Euro

Where do we go with the Euro from here on?

Euro is in a consolidation range for some time now. But where do we go from here? We had an exceptional rally in the markets yesterday and the Euro added nearly 500 pips yesterday at the highs. We came back quite a bit overnight and I have to decide whether I see Euro falling back to 1.2500 or whether the Euro has finished the consolidation and is ready to break the pattern to the upside.

To the upside? Hold on...Consolidations are broken in the direction of the primary trend, which is not up but down in the Euro. So why am I thinking that the euro might break the pattern to the upside?

Well it will break the pattern to the upside if that consolidation was a bottoming formation and the downtrend in the Euro, which started in July from the all time high, has already made a midtrend consolidation pattern, which was broken to the downside.

Let's take a look at a longer term chart.

Yes, the Euro has made a midtrend consolidation, which I marked in the chart above. The all time high is some pips below the second target from that consolidation range and our current year low is a few pips above the second downside target from that consolidation. So we can for sure say, the euro has already made a midtrend consolidation, it has broken to the downside and what we are seeing currently is no consolidation but a bottoming reversal pattern.

Anything else supporting that view?

We have made three higher lows and we are at the apex of a Wolfe Wave Pattern with an ascending baseline whose target is 1.32

Longer term where do we go from here?

If this bottom at 1.2500 in the Euro proves to be the bottom of the current steep downmove then the monthly Euro chart tells us we are in for a more leisurely ride in the Euro in line with the monthly volume weighted average (yellow line).

This actually would be a very healthy development as the steep ascend of the 55 moving average wasn't sustainable for the long term.

But this monthly outlook is too long even when I'm trading the euro on an account cash basis and not with futures. I need to decide what to do today.

Go long US Dollar an the basis, that euro tested and rejected 1.30 and is now returning to the 1.25 level or stay long Euro on the basis that we had 3 successful tests of the lows with strong support shown by the ascending lows. We made a nearly 500 pip move yesterday. This move needs to consolidate and we might retrace today. As long as 1.27 holds we are still in the uptrend to retest the 1.30 level. 160 pips from current levels to the downside sounds quite a lot, but I'm in euro cash, staying in the euro will cost me a few US Dollar, when converted to base currency. But Euro seems to be supported this morning looking at a 50 tick chart and therefore I'm not inclined to go against it right now. Actually I might support my stance by trading Euro futures on the long side today. Will see how the day unfolds.

Investment Plan (November expiration)

I'm down on my investment plan for the moment. I sold 10 UYG 6 Puts on 11/19, which got caught in the downward market spiral starting that day. So I bought these back for a loss of 600$ and at the same time sold the lower 5 strike for 600$. This weekend I was assigned the 1000 UYG shares at 5.00 which currently trade at 3.98.

I said earlier I wanted to start a longer time Portfolio on the idea, that without order being restored to the financial system, no recovery will be possible. I have no idea, if that assumption is correct or not. Maybe the banks will all be nationalized and the US government introduces the Chinese idea of capitalism. I don't think so. In Germany and a lot of other European states we have had government participation in private industries for a long time without becoming communist countries. Direct government involvement in private corporations can work and the US may only need to get used to it.

The government is like any other long time investor: They buy cheap and sell high. The German government sold most of it's silver -as we say here- until mid 2007. They had not a lot left (the railroads still have to be privatize) for future generations and they sure had become accustomed to the earnings these acquisitions provided for the last 20 years. Now everyone is running to the government for help and they provide that help at bargain prices against participation in the corporations. And this will be sold again into the next boom cycle. Governments have a lot more time than any private investor. It sure helps, if you can print the money you need.

Back to my portfolio, which consists of 1000 UYG now. Next expiry is 12/19 and the question is, will we get a x-mas rally or will Santa stay at home with a cold this year.

Well it doesn't really matter, I will try to sell 10 Calls 8 strike for 1 $, if I get it (it trades at 0.30 at the moment) and will sell 10 Puts 4 strike (I think) for 1.25. I will most likely have to sell the Puts first and might even decide to scale into them depending how Citi trades today as the development there was the reason UYG lost about 50% of it's value the last week.

Here is a copy of the trading spreadsheet.

Will keep you informed, how the story unfolds.

Update:
We have had a huge rally today.
And while I intended to keep the strike 3 and strike 4 UYG puts I sold this morning, I could not let the profits slip away after UYG made a 32.5% move today. This morning I was down about 800$ in my Options trading. This evening I'm up a total of 775$ after being stopped on my UYG position at 5.25.

500 $ margin

It's tempting, it's really tempting!

The last few days I have been testing a trading platform used by a broker, who offers me 500 $ intraday margin to trade the ES futures.

