Thursday, September 27, 2007

$40 billion for swimming lessons

I compared the move by the fed to dump $40 BILLION into the market to add liquidity like having 3 drowning people in shark infested water. The housing market, the economy and the dollar are all drowning simultaneously, offering $40 BILLION in essence has the housing market and the economy trying to climb on top of the dollar to keep from drowning. Not only does this force the dollar to drown quicker but the life saving benefit is so temporary only offering maybe one or two more breaths for the two at the expense of the third. In the end, if nothing or no one can save the three of them, they will all suffer a similar watery, shark bate-y death.

You would think for $40 billion you could buy some pretty sweet swim lessons. Watch the fed with the $40 billion in swim lessons below.

"So, how do you like my swimming?"


I am very torn on this trade. We discussed the USD/CAD from the view that it could be in a bear flag but I expected a bigger move to the top side. Well it broke out of the bear flag we were watching and bounced off the 1.0000 level, proving a worthy foe to my bearish stance. Now that it has bounced, what do I really expect? A retest, maybe. A break down, probable. A bullish run, not likely but possible.

The interesting thing about this trade is that even though the price has dropped nearly 40 pips from yesterday, our put doesn't really cost us anymore than what we were looking at. So there is the dilemma. Do I take a short position now or wait for a bounce higher. I favor a bounce higher, this bear flag confirmation with a bounce off of the 1.000 level is exactly why I don't like trading break outs. I like selling resistances. The put would allow me to just buy the put, take the same basic trade, allow it to run for nearly 8 weeks with no more worry than a 150 pip stop max. That is very promising but now I have to wait until the morning to buy my put.

Fundamentally, New Homes came in worse than expected and the Fed dumped 40 billion on the market, both should have trounced the dollar, but instead the dollar held it's fleeting foothold. Tomorrow GDP for the CAD comes out, I wouldn't be surprised by a better than expected GDP and a worse than expected on the CPI from the USD both potential catalysts to break this pair out for another run, to be seen in the morning. If you are going to trade the put you will have to be right at your computer when the market opens, if you are trading the spot, watch for a retest near 1.0060ish.

Wednesday, September 26, 2007

No registration necessary

I have removed the need to register to add comments. This is for all you "anonymous" types, you know the kind that like to make anonymous phone calls, anonymous letters, anonymous subscriptions. You know who you are. At least now you have one more outlet to hide your identity yet let your voice be heard.

Just click on comment, write up your comment, and submit. Don't be shy and don't be over sensitive.

Longer term fib fans and estimated times to sell UsdCad

So here are the slightly longer term fib fans I am watching. How close are your line's to mine? Trade yours, not mine, yours will be more accurate for your trading.
I changed this to an 8 hour candle so the image is more visible but let me tell you the times that these fan lines cross the resistance levels as potential times and levels to sell into this trade.
The times I see on the 2 hour chart show 8am Eastern tomorrow morning at a price near 1.0100. The next cross happens at the same time, 8 am Eastern on October 1st (Monday morning). How predictive will these be. Are you feeling brave or disciplined enough to buy it now with the hopes or expectations of the price going up to 1.0100 by tomorrow morning.
I want you to be disciplined and not brave and I want you to be expecting the specific move and not hoping. Yes there is a difference. I personally am willing to wait until it gets up a little higher and then trade it rather than taking the short term trade. If you drop it down to an hourly chart there is plenty of opportunity to trade this in the channel, just make sure you are getting out of the trade at the right time.

Predictive power of forex options

The price has remained fairly stale in the past 18 hours. This doesn't mean there aren't some messages being put together in the mean time. First look at the changes in the price and where it to and returned to. What does that mean? The price has pushed beyond our short term fib fan line, a longer term fib fan puts resistance levels meeting fan lines near 1.01 and 1.02. Try it yourself and see if you get similar levels, I will post my long term fibs later.
If the bear flag confirms as indicated by the yellow line, 0.9750 is a fairly easy target that could play out in a matter of a couple of days. I have commented to those I work with a number of times that I think the Usd/Cad could trade in this range for most of the week or longer. So far so good. This leads me back to the idea of using an option trade. Before we get into the intricacy of option pricing, note that the at the money, and you can't get much more at the money than one one hundredth of a penny, is the same for both the November 100.50 call and put.
Call Bid Ask Put Bid Ask
CNJKA 1.35 1.50 CNJWA 1.35 1.50
So the 'at the money' costs the same. In theory the market has it priced equally the same risk wise. This is true but not not true. Looking a little deeper at the implied volatility shows nearly double the implied volatility on the puts than on the calls. This is not normal. The open interest is 8 times more on the call options too. How can implied volatility be higher and not price for the same options. I like the idea of selling a call or buying a put. What are your thoughts. Put them in the comments.

Tuesday, September 25, 2007

It's the CAD or the CDD

The chart was the Usd/Cad intra-day. As you can see I told you not to chase the trade because I expected it to come back up. Because it has come back up, is there a buy or a sell in this trade. I don't think we have seen any reason to be looking for a long trade on this pair. It is a pull back that can make money management difficult but could be a great longer term trade. How far will it pull back? Since I did this screen shot the price has risen back to 1.0035 and is still climbing slowly. I would like to sell this again but at the right time. Maybe near 1.0050 or 1.0075 but I wouldn't be surprised with a pull back to 1.0100 or even 1.0200. I seriously doubt a move to 1.03 before a drop.

So here is the trade I am looking at...a put on November 100.00 CDD. What is that? CDD is the International Security Exchange (ISE) option that trade the major currency pair. As you can see on the daily charts of the CDD, the price is in line with the spot market. The stochastic is possibly setting up for a short term divergence to sell of this pair. The advantage of the CDD over the spot market in this situation is being able to sell with a max loss, similar to a stop loss but the price can move beyond a traditional spot stop loss and still come back down and make you money as it move toward your price.
Currently the price is sitting at 1.0040, as I type the price is rising slightly, if I sold the pair now in the spot market with 150 pip stop, the pair could move to 1.0200 and push 10 pips past your trade and then move all the way back down and through the key 1.000 mark and potentially down to 0.9800 or lower.
For the CDD position, first let's recognize that the 1.35 price of the 100.00 put will cost $135 per contract because we buy them in 100 unit contracts. So when I reference pennies and dollars on the options contract, multiply it by 100 to get the per contract value. Now, let's use the 100.00 put this is the same as the 1.0000 price level on the spot market. If my anticipation is that it could go down to .9800 the value of the put at expiration in November could be worth 2.00.
The difference between the purchase (1.35 for the November 100 put) and the estimated value at expiration is only .65. That may not sound that great, but remember I am saying at expiration it would be worth that. Hopefully as it nears your limit you will step out with more than the 2.00 per option price. If you set this up as a bear put spread and sold the 98 put and bought the 100 put, the net difference of the spread is a cost of .85 with a max gain potential of 1.15. It nearly doubles the expected gains but it does cap the trade on both sides.
Max loss .85 (similar to a 85 pip stop but it can go beyond the level without getting stopped out) and a great target. Take a look at the prices here and we will watch this trade over the next couple of weeks. We will track it both as a spot trade and an option trade to measure both risk and reward for both trade potentials.
Good luck, more tomorrow.

Come on now, be brave, we're all friends here.

Answer the poll and put in comments. What would you do with this chart. I am going to put together an option trade in the next few minutes but I want your views and comments.

Can you guess what this is?

What chart is this? How would you play it? What does it mean in the short term? What does it mean in the long term?