Say, about that unwind...

I was gonna title this "Is "The Great Unwind: Part II" upon us?" and try and submit it as a news story, but then thought nah, too much risk of people actually reading it.

So I thought this place might make for a much nicer ridicule target-practice ;p

Faithful James16 thread readers will already know about my constant "oh oh but the DJI could be just about to crash again" doom-and-glooming, and I tried to write a "wannabe serious" article about it as well...

Comments from some FA folks as well as others are welcome, if only about the language and writing style, let alone the content.

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Is "The Great Unwind: Part II" upon us?

First, let us look back a bit...and in my case, not from an analysts/FA, but from a chart perspective.

I'm a bit torn between "Market Insights" and "TA", but really TA is always both.

Back in July, when we were just peaking out on the DJI futures at 14100 and the DJI at 14000 figures, headlines reading "new record high" and whatnot - giant red warning signs were flashing on the charts.

From overenthused rallies we were suddenly plopped into a sideways lull and dojis started to appear - right at all time highs, right at a conveniently simple, nice round number - the great 14k.

This alone may not have been that terrible, but rumorings of the mortgage crisis were starting to amass and when people started to realize what was what, the stocks got hit and got hit bad, and the DJI, S&P, carry trade(xxxJPY) and the exotics(AUDUSD, NZDUSD) took big, bit hits.

8 weeks have passed, and now we have spent this time wondering: was this it?
Are we back to business as usual?
Has the nice wizard magicked all our troubles away with a nice, swift 50bps cut?

No.

Banks and hedge funds are reporting collapses in their portfolios every day, earnings warnings and a vast unknown extent of "hidden", unrealized, unpublished "toxic waste" remain.

This is our scenario.

So nothing has really changed - or has it?

I am seeing signs on the charts that paint a scenario in which - unlike the last time, in which the USD rallied - there might a slight shift in the way things are "done" - or perhaps it is just a beginning feint.
The cores, USDCHF and USDJPY, have begun a steep and ugly descent, seemingly alone, and are dragging the xxxCHF and xxxJPY crosses with them.

This is creating the paradox of a softer USD, but also a falling carry trade.

How far this can be pushed is unknown, but I suspect that if the panic selling resumes, not only the exotics but the majors as well will once again be subject to a beating.
But who knows, maybe the rules have changed.
For us there is only one rule: be ready to adapt to whatever comes.

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So much for the theoretical side.

For the practical TA application:

Several pairs have "gotten ahead of themselves", especially AUDUSD and EURJPY.

The carry and exotics have retraced back up to mostly .618 - .786 levels on their charts and some, like NZDUSD, also now fit a bigger ABC corrective pattern. This puts risk for a continuation back on the table, as these are the prime "start to sell the big rally" price levels back up here.

On weekly USDJPY we have made a doji at the formerly lost TL:
http://img170.imageshack.us/img170/3...09007tlbp3.gif


We have had signs of stalling and exhaustion on NZDUSD and AUDUSD, as well.
NZDUSD looks set to retest 0.7250 after possibly finishing an ABC off the low made during the unwind and on loss of the 0.7250 level risks downside acceleration.

http://img215.imageshack.us/img215/2...9007bigkh3.gif

Further down the road NZDUSD's lows at the "neckline" with the 0.6650-0.6900 area being a last resort would be critical for keeping us in this upper area of 0.6600-0.8000.

I could go on and on and on about AUDUSD and all the other xxxJPY pairs, but fact is all of them are at critical levels which to people looking to short must look very tempting indeed. If we are to go down again hard at all, these are the places to start with almost on every pair.

And as for our most interesting candidate, the DOW:
We have had our "double intervention" pushes and we've gotten back to right near our all time highs.
Now the question is: continuation or reversal?

http://img444.imageshack.us/img444/1...ausingaaj8.gif

As with the carry and exotics, we are very much in a "now or never" scenario, where this and the next 1-2 weeks should show us what's what.


Some further musings:

A lot of people seem to have taken the emergency measures not as a reassurance, but as a sign that there is potential for genuine trouble in the machinery that once was the robust american economy.
There have been big shocks in both the NFP as well as other areas, but we must not forget that all the folks getting foreclosed, losing house and home and their credit eligibilities and their financial options will not only drop out as super-consumers, but they will be high visibility flashing highlights for anyone in their proximity and emphasized through media and surroundings, thus perhaps causing more fear to over-spend and perhaps for the first time changing the carefree "everyone's doing it so why shouldn't we" overspending and debt based living standard that has become the american way of life for a shockingly large amount of people.

