Previous week Market Recap:
S&P, Breaking News and Volatility.
This week we experienced a mini turbulence in both stock and currency market, due to the comments of Ben Bernanke, the chairman of the Federal Reserve.
As traders, we all know how market participants scrutinize every word of the Fed, as his words define the present and future of the economic policy of the United States.
Sometimes though, the interpretation of the participants is controversial, leading to high volatility and uncertainty in market direction, as we have seen this week:
As you can see, on Wednesday (The 5/22) there was a strong rally early on the morning, which quickly faded, and later on we saw the market turn into red.
What were Bernanke’s words that triggered such a bizarre market behaviour? how come the market sentiment changed so fast? We all look for a logical reason, right? Well, this time, the market proves again to have his own “logic”.
On the morning of the 22ed Bernanke stated in front of the Congress that the central bank could consider tapering [Lowering] its bond-buying program in the coming months if the U.S economy improved. This is good news for the economy and the market, since it suggests that the economy is in fact improving.
Here is what Bloomberg had to say about that event:
“…as optimism over stimulus fades”, that’s a nice try to explain the move but not quite convincing.
Once again, the Market’s elusive nature hit those who trade solely by the news. News are just an indicator, a piece of knowledge that is relevant for a few, and sometimes short moments. Therefore, the market should always be traded with regard of the actual price action.
An interesting hint about the morning reversal could be drawn from the relatively big green bars and high volume accompanied with our Magic Bars indicator plot. This kind of pattern is frequently seen within an exhaustion of an either upward or downward big move:
For those who live outside of the U.S and have a hard time tracking the american holidays, tomorrow is the Memorial Day and therefore markets will be closed all day.
USD Vs. JPY
Another interesting development is the recent events regarding the Japanese Yen versus the U.S dollar, as known as the USDJPY.
An important milestone has been reached this week. The dollar hit over a 4 year high against the yen, just after Bernanke’s speech:
This steep looking upward move brings concerns whether we are about to experience a sharp correction. As a general rule, currency prices are much more sensitive to economic news and local central banks actions and speeches. Next we are going to explain an analysis method which we will apply later on the USDJPY chart –
Traders look at market indices such as S&P Index or the Dow Index to gauge the weakness or strength of a certain stock by looking on the relative performance of the two. Example:
Here, Facebook (FB) in relation to the SPY is weak. When the market goes up FB goes sideways, and eventually drifts lower.
This is an important concept for traders. Some use sector indexes as a more refined benchmark to gauge the strength of the underlying stock with. If so, what is the benchmark used to gauge the strength of a certain currency?
The answer is the Dollar Index (DXY). The same way the Dow is comprised of 30 large publicly known U.S companies, the Dollar Index is comprised of 6 different currencies, each with a different weight. Just for your general knowledge the 6 currencies are: Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and the Swiss Franc.
Placing that Index above any of the currencies chart, can give us an interesting perspective of the strength of the currency being compared.
Let’s get back to the Japanese Yen:
Carefully observing the chart, we can see the weakness of the Dollar Index (Top chart) relative to the Japanese Yen (Lower chart). Watch how the Index tends to move lower as the JPY “Hold” back and “refuses” to go lower, That’s a classic sign of strength.
Reaching the conclusion that the JPY is strong, all we have to do is look for an entry point. We like to attach this kind of strength pattern to our Inside Bars indicators which identifies the potential breaking points. This time there’s a perfect Long position that extends for about a week.
Notice how big is the reward regarding the risk! (The Inside Bar’s range formed by the parallel horizontal lines).
That’s it for the week, have a nice holiday and see you next time!