I have been trading on the long side in this 2 day breakdown and I made a ton of paper money. Unfortunately by taking risks my account would never ever survive. The sell-off into the lows on Thursday I survived by trading 1000 cars in the final add-on. 1000 * 500 = 500.000 USD margin and every tick is worth 12.500 USD. That means I was 10 points away from burning half a million USD, when the ES traded at 746 Thursday evening. Cool.

But even realistic trading with the leverage that margin offers me, got me trading up to 15 cars with a point-value of the ES (4 ticks) of 750 $ on a margin used of 7500 USD. Still another 20 to add, if ES continues against or with my position, depending on the strategy traded. Yes, gains come fast with that kind of leverage, but losses come even faster.

On the other hand there is my good old extremely conservative Interactive Brokers account, which offers me intraday margins on the ES which equal overnight margins. I'm limited, very limited trading the ES with that kind of margin. But surprise, I made 2.700 $ trading just 1 or 2 cars in a contract I refused to trade so far, because I considered it extremely difficult and to tell the truth sometimes very boring to trade. This has definitely changed.

Not being able to add at a loss, means you have to use stops and the ES is the first contract I trade, which is not as fuzzy with stop levels as other contracts I'm used to. After you have identified a short term support or resistance, that S/R level either holds or it's down to the next S/R level. That means the ES is the first contract where my add-on strategy really works.

I wait for a trade signal, I take the trade at a level, where I can use a 17 tick stop, which means the initial risk is 220 $ (incl. comm). Now I place an add-on 1 or 2 ticks above the last S/R which has to be nearer than the 17 ticks. EG: Long ES 847.5, Stop at 844.25 Add-on at 845.25 assuming 845 was the low tested and rejected on the last move down. The Add-on moves my trade risk to 330 $ and the average comes down to 846.5.

You can ask, why not enter at 845.25 in the first place after you get a trade signal? Well, I miss the trade if I don't take the signal when it occurs. That's why I usually also have a Add-on at 1 or 2 points above my entry. But to tell the truth, in the current environment these add-on's in the profit have proven to be extremely difficult to manage, as the current volatility in ES means in about 99% of all trades, that this trade will be down under at least for a time and the trade risk has considerably increased. There is no new S/R level to place the stop, meaning the stop has to remain at 844.25, while I added say at 850.50, bringing my average up to 849. That means the trade now carries a risk of 490 $ compared to the 330 $ I was willing to take initially.

As it stands now, I will leave the profit Add-On's until I can trade more cars in the ES. If ES runs right now, it's worth to be on the ride even if it's just 1 car. And if it first trades down only to be rejected and driven up again then I have added at the optimal spot 1 or 2 ticks above support, if I want to go long.

My Fib-lines continue to work real nicely. Here is a new picture for the weekend:

Trading ES

With the big ranges we are seeing in the last weeks and months I'm thinking about trading ES again. It feels safer than other contracts which can jump 10 to 15 ticks on me in the blink of an eye. I applied my standard chart template to ES, but wasn't really content. And I did what you should do in such a case. Go back to the basic.

Start with a clear candlestick chart and add what you feel is missing to read the chart:

I added a moving average to have a trend feeling.

I added my round number tick lines calculated from yesterdays close, which I use as horizontal gridlines. Not only will they show me round numbers most traders trading with numbers only have on their screen as well, the spacing also tells me something about the volatility of a contract compared to another one. The wider the spacing the slower the contract trades.

Some markers on the right side showing me the pivot, today's and yesterday's important trade levels.

That's it.

But my wonderful band I introduced to tell me about oversold or overbought conditions, my Donchian channel...Gone after I applied the great tool I had sleeping in my pocket. Stashed and waiting to be used again

Sweet, don't you think, considering I got that picture by applying the Fib-tool to the opening range from 888.25 (strong premarket support into the open) to the open move high at 907.

Trading your account

I said, we see unprecedented moves in currencies in my last post, but I failed to recognize a spike when I saw one.

1.3150 would have been the right spot to go back into the USD. As you can see the Euro came back to the 1.29 level quite fast, actually it bounced at the 50% line and I stayed in the trade, Euro broke further overnight on October 31st, but held the bottom above 1.2650. The Euro tried a swing up, but failed breaking the 50% line a second time and I went long USD in my account at 1.2720. The Euro continued the 60min down pattern and may actually test the 1.2350 lows prior to the rate decision on Thursday, which might cause a relief rally, as I don't see Trichet cutting by 1% as some market participants seem to price in right now.

One thing to remember, when trading your account that way is, that you are never short. You are always long one currency or another and by going into your home currency you go flat and take a time out.

...... 6 hours later

MISTAKE...

and it cost me big today, as I trade the euro on the short side for most of the morning.

I failed to recognize this huge buying wave. Yes you ask, how? I was biased I guess. And that bias cost me in a row of stopped short trades in the futures. The account is back into euro at 1.2820 and we will see what develops after the election.

....

Upmove