MooTrades.com

US equity markets are giving back gains seen earlier in the day and now turning negative, crossing below the VWAP (1014), testing the pivot point (990) and set to possibly retest support (960) on the S&P 500 if the selling continues at this rate. This is likely because redemptions and liquidations are continuing from individuals, banks and funds. Keep an eye on 960 as that’s an important level of short term support. We are still looking for the correction in the dollar to continue.

Markets have been a wild seesaw ride through positive and negative territory all day.  No sign that this indecisiveness will let up before a decision is reached, one way or the other, by the US Congress.   Commodities markets are mixed as players are uncertain of where to put cash to work.  Foreign exchange markets have shown some dollar strength vs. European currencies.  Overall, a day that most could have slept through without regret.

The Fed is quickly working with central banks around the world to increase dollar liquidity availability in an attempt to ease strains on the short term credit markets.  These moves further suggest that global rate cuts may be in the works as the stresses on growth continue to outweigh inflation concerns in many economies.

More info in the official Fed press release here: http://www.federalreserve.gov/newsevents/press/monetary/20080929a.htm

Could an interest rate cut at the ECB be in the works?  We’ve seen interesting overnight activity indicating the rate dropped to 3.0% as liquidity was flooded in to the markets in an attempt to avert a panic over the bail out of Fortis and other troubled financial institutions.  Risks to growth seem to be worsening faster than the risks of inflation in the Euro zone.  Significant rate cuts by the end of the year seem likely.

Overseas the Brits nationalized some more financial institutions to “boost” confidence.  The GBP fell 475 pips to below 1.80.  Concerns about the economy are growing.  This is the biggest drop vs US dollar in 15 years.

Home builders have had a very rough run lately. It’s probably not over by a long shot either. Those engaged in the industry generally understood that residential real estate was overbought and inventories would eventually grow very large if building kept on pace. These same builders kept building at the same pace, all the while creating an astronomical number of unsold developed properties in their portfolio.

With the credit crisis stifling mortgages and home sales, these builders are in a very risky position with portfolio’s full of unsold homes that are now depreciating in value by the day. Without substantial rate cuts, the housing market will likely not rebound for a few years. This will force many home builders to sell their inventory at a discount and others to declare bankruptcy. It may be a good time to watch ITB (see below chart vs. CFC) and consider shorting it.

I’ve charted ITB against CFC because I believe they follow a very similar downward trend without support. CFC is guiding even lower and ITB is likely to follow as the situation worsens throughout 2007. Traders may want to short ITB and go long gold, US treasury bonds or Euros for a potential recession hedge. Good luck!

Forex traders may want to go long Euro short US dollar and reverse positions on any indication that the trend is over. Stock traders may want to consider adding the FXE ETF to their portfolio as a hedge against the weakening US dollar. Keep an eye on this trend because it will also eventually raise the price of imports, goods and services and potentially increase US exports, too.

The weakening dollar will also likely cause an already established “flight to quality” run to bonds to continue.

Today, as the dollar weakened, gold rallied in response by 2%. Traders also speculate that this rally in gold is in response to the anticipated US Federal Reserve rate cut on September 18th. AUY along with other gold miners also rallied in response.

This morning, with tremendous support from the US futures, European markets and gold, the world optimistically awaits the Federal Reserve’s speech during the conference on housing and monetary policy in Jackson Hole, Wyo. at 10 a.m. EDT.

Currently S&P futures are up about 1%, gold is up about 1.5% and the German DAX is up 1% all in anticipation of good news.

Why is the world optimistic about this? Let me present a few views:

1) President Bush has stated he will expand the government’s role to deal with the subprime mortgage credit crisis.

2) Ben Bernanke is expected to at least give traders and investors clarity about his views on the economy. There is also (somewhat irrational) speculation that Dr. Bernanke will give indications on his Federal funds rate policy decision at this speech.

3) Bond rates indicate traders expect a rate cut in the short term.

4) A lack of volume because of the upcoming holiday makes the US market very volatile.

5) The weakness of the Yen has lent strength to US markets as the carry trade may be winding up again.

All of this is important to consider today. What does it mean?

If the Fed speech gives no clear indication of policy or interest rates we may see market weakness. That market weakness may be exaggerated to the downside because of the low volume. This weakness may be temporary, as President Bush will be speaking around 11AM EDT regarding the subprime mortgage credit crisis. It will be very important to watch bond yields and the Yen today for signals.

Alternatively, if Mr. Bernanke gives the market a high degree of transparency in his speech, and it gives markets the indications it wants to hear about a rate cut, we will absolutely see an unprecedented rally.

My advice? Watch and wait. If you are an experienced trader you may want to trade the speech.

We see the Japanese Yen (JPY) playing an ever increasingly important role in the American markets during this low volume August trading. As one floor trader has said, “It’s evident that the trade between the Yen and the S&P futures are directly inverse with this lack of activity.”

This chart illustrates the directly inverse relationship between the Yen’s strength and US market weakness this week. This relationship exists because of the carry trade. It will be important to keep watching this trend until the Federal Reserve speech Friday at 10:00AM, when traders will be paying much more attention to Dr. Bernanke.

Another interesting chart demonstrating how the carry trade unraveling affects all asset classes, including gold. In the chart below I have JPY (vs US dollar) compared with gold (rather than the reverse in my previous entry). As you can see, JPY and gold have a direct correlation, much more than I expected.

Good luck trading!

Hedge funds and brokerages typically borrow low interest rate Japanese Yen (JPY) to buy US and European equities. This creates a flood of cheap liquidity boosting the markets. What happens when this situation dries up?

Below you will see a chart of the S&P 500 (blue candlesticks) with the US dollar vs. JPY imposed above (the red line). This illustrates that the weaker the US dollar is vs. JPY, the weaker the US stock market. It is very important to note this trend and watch it closely.

Good luck trading!

It’s important that every investor realize that we are not limited to stocks, mutual funds, ETFs and bonds. There are other asset classes, such as commodities and currencies (forex) that offer profit, too. Trading anything requires consistency and a system to be regularly successful. The same systems that analyse stocks are applicable to intraday trading of foreign exchange futures.

Remember that this is a very speculative play that requires sophisticated technical analysis skills and an established system to successfully trade.

The first system is bottom trading a downward trend (note that the EMA is moving downward). That means, if we see the Euro become “oversold” (or if it’s sold on very high volume, and dips below the lower Bollinger band) it is likely due for a technical rebound upwards. Because of the weakness at this point, I only hold the Euro until it peaks the EMA and sell the futures contracts there. This is a bullish sign, but it’s also a point of resistance.

The second system is momentum trading. I trade the upward trend, purchasing futures contracts as it moves above the moving average, which you will notice is establishing an upward trend (notice upper/lower bands). As the Euro crosses below the EMA again and the bands begin to widen indicating increased risk, I sell.

The US Dollar slid vs. the Euro amid expectations of lower economic growth in the US, pushing gold higher. US Markets are poised to open higher as better than expected earnings from General Motors, Waste Management and Sun Microsystems beat Wall Street expectations.

UPDATE: The dollar’s strength was increased by news of slower domestic inflation. This caused a sharp turn-around against the Euro and as a result pushed gold futures lower.