Saturday, December 11, 2010

Wednesday, December 08, 2010

Monday, December 06, 2010

Fed's overworked printing presses break down

"An official familiar with the situation told CNBC that 1.1 billion of new $100 bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face.

A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.

The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in "cash packs" of four bundles of 4,000 each, with each pack containing 16,000 bills.

Officials don't know exactly what caused the problem. "There is something drastically wrong here," a person familiar with the situation said. "The frustration level is off the charts."" -source

Well at least they've recognized that there's a problem. The first step to any addition is to admit that you have a problem right?

Sunday, December 05, 2010

JA Solar (JASO) looks better than ever


As you know, I've been a fan of JA Solar since they did their IPO in 2007 but my opinion of the stock has varied with he times and the charts. I've kept a close eye on JASO ever since it broke out of its two year range in September, nearly doubling in price over two months. Since that peak JASO has sold off with the sector after a sharp decline in crude bringing JASO back to the breakout point for a perfect buying opportunity. Volume was strong on the initial breakout so I'd expect it to follow through (upward) from here. One word of caution on this chart, the stochastics look bearish and the CCI is giving a sell signal.

I'm no value investor by any stretch of the imagination but with a PE of under 7 and a PEG of 0.34 (five year expected) JASO looks like the cheapest growth stock on the planet. They just signed a massive five year 10GW polysilicon supply deal which is roughly equal to the annual total global production of solar cells. They certainly don't seem to be in any kind of trouble and are planning ahead for the long run, why such a low valuation? Since solar is really a call option on future energy prices, we have to check out crude:

Crude rallied to a new two year high at the close Friday, no issues there. You can draw your own conclusions about this situation. Other issues I like in the solar space are FSLR and the TAN etf.

Disclosure: I am long JASO calls.

Saturday, December 04, 2010

Thursday, December 02, 2010

Saturday, November 27, 2010

Saturday Rock Blog: Baby on Board


Looks like the jig is up, the dollar has reversed its medium term trend to resume the long term trend. Here's FXE (Euro ETF), a three year weekly:

Wednesday, November 24, 2010

11/22/10 Natural Gas Market Update


Since the bullish gap breakout September of last year, natural gas rallied off its lows of $2.409 targeting and completing a 50% retracement from the selloff of $9.60 to make a high of $6.108 January of 2010. As this high was made, natural gas slowly moved lower and formed a channel that it’s been within for the year of 2010. In October natural gas made a low of $3.255 before finding support and pushing higher. This low came within testing the lows of May of 2009 at $3.155. By holding and pushing higher the market has put in a low that is trying to create a potential inverted head and shoulders formation. The past three weeks has been a consolidation of that push higher and this has created a bull flag as the December contract goes into expiration on November 24. Market bulls will want to see a continuation of that push off the lows with short covering going into expiration to try and test and break out of the downward channel or as January becomes front month the difference in price puts it above the channel to gap and go higher. Upside resistance to be met up to the June highs of $5.196 and then January highs of $6.108. Getting above and holding $6.108 gives the bulls an inverted h/s target of $9.807 (6.108-2.409=3.699, 3.699+6.108=9.807). This also retraces 100% of the move from $9.600 August 2008 to $2.409 September 2009.



As of Friday, November 19, 2010:
December 2012 $10C Open Interest = 2,713
December 2013 $10C Open Interest = 2,790



RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.

Stewart Solaka

Twitter: @CHICAGOSTOCK
EMAIL: CHICAGOSTOCK

Saturday, November 20, 2010

Tuesday, November 16, 2010

Failed Breakouts Galore

Netflix (NTFX) six month daily:

Russell 2000 (IWM) six month daily:

US Oil ETF (USO) six month daily:

Euro ETF (FXE) six month daily:

I think there's more downside to come and failed breakouts often lead to sharp corrections. A week ago everyone on the planet was wild eyed bullish, investors may be re-thinking fed induced purchases.

Disclosure: I do not have any positions in the above equities but I am short some stocks and am long the US dollar against the Aussie dollar.