Just to illustrate: spending curves have shown growth in excess of 20-30% increase, whereas real world net income has wavered sideways or only slightly increased. Simple math dictates you can only spend what you have - unless you bring in the credit companies into the equations OR go into savings. And your savings in turn will eventually be used up at some point.

And I believe there is or will be a certain "deadpoint" - there won't be shiftable debt from one credit card to the next forever. Alternatively, if we get a stronger savings emphasis like the curve below shows we might be already shaping up to, then that also should mean potential for a more "squirrely" attitude vs the rampant spending the economy has gotten used to.

(What is however odd is that there are also reports of a corrected savings curve which claim that there has actually already been an increased trend towards saving vs spending...maybe I'm just suffering from bad data sources here or maybe someone more versed in this could help me out. But either way)

Revised savings curve:
http://businomics.typepad.com/photos...02/savings.jpg

There's also a historical housing - spending correlation(this is "old data" from the eighties to 2006, but I believe the point of the correlation is still made well):

http://bigpicture.typepad.com/commen...k_spending.png

We've already begun pushing around domino stones, question now is how many, which and where they are going to start collapsing first and how much collateral damage our dear collateral will cause.

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If any mod thinks this should be put under "news" then by all means...it's all 1:1 transferrable. Just let me know...

SL............I really enjoy posts like this one in the new "Trading Room"; I just don't understand how you find the time to write AND post as much as you do. I must be tooooooo slow with my trading regimen.......... I might need to start using PeterFM's signature..........."getting there slowly"!

Then I prolly shouldn't mention that I also got a haircut and went shopping as well today
Cooking's next!

Enjoyed your post.

What's cooking... mind if few of us flew in for dinner?
We'll bring something good and liquid..

Thanks

Today I'm being lazy - just some Spaghetti with my secret ingredients ;p

Delicious nonetheless of course.

And sure, the more the merrier, got enough pasta lying around, but since I don't drink booze the good and liquid should preferably be a tall blonde pool babe or similiar ;p

u know
i always felt like the last unwind was just the usual stuff as in were back in business next stop some new highs bla bla bla

as far as i know at the moment is that everything is back to normal unless somethin big like the mortgage crisis happens again. i think that would be a catalyst to a huge drop.

i dont know it seems a bit different from the other times but then again it was just bigger and had more hype and doesnt exactly mean its any much different.

i believe ( and im not a carry hater) that aside from everything, this was a needed wake up call to carry traders that hey buyin gbpjpy and hoping for the best is not gonna secure ur future. but at the same time carry trading and ridin the dow is what alot of people have done for a long time and will always be profitable if enough people do it again or jump start it

ok ive smoked 2 bowls outa my hookah and it was raw tobacco, middle eastern style so yea im sure that didnt make too much sense.

i figured one thing i could do to keep myself outa some trouble is to avoid yen pairs. ive made alot and lost alot with them and eventually i found theres no need to throw any money in there. its almost like they are so very well predictable yet only clear to certain people and not to others.


lol im watchin disney channel and they got donald wearin board shorts and shirtless and he just looks damn funny


btw seekinglight that was a very good and informative post. thank you. if it werent for people like u id never know what really goes on as u can tell from my very basic knowledge of what the hell happened during the last drop and what follows

Right, well, putting aside bongs and hookas just for long enough to get back to TA, here's what I'm currently seeing when looking at the indices:

Last week gave a weekly doji on both the S&P as well as the DJI.

A look at doomberg newswires today and I see they are abuzz with war, mortgage crisis, cuts, meetings, earnings reports...(read: anything that fits in well with our doji bar scenario, really. I expect the president is briefed on the DJI chart and then simply holds speeches accordingly, similiar to Ben and his trendline coinciding over night lending rate cuts.)

If this weekly bar does not manage to get itself together but ends bearish, it is likely we'll just get a continuation down back to the now established trendlines. If those fail, the next lower one is quite a bit down.

A war would certainly do it, but the imminent threat of one and a bit of shaking the tree might also help enough.

Me, I'll just keep looking at the chart first. We've also reached significant spots in a few carry pairs and USDJPY has retraced 50% of it's drop and instantly shed near 200 pips.

Imho, the race is on.

UJ, since it's been the counterpart to the indices.

