TRADE Focus

06/11/2009

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The Trade Focus commentary was written Wednesday, June 10th and the market analysis section was written during the course of business on Thursday, June 11th.

This week saw another assault on the dollar. As we are writing this week though, it has held a price that holds significance with our retracement support levels based on the September Dollar Index contract. It appears tenuous to say the least but at this moment in time it has held. With all the concern over the dollar and its status as a reserve currency, there were wire story reports saying that China was not abandoning the dollar. A little surprising to us and to many we believe is that the gold and silver have not exhibited more strength amidst the Dollar's weakness. Some may think that it means these will have to catch up but we do not necessarily agree. There were reversals for both Gold and Silver posted on June 3 and a subsequent breach of an intermediate uptrend line. The attempts at rallies have been thwarted up to now by the underside of these trendlines. In the case of the US T-Bonds, which we had mentioned in a recent Trade Focus how the price had reached an area where the 50 month moving average along with a retracment level and trendline converged we have seen this level penetrated to the downside. The heavy slate of Treasury offerings with the auctions resuming this week have been the likely culprit. There were 3yr notes, 10-yr notes and the 30-yr bond sold by the Treasury this week. The 3's and 10's were said to have found strong interest but apparently it took lofty yield's to attract the demand. In fact it was reported that the yield on the 10-yr notes hit seven month highs this week. We await the results of the 30-yr bonds and perhaps once out of the way there will be at least a brief end to the recent onslaught seen in the T-Bond and T-Note futures. We did notice that based on daily data, observing what we see as the most recent measurable swing down in price, that the T-Bond futures reached an extension target and have held that level to this point. We will be taking interest in the reaction following the 30-yr auction results, particularly through the close of Friday's trading session. Other markets of note are the liquid energies which continued to press higher. It seems a month or more ago we mentioned that a close above 60 in the crude oil futures could propel it to the mid 70's or to near 80 if we remember correctly. As of right now we have daily swing extension targets that measure to approximately 7400 and then to 7725 and 7985. Industrial Metals such as Copper and Aluminum moved higher with a target area in copper in sight at approximately 25450. Aluminum may have just more recently broke out to the upside and bodes some attention. Over the course of the past few weeks we have heard both pro and con about the state of the Chinese economy and its recovery. Most recently and from sources we believe reliable, we have heard that the recovery is going well as it responds more positively to stimulus measures taken there, with property sales up something like 45 pct in 2009 and with investment accelerating. We imagine that it probably doesn't hurt much that China has a reported one trillion dollars in foreign reserves. Here in the US , although the stock market maintains its two and one half month bid, we heard it reported that mortgage applications declined recently to a four month low. Along with this, unemployment continues to rise not fall. To us this means that with the number of consumers that are employed on the decline that consumption levels will find it difficult to rise. We did have the Fed's Beige Book released this week too and although it said the pace of economic decline in the US is moderating it reported that credit conditions remain tight, the labor market is weak with wages either falling or flat, retail spending continuing slow, but it was noted there is improvement in economic expectations.

Having gone through that weekly recap above may beg the question as to how do we trade in this environment. Truly what we believe is that regardless of how economic conditions or news items may make things appear or even how certain markets or groups of markets may be behaving it is wise to remain true to the plan and to not allow outside influences to effect decision making. That includes allowing price movement in one market, even though it may correlate, to not influence decisions for the market being traded. Relationships between markets change at indiscriminant times so if trading Gold trade how the Gold market analysis determines not how the stock market is trading. This brings to mind a particular aspect of trading particularly pertaining to the big picture. That is the principle of capital preservation. We believe we have seen where traders employing this concept in their trading approach have enjoyed long term positive benefits. One way of describing it may be to say that "when in doubt get out." That is only one small part of the principle, however. Implementing it can be seen in a trading approach where multiple units are traded with exit points placed at staggered levels based on the initial predetermined potential price targets and then adjusted as the trading pattern evolves. In this way taking money off the table goes into the bank while still being able to capture more of the move if it should continue, while at the same time reducing exposure to the unforeseen. This is usually accompanied by the stop protection being adjusted in the favorable direction of the trade as those levels are reached. Certainly, market positions do not always go favorably and that is where the option of "when in doubt get out" is useful because if a pattern evolves during the course of a trade that changes it's potential it may not make sense to stay with it. It likely increases the odds against the outcome being profitable and is more prudent to take to the sidelines thus preserving capital. In general the concept goes along with our theme that anything can happen and usually does. There is no way to know what the next tick or next series of ticks will be. There have been too many times that a world event or a rumor can cause markets to make dramatic turn abouts. Therefore employing capital preservation methods can be a beneficial approach to a trader's performance in the long run.

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