Sunday, November 14, 2010

Saturday, November 13, 2010

Saturday "Rock" Blogging: The Pines of Rome

This is one of my favorite classical pieces, enjoy:



Saturday, October 30, 2010

Saturday, October 23, 2010

ETF Golden Crosses (50/200dma) Galore

IWM (Russell 2000 small caps) daily:

FXE (The Euro) daily:

DBA (Agriculture commodities) daily:

FXI (Chinese stocks) daily:

QQQQ (Nasdaq 100) daily:
Disclosure: I am short EUR and own QQQQ puts.

Saturday Rock Blog: Thunder Busters



Happy Halloween everyone!

Friday, October 22, 2010

US Treasuries Cross of Death


30 Year Treasury Bonds Daily 04/13/10-10/21/10:

The 30 year is currently trading under its 50day moving average. The last time the market was under this average was in September and bonds were able to hold to move higher. This move comes as bonds failed to retake the August highs of 137 and have now fallen under this 50 day moving average that has the market bear flagging and testing the trendline support from May’s breakout. Seeing the bear flag confirm with another leg down will have the 20 day moving average cross down and through the 50 day creating a “death cross”. The last time the 20day crossed through the 50 day was in April as it created a golden cross and the market began its move higher. This current cross can attempt to change direction in the market’s current trend. A test of the 100 day moving average down to 129 along with the September lows would be targeted. The fed is expected to buy treasuries today and the question is will their purchases be enough to hold yields at these levels? The St. Louis Fed President James Bullard has proposed the central bank buy $100 billion in long-term Treasuries next month and consider more purchases later. Are they bluffing? Buy stops to be triggered on a move through 133.

Bloomberg: Treasury Traders Increase Bets on Inflation for a Third Consecutive Week- http://bit.ly/cJVyrL

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS.

Thank you and best of luck trading!

Stewart Solaka

futuresMONSTER

Twitter: @CHICAGOSTOCK

Tuesday, October 19, 2010

Saturday, October 16, 2010

Saturday Rock Blog: Time Bomb (The Euro)





Disclosure: I am short EURUSD

Thursday, October 14, 2010

Apple's 240/230 Put Seller


On September 28th, 2010, Apple had opened at $291.77 and was followed by a sharp and quick sell off down to $275.00. Moving down $16.77 in a matter of seconds. As this volatile move came about, someone took advantage of the day by selling 4000 240/230 put options: http://twitpic.com/2subbs. This created a spread with a net credit of $1.50 4k times giving the seller a credit of $600,000 and a max risk of $3.4 million dollars with Apple closing under 230 by Jan 21, 2011. (240-230=10, 10x100shares per option = 1000, 1000x4000 = 4mil, 4mil-600k credit=$3.4m).



Apple held those lows and retested them on October 4th with a low of $277.77. Since then, Apple has marched higher with yesterday breaking through the $300 benchmark. Today, Apple has made a new 52wk high of $302.47 and that same spread sold on 9/28 for $1.50 is now trading worth about .88. A 62 cent gain on the 4k spread has made someone $248k richer. Is the person out? We do not know, but we do know that this person took on some big risk, and gave us the indication that they thought Apple would hold above that level. The longer it holds above $240, the more of that $600k they can keep. In any event, a very nice trade indeed!


RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS.

Thank you and best of luck trading!

Stewart Solaka

futuresMONSTER

Twitter: @CHICAGOSTOCK

Saturday, October 09, 2010

Tuesday, October 05, 2010

Exchange Stocks ICE & CME, Bullish?

ICE Weekly

ICE is on the break out this week as it made a new 13 week high of $111.84 before settling at $111.30 on Tuesday. On Monday, ICE reported record futures volume for the month of September (http://bit.ly/duKHbG). This breakout has ICE above the $110 neckline of an inverted h/s formation that has been forming since July. The market will need to close above $110 for the week for a confirmation on the weekly chart above. The h/s has a range of $17.82 (neckline 110.00 - head 92.18). Holding above the neckline of $110 gives bulls a target level of $127.82 (110+17.82). This level also tests the highs in June of $129.53. In the chart above, resistance is seen between $114.93 Dec 2009 highs, and $121.93 June 2009 highs. This also puts the 200day moving average in play at $115 level.