Currently we're seeing the paradox of rising majors(lower USD) but falling crosses, exotics and a strongly diving USDJPY.

Stage is set, curtains up.

To illustrate, I shall supply some more charts. (This never hurts )

I don't need to use much words if I can just show what's going on.

Please be aware this is the market - everything is subject to change at any point in time, but currently I was/am observing USD strength coupling with USDJPY and equity market weakness. Since a weaker USD makes it harder for the exotics to sell off unless the exotic/major crosses like EURAUD or GBPAUD etc pp drop/rise in favor of the majors, there might be a slightly delayed or weakened effect on the exotics.

I believe this may simply be because instead of buying up the crosses again people simply bought the "pure" exotics on USD weakness, so there might be less to unwind now.
Just a guess however, like I said. Anything goes. I am rather focused on USDJPY / indices at the moment.

Maybe there'll come a certain "equilibrium point" at which the exotics get hit harder again, but what with all the uncertainty in the future of the USD(mortgage crisis, recession talk, cuts, etc), it's hard to imagine scaling into/running to the USD when fleeing from risk.


http://i22.tinypic.com/o6gxns.jpg

http://i21.tinypic.com/205p9iu.jpg

Things are approaching the first waystation faster than expected actually.

The current situation seems to be: nobody wants to be in risk. Equities, carry, BUT, and this is just so far and subject to change again perhaps, also the dollar.

Majors are strong and GBPUSD especially has just managed a weekly close above 2.05. EURUSD is solid still and USDCHF, as "the other carry core" is looking hurt indeed. It looks like the game is very much on and the indices put in quite a show this week. USDJPY shed close to 400 points as well, also approaching a break of it's 4h trendline.

Soon the more "real" trendlines will come into play, and then...well, then things will get really interesting. Then we will finally find out whether the carry is truly immortal, whether there's going to be another "trendline and official intervention coincidence" and what is to become of all of this.

Bit ominous to have S&P close spot on on 1500...

Well, we shall see. My focus remains on USDJPY as the most directly correlated pair with both the USD AND the stock market indices, making it a lot nicer, cleaner and less "fuzzy" as the carry crosses, torn between a sinking USDJPY ship and rallying majors.

I will also have no shame in utilizing USDCHF as an outperformer if it presents itself as such.

Update to the charts:

I like anyone have been looking at the charts of the DJI and S&P going "hmmm"...thinking about the fed cut rumours and everything...als about USDJPY's fate...this pretty much translates into: "Will the fed cut any second now? Will the relief rally be another 1500+ points? Is the magic still working? Is there any risk appetite left? Will the DJI / S&P continue blindly exploding and disregard everything that's going on?"

I don't think USDJPY alone has much of a chance...either the indices tank or the USD gets hit so hard that it can't BUT go down. I could of course always just be wrong however.

IMHO there's an alternative to all that risk talk and to me it's becoming clear that this might just factor in. If the USD paid interest is getting crippled due to incessant cuts and BOJ is on a tightening course, then the core USDJPY can't but get more and more unattractive, no?
(this is all along the lines of a "new unwind" phenomenon...AUDUSD has simply taken off to the sky again after that week of weakness, recovering 100%, USDJPY remains less than 38.2% recovered - this imho should tell us something)

Also - the Yuan is finally starting to continually appreciate and the Yen is like a brother to it...so one way or another, the JPY has to gain..the question imho just is - against whom will it be swiftest? Who is weakest?
And obviously the answer is much sooner USD than AUD or NZD or CAD or EUR...so the core fails, but the crosses might just be caught in a mosh..

We should also not forget that people are loathe to take on fresh risk before year's end - so it could be the crosses and exotics get moved by USD weakness(pro majors / exotics as long as the USD is falling => pro their side of a cross) - but the USDJPY might get moved by the very same ALONG with JPY strength...so two factors moving against it...since even if there is a resurgance of the equity markets, surely there are better / safer bets around to keep the rudder steady(=make profits safely) than the USDJPY which has burnt everyone around at least twice now?

Anyhow. Just some thoughts.


Some TA to complement all these FA musings for the S&P futures, showing imho why we've bounced around here on both sides and are now pressing for a decision...which could in turn get ugly fast.


Guess I was right about feeling a weekly close at 1500 S&P being very odd...thereabouts (1490) turned out to be the bottom for now the whole current week.

In that same vein - we are now back to 50% of the drop on both the DJI / S&P as well as their respective futures charts. Indices and futures have rallied all the way into the close.

