said that, making a few percent a week is a decent return.  If you could do that consistently, you double your money every year.  The problem, IMO, is it’s too time consuming and it wears me out.  Will be glad when the verdict is in and we can get back to normal — hopefully later this week.

      Buy and hold is fine, but what if we’re coming up to another January 08?  Didn’t work out very well for that strategy then.  If the doomers are right and we’re on the verge of another depression, it would be a real lousy strategy.  Blue chips fell along with everything else in the 30’s. 

      Re the economy, I agree.  We’d be in the same or worse condition as eurozone if we hadn’t started printing like crazy along w/ massive deficit spending.  Doing so postponed (not prevented) the pain, and allowed the market to ramp — the liquidity has to go somewhere.  But, the music must stop sooner or later — probably with higher rates, which will mean higher inflation and economic pain. 

      Don’t confuse a horrid economic backdrop with a lack of investing opportunity.  We can make just as much in a downturn as a ramp (unlike the buy and hold crowd.)  Until then, I’ll try to anticipate the trends and tag alone, using stops to mitigate risk of being wrong and trying not to get too wedded to a macro view.  This is new ground for the US economy and the old rules might not always apply.

  2. with traders net short on USD for the first time since sept.’11 (when euro fell from 1,45 to 1,31 in just over a month) and euro net short positions more than halved since june 5th (these are data as of august 28th) I think today might be the final short squeeze. I think it is going to be an overthrow rather than a break out of the little rising wedge we have been in since last month.

    • good thinking, fred; my gut is that you’re right on the money.  What would really help is one last gasp to 79.90 on DX, 1.2869 on EURUSD, 14.3 on VIX and 1440-1443 on SPX.

    • I like it.  ADX follows the RSI model very closely.  TOS doesn’t do a good job of presenting it, though, so I never include it in my charts.  Thanks

  3. Grabbed EUO pre-market on EURUSD near 1.277 looking for the same reaction off that top white channel line.  I have a little higher target on the SPX at 1466, but I’m sitting on lots of cash waiting for a good entry.  QE3 is driving the market again…Sept 13 disappointment by BB the catalyst for a drop?

    • that’s what I keep wondering.  Unless we get a decent plunge between here and there to reset things.  If the euro “fix” keeps pumps the market enough, can they delay QE3 till Oct 23-24, talking it up just enough to keep the game going?  I still think BB would rather not do it at all unless absolutely necessary.