CME Daily

CME is also showing a potential inverted h/s formation in development. The stock rallied $35 from the August lows of $234.50 before meeting resistance at $275. The market appears to be trying to build a right shoulder as we have seen it consolidate between $255 and $275. This flagging formation is taking place above the resistance trend line from May highs to June highs. The most recent low in this right shoulder is $256.53 made Oct 1st. The market held and reversed to make a high of $269.72 today. This high as you see in the above chart is testing another resistance trend line from the August highs to the September highs. Market bulls will need to hold above $272 to break out of this range and try to leg higher. First resistance to be met at the 100day moving average around $279 followed by the neckline at $290.00. This makes a range of $55 (290-235). Holding above the neckline of $290 gives bulls a target of $345 (290+55). This lands bulls on the door steps of the April highs of $347.50. However, there is work to do on the upside, with the 200day moving average currently at $297.51 and a gap to fill at $296.8 from June 28, 2010. CME is expected to report earnings before the bell on October 28, 2010.

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS.

Thank you and best of luck trading!

Stewart Solaka

futuresMONSTER

Twitter: @CHICAGOSTOCK

Friday, October 01, 2010

10/01/10 Copper Breakout & Australian Dollar Correlation


Continuous Australian Dollar Futures 12/21/07-09/30/10:
The Australian dollar has rallied 61.5% since the lows in October of 2008. Following this move from .60 to .95, the Aussie tested its 2008 highs for 6 months (10/09-04/10), before it sold off sharply and shook out down to .80 in May of 2010. Since then, the Aussie is up 19.9% and has managed to break above this resistance level of .95. This leaves the market breaking out and in an area of resistance as it heads to test the highs in July of 2008 at .9770. The Reserve Bank of Australia has raised rates 150 basis points between October and May and expected to raise another 25 basis points next week. Australian banks are looking to raise their lending rates faster then the pace of it's central bank. As you will see below, the chart of copper and the Australian dollar are very similar.

Continuous High Grade Copper Futures 12/21/07-09/30/10:

Copper is breaking out the upside riding its Bollinger Bands and testing the highs from April 2010 at 3.68. China's September PMI was released today showing a rise to 53.8% from the 51.7% in August. The rise in PMI reaffirms China's slowdown is not that sluggish and their manufacturing is picking up. This adds a boast to copper as China is one of coppers biggest consumers. Technically, copper has been rising since it tested and held 2.80 back in May: http://twitpic.com/1pl6z8 and http://twitpic.com/1z5l4w. This move has been resilient as it has been able to push through resistance levels of 3.40-3.60 and head to the April highs. Taking out this high leaves the market in a bullish momentum with next major area of resistance between 3.80-4.00, and ultimately the highs of 4.27 from May 2008. In both the Aussie and copper, pullbacks to trend line should find support and be bought.

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT. OPINIONS EXPRESSED. INFORMATION COMPILED FROM SOURCES BELIEVED TO BE RELIABLE, ACCURACY CANNOT BE GUARANTEED.

Thank you and best of luck trading!

Stewart Solaka

futuresMONSTER

Twitter: @CHICAGOSTOCK

10/01/10 US Dollar Index Targets New Lows

Continuous US Dollar Index Weekly 12/28/07-09/30/10:

