Profit Taking and Reassessing

As the saying goes, no one ever went broke taking profits.  That may be true, but you can certainly sell yourself short by taking them too soon, and right now, I'm wondering if I did just that on my short Euro position yesterday.  Here's the thing, though.  I also try to maintain a level of discipline in my trading, which includes another old saying:  Plan your trade, then trade your plan.  So what was the plan?  If you go back a couple of days to this blog entry you'll see it.  My take profit target was the 50% fibonacci retracement at $1.3462.  We ended up reaching that target yesterday, so I hit the profit button.  

Below I'll provide a recap of the Euro trade, with a look at what was happening then and what we're seeing now, and my thoughts on the overall market via the S&P 500.


Below is the same Euro daily chart that I've been posting for the past few days, and it is easy to see that we hit the target zone during yesterday's session.

Overall, I'm still very bearish on the Euro, and think that we could easily trade back down to the September lows, but 2010 has also shown us how incredibly brutal the forex market can be, with news clips, rumors, and/or central bank intervention being the catalyst for some monster moves in a very short period of time.  This has made SingleMalt respectfully skittish in the near term.  On the one hand, we have a lot of negative news in Europe, specifically Ireland, which has been putting some well deserved pressure on the Euro.  We saw this happen with Greece earlier in the year too, but what else did we see happen with Greece?  Once the EU, IMF and the Fed came up with a bail-out package, all of a sudden everyone felt like the problem had been contained and the Euro was once again a safe-haven currency.  The result?   A 2,000 + pip move between June and November.  That is why I am being very conservative on my Euro positions these days, and taking my profits 200 - 300 pips at a time.  The downside to this approach is that I may very well miss out on a much larger sell-off, if it triggers overnight at a point when I'm out of the market.....but that's trading.

So coming back to a 30 minute chart, you'll see some familiar annotations below, and some new ones.  I'll use this chart to discuss what's currently happening, and what I'm looking for in terms of a set-up to enter a new short position.

Starting first with the familiar...you'll see the green up-arrows from yesterday, marking off the last support area that the bulls spent a couple of days defending.  Then you'll see the waterfall sell-off that resulted when we broke through this support yesterday, late morning EST.  As previously mentioned, I took my profits and am now out of the Euro completely.  Following such a violent sell-off, we usually see a period of consolidation and some retracement, prior to continuing the downward move.  My hope was that we might come back up and retest that former support line, which would now act as resistance, sending price back down to establish new lows.  So far however, that doesn't seem to be in the cards.  What has happened, is the formation of a well defined bear flag during the overnight session, which we appear to be breaking through right now, but the bulls also seem to be defending the 50% retracement at 1.3462 as the new "line in the sand" support area. 


Bottom line:  I'm in wait-and-see mode.  I'll consider an entry if we trade back up to old support at 1.3575 and get rejected there, or if we trade below new support at 1.3462.

As for the S&P 500, let me first say that I'm completely flat in my equities account, and have been for several weeks, with the exception of a speculative position in SLV (the silver ETF) that I finally took profits on last week.  I'll talk much more about silver in a separate post.  For now, let's go back to the familiar SPX daily chart below.

As you can see, we have clearly broken out of the multi-month trading channel that began back in Aug/Sept.  I personally feel like we could see a correction down to 1130 over the next few weeks, and that it would be a healthy correction for the market.  Whether or not we get that far down remains to be seen, and I'm not planning on taking on any big short positions, with the exception of some crash insurance...$2.5k in way out of the money SPX puts with expiration in Q1 2011. 

As mentioned in yesterday's post, we've had $20 Billion of POMO injected into the system in the past three trading days, and we will have another $20 Billion + by the end of this week.  That's a lot of fucking money, folks.  $40,000,000,000 of new money in a little over one week's time.  That is why I'm not sure that we get down to the correction target I've specified above.  Below is another view of the same SPX daily, but with the old annotations removed, and a fib grid inserted.

The interesting thing to note here is that the 38% and 50% retracement lines also happen to coincide with previous support areas that were defined during the rally.  I've circled these to make them easier to identify.  If we do continue to sell-off, these are the areas I would expect us to stall, and as such, will make good target values if you plan on trading a further downside move.  Keep an eye on the Aroon indicator as well - still showing an up-trend until the red line crosses back over the green.

Bottom line:  Although we have been seeing some selling lately, with all of the $$$Billions in new Fed money entering the system almost every single day over the next 3 weeks, I think we will bounce and start to head higher much sooner than we would if the market were left to its own devices.  Once we bounce, I may enter a few longs in the equities market, but even better money will be made on the precious metals front, which I will discuss in more detail later this week. 

Good luck trading.