Tuesday, June 13, 2006

Traders Helping Traders Big Weekend Edition

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Questions and Answers - Lesson du Jour
Question:
You've heard me refer to last Thursday's session in July Sugar as being a "perfect" set up to sell the market on Friday. What was so perfect about it? HINT: there are at least three things you should be able to spot (and there could be as many as five)

Answer:
Thanks to Dino Dave for his efforts at the forum. Unfortunately Dave was the only one who took a run at the question. Dave and I were thinking along the same lines on some of his answers, but we differed on others (that's not bad...just different). Either way the end result was the same.
The reason I was excited about selling sugar was:

1. we have a very strong downtrend (see DMI)
2. we just had RSI hook lower off a test point
3. we have a trendline test

Those were my big three. You could have also added:

4. the market already reacted off 1600's support and the mountain of resistance above the market at 1650 and 1670
5. the long term charts show prices breaking support and holding resistance. How'd you do?

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Got a question that needs answering like an itch you can't scratch? Send it along to me at [email protected] and I'll be happy to try and clear things up for you.
- Erich

Currencies Market Overview

A reactionary week for the currencies last week. Most of the US sensitive markets went into decline as the USD found some support and posted a pretty decent rally. By the weekend it looks as though some of the markets formed resistance which could give us another chance to get in this week.
While you can easily transfer these trades to any market you like, I think the strongest trades are in the Aussie, British Pound and Yen.
Australian Dollar

There is nothing fancy about our Australian Dollar trade this week. The market is firmly in a downtrend and remained in a downtrend until it ran into the support at 7400 last week. After a couple of runs at 7400 the market gave up and rallied on Friday.

There are a couple of interesting things to note about Friday's session. First you will notice that it is a gap and fade day. This means that the market opened high and moved lower for the rest of the day. In most cases we can expect to see the market continue in the direction of the fade the following day as well. You'll also notice that the market topped out at the 7500 resistance line, which is very near the price trendline as well as being a significant resistance level.

The only thing I don't like about Friday's session, as a signal for shorting, is the opening gap. Gaps have a tendency to occur in quickly moving markets. This means that there is a chance the AD will continue higher. For this reason we need to be choosey about where we are going to enter the trade.

While I would prefer to wait until the market broke the 7450 support on the other side of the gap that would leave far too much money at risk for a feasible trade. Alternatively we could look at selling a break of the 7465 – 7470 support just below the market. Exit stops will go above the 7500 line. Profit target is the 62% retracement level and support at 7330.

All in all it looks like a promising trade. The only glitch is that the contract is nearing expiration, so if rates take their time heading lower you might have to pay another commission to flip into the September contract.

SELL June Australian Dollar at 7463
Exit Order: 7503
Approximate Risk Exposure: $400 per contract
Profit Target: 7333
Approximate Potential Profit: $1300 per contract
RRR: 3:1
Degree of Risk: Low to Moderate
British Pound

After several weeks of a rather spectacular rally, the British Pound moved into bearish territory this week. The market officially became a bear market when rates crossed over the 20 day moving average on Wednesday. Rates continued marginally lower for the remainder of the week before forming support by the weekend.

While we are likely to see a bounce off this support on Monday I would consider setting up a sell order below here for when the market moves lower. Why do I think there will be a bounce? Because the double hit on support for Thursday and Friday also coincides with the 38% retracement level. This bit of added punch could send the market temporarily higher.
Support is technically in the 183.60- 183.70 zone; however it could be argued that this is merely an early reaction to the 183.50 support line. Therefore I'll try to give the market a few extra ticks and short from the other side of 183.50 and the 38% retracement line. Exit stops will go above Thursday's high and the intermediate resistance from last April. Profit target is the 62% retracement line where there is also a bundle of support at 179.50. Of course we should expect some sort of reaction at the 50% level as well, but right now it doesn't look like there is enough there to hold it.

SELL June British Pound at 183.49
Exit Order: 184.57
Approximate Risk Exposure: $675 per contract
Profit Target: 179.67
Approximate Potential Profit: $2387 per contract
RRR: 3 1/2:1
Degree of Risk: Moderate to HIGH

Japanese Yen

The reason I chose the Yen over some of the other markets is the current strength of the trend. DMI shows a reasonably strong downtrend and it could be building as well. Strong trending markets (or markets that have the potential to be strong trending markets) are the ones which we want to focus on.

But all is not rosy with the Yen. Did you notice the big gap and support that held the market up on Thursday? This is significant. Gaps have a way of highlighting important support and resistance levels, so we could see a continued bounce higher from here.

As a result I want to make sure I only sell the Yen IF it trades through last Thursday's low. Thursday's session clearly shows us how low the market is prepared to go at this time and the gap shows us why.

I'd probably be pretty quick to sell a break of 8728, as that is likely an overrun of the 8730 support line. Exit stops will go above the intermediate resistance at 8777, although I would have preferred to be above 8780 somewhere – but this should do. The first profit target is the obvious line of support at 8550, but watch out for possible support on the bottom end of the gap at 8600.

SELL June Japanese Yen at 8727
Exit Order: 8777
Approximate Risk Exposure: $625 per contract
Profit Target: 8563
Approximate Potential Profit: $2050 per contract
RRR: 3:1
Degree of Risk: Moderate to HIGH

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