The US Dollar Index broke down and lost 5.8% during the month of September as it failed to hold above 80.00. In the previous market update, I noted the dollar index being at a "critical level" as it was testing a neckline from it's head and shoulders formation, "...breaking this neckline here will suggest the market may believe QE2 will happen and if confirmed this could lead the dollar index further depreciating and targeting down to 71.00." Looking at the above chart, the dollar index broke below this level, and has made lows down to 78.620. Is the market anticipating QE2? Possibly, but nothing is confirmed and all we see is the price action in the market. Technically, a head and shoulders is in the charts, 89.10 head, 80.00 neckline, giving a range of 9.10. The market has broken below its neckline giving a potential target of 70.90 (80.00-9.10=70.90). This would lead the dollar to test it's lows from 2008 of 71.05. Short term, the US dollar may be oversold, any retraces back to 80.00 should resist and be seen as an opportunity to sell. If the market can find itself getting back above 80.00, the right shoulder area of 80-83 would need to be worked through for any attempt to move higher and retest the highs of 89.00. The Euro has moved higher against the dollar in hopes that Europe may be removing their stimulus policies before the US and Britain. The Euro futures gained 7.7% in September.

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT. OPINIONS EXPRESSED. INFORMATION COMPILED FROM SOURCES BELIEVED TO BE RELIABLE, ACCURACY CANNOT BE GUARANTEED.

Thank you and best of luck trading!

Stewart Solaka

futuresMONSTER

Twitter: @CHICAGOSTOCK

Sunday, September 26, 2010

Going Parabolic: BIDU (market leader)


Disclosure: Last week I bought (and still own) a few BIDU October $85 puts but it was a really dumb idea. BIDU decided to make a sprint for par ($100) last week and hasn't looked back since. The breakout and rally in BIDU strongly supports the thesis that we are still in a huge bull market. So its pretty silly to try and short it despite how much BIDU is up in the past two years.

Saturday, September 25, 2010

Saturday Rock Blog: Green to Black (So High)

Wow, what a week! The S&P broke out of its four month range, pulled back to support, then followed through. This is exactly the kind of action that the bulls want to see and in September of all months! (September is historically the worst by far) Those who have been betting on a weak market around the November elections are now in a tight spot with a couple of months to go. The measured rule for this breakout is around 1260 which would place the S&P at new 52 week highs and confirm that the two year old bull market is still alive. Actually, the pattern of the past 5 months or so look like a very healthy and solid base out of which the next leg up can begin:


I haven't been long many stocks during the recent rally, instead I chose to short the dollar by going long EUR and AUD which has worked out quite well so far and I see no reason to exit these positions. The EUR seems to be doing something like a simple ABC correction to its longer term downtrend. Each phase thus far has been about 700 pips wide (1.19-1.26-1.33) so I am thinking it can hit 1.40:


The Aussie has just been fantastic for me, making new all time highs against the dollar this week. It broke out of a nearly perfect cup n handle formation and seems to be targeting at least parity with the dollar, perhaps higher:


I'll try to get some more charts up tomorrow, cheers!

Friday, September 10, 2010

09/10/10 SP500 Market Update - Battle of the Golden Crosses


$SPX Cash SP500 Index Daily 04/01/10-09/09/10:

The SP500 is stuck between a rock and a hard place after the highs for the year were made in April up to the 1220 level. For the past three months, the market has been trading within a range of 1000-1130, as forces continue to push and pull this market back and forth. The SP index is up 7.1% for the quarter, up 10.8% from the lows in July, down 9.5% from the highs in April, and still finds itself to be at -.01% for the year! There has been a lot of fundamental activity that has attributed to the indecision in investors and the market to find direction, however this market has also rallied 83% from the lows in March of 09 before the brakes were hit in April as the SP retraced nearly 61.8% of its fall from 2007-2009. This year has been a year of consolidation to put it at best.

The high created a small head and shoulders in April which ultimately led to the flash crash. The past 4 months has been a right shoulder of a much larger h/s formation as seen in the weekly and monthly charts below. The daily chart above has brought 2 "golden crosses". A golden cross is when a short term moving average breaks through a longer term moving average. The first cross was created in early July as the SP500 sold down to then 1010 level, the 50 day crossed through the 200day moving average. This breakdown failed and the market marched back up to 1130 and created another head and shoulders formation between 1060-1130. The second golden cross was created in late August as the market broke the neckline of 1060 and the 100 day moving average crossed through the 200day to sell down to the 1040 level. This breakdown once again failed and the market held to create a right shoulder in an inverted h/s pattern from May to August. This test late August saw 3 lows (1039.83, 1039.70, 1040.88) another inverted h/s pattern. This area subsequently was also the time that the Fed chairmen Ben Bernanke reiterated he did not expect to see another double dip in the economy. Another squeeze occurred and the market traded back to the 1100 level. As of this Thursday the SP500 has broken through the trend line from the April highs to the August highs. This is a major area of resistance, as the market is now testing the "head" of the h/s pattern up to the 1130 area. The reason there are so many h/s patterns in my opinion is due to the market consolidating and fighting between forces back and forth.