This is pretty much the "decision point" for anything wanting to go somewhere. If someone were looking to sell or average into a selling position for a collapse, this is most likely the place to go for.
To turn bullish, exceeding the 50% mark and eventually the .618 makes the resumption of the reversal back into the uptrend more and more likely.

Whether or not either happens probably depends wholly on what goes on the last 3 days before the Fed decision and what gets announced or not and what the market feels is necessary.

The Yen crosses have put in reversal formations(to the upside), AUDUSD has gone on to explode upwards without pause after having had only a single day of "unwind like behavior" and then reversing in turn, while USDJPY still remains below 115 / 114.50 currently.

This is exactly the oddball phenomenon I keep talking about. AUDUSD has simply outdone anyone and everything across the board. Nothing comes close to it even remotely. Yet USDJPY has gone pretty much sideways after stabilizing - which in itself is a sign we might be attempting to put in a bottom, as this makes another weekly reversal setup at the low of the steep drop.

All signs point to up on the charts - and the Fed cut rumour runs in the same vein. The question is - will this all manifest itself or will someone raise a hand and go "say, aren't prices supposed to fall when everything is going to crap" at some point?

Currently it seems the old "a steep drop just means more bargains for the immortal bull herder" adage. Can this literally "carry on" forever?


(Side note: boy, do those blue boxes ever have incredible reversing powahs or what! Huh..hehehe)

What an interesting week..after the seemingly revival of the carry, we've hit those interesting levels on the indices and carry pairs again it would appear, and ooops, slipped.

Just a chart update, tomorrow's weekly close will of course be the really interesting one.

Bit late with the weekly update. Seems those blue boxes are still pretty resilient. I shouldn't have drawn them in!

USDJPY however, regardless of the crosses which have been dragged higher because of the majors, has fallen back down to 113, belying the old theory that everything's always in synch and that only carry unwinds drive things lower.

The USD selloff is taking it's toll and the best pair to trade anti-carry wise was the USDJPY. A win-win pair in this current environment: as part of the USDX it gets dragged along in USD selling frenzies, as a carry pair it gets ditched when stocks take a dive.

Current article that sounded interesting to me in regards to the S&P:
http://bigpicture.typepad.com/commen...0-ex-risk.html

And since this has been a point of debate, here an example of what I mean with changed conditions. Even though the DJI had already fallen back again, GBPJPY barely did a normal retrace to the .382. And the exotic pairs just rose as well.

This is basically due to USDJPY not giving as much back as GBPUSD was rallying(read: the USD is just dying too darn fast), so GJ managed to gain despite weaker equity markets.

The moves were also not very drastic, so I guess the panic required to change behavior enough just wasn't there and imho GBPUSD just had a place to go - 2.1.

The USD is unattractive, the carry trade on USDJPY is getting more and more unattractive...how this will pan out will be interesting to watch.

Further proof of my "new phenomenon" theory.

GBPUSD just proceeded to a new high at 2.11 whereas all the stock market futures and live prices fell through their lows.
The old adage of lower stocks = higher USD is no longer applicable in the current condition. However USDCHF is falling out(new low just hit) and so are the xxxCHF carry pairs - this is indeed a sign of unwind - just of that "other" carry.
USDJPY of course also getting hit, but still tame while above 112. We are now on the same TL on DJI that had it "rescued" with the suprise over night rate cut. So, what will happen THIS Friday?
Or will Ben secretly have a live DJI feed installed in his wristwatch so he can change what he's saying live during his conference?
This is what's up, Ben, or should I say down..:

This has been out the window for some time.

Yepp. But some people still try to hold on to that belief, so I'm trying to supply proof alongside my arguments so that people can see what's what Charts don't lie... Could also be it never was only a single stage thing..could be there's two sorts or phases of stock-dive-ditching reflected in the FX market. Currently it's the "kill the cores(USDCHF and USDJPY) and make USD smores" one

And now stage two - the main event: as the cores have given room, the majors get bent ;p

Makes sense - use the USD crushing to drive down UJ and UC, then keep them level or suppressed and kill the crosses by crushing the majors and exotics

Two step combustion engine

Anyhow - chart update for S&P and futures (DJI feed is totally borked. Stupid NF.) Lost all trigger lines(blue box) / upper trendline and is headed lower it would appear!

Update to the charts.

DAX looks interesting to me as well =)