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2 TECHNICAL TRENDS THAT WORRY RICHARD RUSSELL

In his most recent letter, Richard Russell of the Dow Theory Letters discussed why he is growing increasingly concerned about the state of the bull market.  Russell believes there is “technical deterioration” when looking under the hood at the market:

“Late yesterday I was playing around with various formations on the stock averages, and, to my surprise, I came up with the pattern that you see below. Here is the Dow over a period of a decade. What we see here is a so-called “Broadening formation” or “megaphone pattern.” This pattern often appears towards the end of a bull market .”

“The broadening formation is made up of five successive reversals, four of which you see on the chart below. The rationale behi

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Hard Week for Dollar as US Economy Stalls

The US dollar dropped this week against most major currencies as the macroeconomic data was terrible, reducing attractiveness of the currency as a safe asset.

The global economic situation wasn’t very favorable for the dollar. The influence of the European crisis on market sentiments weakened somewhat, higher-yielding assets are again in favor of investors, erasing appeal of safe currencies.

Without the support from outside of the US the dollar could only rely on the new from America. And the news were really. Virtually every sector of the US economy, be it manufacturing of the housing market, performed very bad. Some analysts think that the r

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USD-JPY Climbing Slowly

The USD-JPY rallied in March from the all time low of 76.12 to 85.82. Within the most recent price history, this is the dominant swing, one defining critical support/resistance levels. Those must be broken before new trend gets under way. Since early April, the price pulled back from the high, but remained well within the preceding up swing. The USD-JPY dropped to as low 79.56, which might prove important in the larger scheme of things. That happens to be a 62% Fibonacci retracement level, a very common place for reversals. In this case, that would mean a resumption of the uptrend.

While the price has been moving slowly up for a couple of weeks now, it is difficult to qualify this move as a legitimate rally. For that, the USD-JPY must climb above the 85.82 high.

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EUR/USD: Falling on “Risk Aversion”? Let’s Look at the Timeline First

From the May 4 top near $1.4950, the EUR/USD has fallen as low as $1.4050 on May 16.

In other words, the dollar has gained 9 full cents on the euro in less than two weeks. That’s a huge move, and people want explanations. And what the media offers boils down to “risk aversion,” in light of “the bad news from Greece.” And that sounds good — until you check the timeline.

The latest wave of trouble in Europe started on May 3, when Portugal asked for a bailout. If you think that event is what pushed forex traders towards “risk aversion” — think again. The euro happily gained against the U.S. dollar the following day, May 4, pushing the exchange rate to that high near $1.50.

And if you think the trouble in Greece pushed the EUR/USD lower — again, please reconsider. Greece made a splas

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US And EZ Concerns Cap EURUSD Moves

In the past week there have been a number of headline grabbing stories in the world of finance, some of which had a more direct impact on the markets than others. The arrest and then resignation of IMF Chief Dominque Strauss-Kahn (DSK) was the biggest story of the week and it initially raised concerns about how it would affect the EcoFin discussions on Greece. As the meeting progressed, investors soon realized that without DSK life still goes on. He may have been crucial to the talks, but not much progress was being made before the EcoFin meeting anyway. On Wednesday, the Federal Reserve laid out its preferred exit strategy, leading some investors to believe that the central bank was gearing up for an exit. However those expectations were squashed by a series of disappointing U.S. eco Read more text…

Japanese Yen Strength is Illogical, but Does it Matter?

On a correlation-weighted basis, the Japanese Yen has been one of the world’s weakest performing currencies in 2011. Alas, while this information is interesting for theoretical purposes, it is of little concern to traders, who focus instead on individual pairs. Against the dollar (USDJPY), the Japanese yen is still quite strong, having recovered most of the losses inflicted upon it by the coordinated G7 intervention in March. Does the yen deserve such a lofty valuation? No. Will it continue to remain strong as the dollar? Well, that is a different question altogether.

As a fundamental analyst, I am inclined to look at the data before making a determination on whether a particular currency will rise or fall. I

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Pound Correction is Already Underway

Last week, I was preparing to write a post about how the British pound was overvalued and due for a correction, but was sidetracked by a series of interviews (the second of which – with Caxton FX – incidentally also hinted at this notion). Alas, the markets beat me to the bunch, and the pound has since fallen more than 3% against the dollar- the sharpest decline in more than six months. Moreover, I think there is a distinct possibility that the pound will continue to fall.

Not much has changed since the last time I wrote about the pound. If anything, the fundamentals have deteriorated. For

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Are Forex Markets Underpricing Volatility?

This question has been raised by several market commentators, including The Wall Street Journal. Its recent analysis, entitled “Currency Investors: What, Me Worry?” wondered whether the forex markets might not have become too complacent about risk and have seriously underestimated the possibility of another shock. First, some basics. There are two principal volatility measurements: implied volatility and realized volatility. The former is so-called because it must be deduced indirectly. In the Black-Scholes model for pricing options, volatility is the only unknown variable and thus is implied by current market prices. It serves as a proxy for investor expectations for volatility over the period for which the option is valid. Realized volatility is of course the actual volatility that is observed in currency markets, calculated based on the size of fluctuations over a given period of time. When fluct Read more text…