The bulls at these levels need to try and hold to regroup and attempt to squeeze higher once again. They can say the ball is in their court because the market is in an uptrend for the past 2 years, and the longer they hold these levels the better shot they have at pushing higher. Working with an inverted h/s formation between 1130 and 1060, which could potentially target them to the 1256 area. To do this, they will have to break through 1130, hold to test 1150, 1175, and ultimately the larger head and highs in April. Sellers will be met at all of these levels with first line of defense at 1130. Below the weekly chart will attempt to show a different view and possible scenarios.


Continuous Emini SP500 Weekly 01/16/09-09/09/10:
Weekly shows a 38.2% retracement of the rally from March of 2009 to April of 2010. Since the highs the market has consolidated and stayed well under 1130. This has created an inverted h/s formation between May and August of (1129.50 head, 1002.75 neckline) that would lead to 1256. This formation is within a right shoulder of a much larger head and shoulders pattern that forms from September of last year to now with the highs in April and 1000 level as the neckline. This range and break of 1000 targets the 783 area. If you have faith in Ben Bernanke, you would not be in this camp looking for that direction. However it is the larger formation which is stronger and leaves the market needing more energy to push higher and get through resistance.

$SPX Cash SP500 Index Monthly 02/01/07-09/09/10:

Above, the monthly chart shows the head and shoulders formation that is embedded between the neckline of 1000 and the highs in April of 1219.80. So for the past 4 months, we have been digesting market activity within this right shoulder. Head being near the 61.8% retracement, and neckline being at the 38.2% retracement. If you are a bear, this would be the right level to sell into and risk the highs, bulls have the "plunge protection team", quantitative easing, and nothing but buy stops above. Continue to monitor these technical levels, with the break of support we want to be sellers, and with the break of resistance we want to be buyers. Play the range until the market finds conviction to move one direction or the other.


$VIX Cash Volatility Index Daily 03/01/10-09/09/10:
Volatility and "fear" factor continues to die out and the vix has traded within 21 and 28 for the past two months. This is a range where one would want to consider buying protection against long positions when vix nears lower end.

Continuous Emini SP500 / Continuous 30 year Treasury Bonds Weekly:


Quick video on price action from April highs to today:


RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT. OPINIONS EXPRESSED. INFORMATION COMPILED FROM SOURCES BELIEVED TO BE RELIABLE, ACCURACY CANNOT BE GUARANTEED.

Thank you and best of luck trading!


Stewart Solaka
futuresMONSTER

Twitter -Chicagostock





Saturday, September 04, 2010

Saturday Rock Blog: Fuck You


I'm becoming increasingly bullish on the market, I no longer have any index puts and I have opened long positions in AUD and EUR. This chart doesn't look super bullish but clearly 1040 (neckline) is holding and there is even a false breakdown to boot. Other indicators (MAs, stochs, CCI) are also starting to turn up as the increasingly low volume of summer wanes. It seems like the market likes the economic news that came out last week so that could be the catalyst for the next leg higher. The head and shoulders pattern that we had all been watching just didn't pan out. Anyways, one thing is for sure, the S&P has been stuck in a very annoying range for a while now:

Saturday, August 28, 2010

Saturday Rock Blog: Bob Rules


I really thought the Aussie Dollar ($AUDUSD) would have broken down harder after it lost it's 50 and 200 dmas and the dma cross over happened. Instead AUD reversed the breakdown after forming a double bottom. The daily chart is actually looking pretty bullish to me now, the top of the range should be test, in the least. The weekly chart below shows that AUD still has not taken out it's 2007 highs but the range bound behavior over the past year or so now looks like consolidation before the next move higher. Perhaps the next move will take AUD to new all time highs against the dollar. I don't have any position in this at the moment.


Saturday, August 14, 2010

Monday, August 09, 2010

Saturday, July 31, 2010

Saturday, July 24, 2010

Saturday, July 17, 2010

Saturday Rock Blog: Shine (on the Sun Bear)



Everything about this chart says that a new trend has begun. The six month S&P charts has increasing volume on down days, decreasing volume on up days. A cross of death and a series of lower highs. The stochastics and CCI are both about to give renewed sell signals (market worked off oversold conditions). We held the flash crash low barely on Friday but I suspect op ex had something to do with that. Watch for a close below 1040 to confirm what everybody is wondering: Has a new bear mearket begun? If so, I'd guess it doesn't take as long as my patience to get to that head and shoulders target at 860. Enjoy the beautiful weekend everyone!

The Malaysian Sun Bear:



Disclosure: I own SPY puts, plan to hold them for a while.

Saturday, July 10, 2010

Saturday Rock Blog: Stars


Turns out I'll be seeing these guys perform down the street later today. These guys were kinda big in the 90's and came from where I currently live. It should be fun, have a great weekend all.

Friday, July 09, 2010

S&P 500 Rallies as Cross of Death Completes


After completing a nearly perfect H&S top on the S&P 500 daily and hitting new lows for 2010, the bulls have come out to squeeze the bears. What a surprise! Nope, seen it a million times. Just when the bears get a grip on things the market miraculous rallies to squeeze the bears. I think stock have likely begun a new bear market as evidenced by a number of technical indications. The series of lower highs and lower lows on both the daily and weekly time frames is an obvious one. Then there's the cross of death on the dow and the S&P, note that this has not yet occurred on IWM or QQQQ yet (but it will soon). Further, you can see that the 50 dma and 200 dma on the S&P 500 are now both declining. I could go on and on about how strong the economic argument is for a renewed weakness in stocks, but.. eh, I'll leave that for another day. There were some short term buy signals this week and after the bulls retook 1040 its no surprise that there has been a squeeze on the false breakdown. Once the market falls back below 1040 I think I will be ready to declare a new bear market with certainty and bet the house short. For now I am happily long as I wait to see how far the retards on Wall Street continue this low volume squeeze. I hope you are all enjoying your summer?

Disclosure: I am long IWM August calls.

Saturday, July 03, 2010

Monday, June 28, 2010

Forex Market Pitfalls (Guest Post)

From Bryan Sayers, a ForexFraud.com exclusive:


How Forex Market Manipulation can Affect You

A number of formerly innocent forex traders have become increasingly aware of the possibility of forex market manipulation, despite the market’s huge size. The manipulation game tends to be played by large and active forex market participants like market making financial institutions and hedge funds.In fact, one of the pitfalls of technical trading is that large market players familiar with your methods can often reasonably anticipate where your stop loss and take profit orders are going to be placed in the market. The low liquidity seen in thin markets also provides ample opportunity for forex market manipulation.The following sections discuss some of the types of forex market manipulation and the situations in which they tend to occur.


Thin Markets

Thin markets provide fertile ground for forex market manipulation since large traders can put less pressure on the market to make a bigger impact on the price. For example, the trading time just after the Sydney open at 5pm EST when other more liquid forex markets like London and Tokyo are closed and New York is closing down for the night can be especially thin.Bank holidays and economic data releases also thin down trading in the forex market since many players are either on vacation or standing aside while the news comes out.


Stop Hunting

Forex traders using technical analysis to base their trades on tend to look for certain conditions or price action occurring in the market. For example, this might be a classic chart pattern like a head and shoulders bottom or a double top. Since everyone is pretty much looking at the same price data, this means that large players can reasonably anticipate where stop orders may be placed in the market, even if they are not themselves watching those orders.This situation can arise even when using technical analysis packages that have the best forex software reviews. Unfortunately, the phenomenon provides fertile ground for forex market manipulation, especially by large players trading in thin markets.For example consider the situation of a market in AUD/USD in which the price action has been forming a triangular consolidation pattern over the last week trading between converging trend lines. Many technical traders knowledgeable about how to use chart patterns when trading will be able to observe this formation themselves on their own charts.They will then probably look to buy low and sell high within the consolidation pattern with stop and reverse orders placed outside the converging trend lines which define the pattern to profit from the triangle breakout’s measured move. As more and more traders observe this pattern and establish positions, orders begin to accumulate in certain price level regions.Market makers know this very well, and a large player can simply identify a place where the market is not too far away from key stop loss levels placed just outside the converging trend lines. They then transact large amounts in order to pressure the market into triggering these accumulated stop loss orders.Furthermore, once the stops have been triggered, the large player merely has to quietly cover their position in order to show significant profits from their intentional manipulation of the forex market.Of course, a more insidious type of stop hunting can occur when a forex market maker is holding a large amount of stop-loss orders within a certain narrow price region. If the market approaches this region, they simply have to coax it a little further in order to trigger all of the stop orders they are holding and therefore profit from any trades they may have executed in advance of those order levels. Many retail forex traders do not understand that these forms of market manipulation are standard operating procedure for professional currency traders working at large financial institutions. Sometimes, they accuse their forex broker of hunting for stops when they are only quoting the market prices which have been manipulated by the larger players who have the ability to control the forex market in some circumstances simply by virtue of their impressive size.


Front Running Orders

Like with stop hunting, front running involves the intentional manipulation of the forex market in order to profit from held or anticipated orders that have been placed in the market. For example, consider the case of a forex market maker in AUDUSD holding a large buy order for Australian Dollars at 0.8500. As the market approaches the order level, the market maker will often front run the order by purchasing AUDUSD at levels just ahead of the order price which tends to keep the market from reaching the order level. Nevertheless, if the market does continue on to trade at the order level, the market maker simply takes a small loss and fills the client with what they purchased slightly higher.Also, if the market does not trade at the order level in sufficient size to allow the market maker to fill the order in its entirety, then they often simply sell the AUDUSD they did manage to purchase out at a profit when the market recovers due to the buying pressure. The disadvantage of front running from a client’s perspective is that the market maker trading ahead of the order may result in the order never being filled. Of course, the market maker still profits from having been allowed to work the order for their customer.


Order Slippage

The primary situation in which order slippage occurs is with the execution of stop-loss orders. Most stop-loss orders will be entered into the market in such a way that if a certain level trades, then this triggers the order which will then be executed at the best available market price as quickly as possible.What this means is that the stop order may not actually be executed at the level at which the stop loss was triggered. The difference between the stop loss trigger level and the executed price for the stop loss order is commonly known as order slippage. As if being stopped out were not bad enough, unscrupulous market makers and dealing desk staff also routinely exploit what they see as the opportunity to make money from their clients who entrust them with stop loss orders. They do this by increasing the order slippage on the rate of their stop-loss order and showing the client an even worse execution rate. By doing so, they make a few extra pips off of their clients.Order slippage rarely occurs on take profit orders, although it has been reported to have occurred with some questionable online retail forex brokers. What is more common, however, is that the take profit order is simply not filled if the market reverses sharply from that level and any amount executed on behalf of the client is simply closed out by the market maker at a profit for them, but not the client of course.

Sunday, June 27, 2010

The head & shoulders everyone is talking about

Here's the 9 month daily S&P 500 chart:

The head and shoulders pattern that seems to be forming here has a neckline at 1040 which is 180 points below the top of the head at 1220. Using a simple measure rule (1040-180) I get a target of 840 upon a close below the neckline. Currently I don't have a position in the S&P directly but I do have a few IWM puts.

Sunday Rock Blog: (Sitting' on) the Dock of the Bay



Disclosure: As tempting as it is to try and play BP capitation by going long, I can't try catching this falling knife here. No position.