A perfect storm

• admin
• October 5th, 2009

$GBPJPY ‘s price action during the Thursday / Friday trading session was a poster child for several of my trading belief’s AND the three-ring-circus news cycle analogy.

In the first ring: Fundamental news forecasts + the technical setup

On Wednesday, the US ADP employment number was disappointing. The consensus estimate of 200K jobs lost was exceeded by 54,000 which set the stage for speculation that the US NFP jobs number on Friday would follow suit. From Wednesday all the way up to Friday’s NFP report, the market, bloggers, analysts and pundits were expecting the worse. The Nasdaq, SP500 and DOW were all trending down on Wednesday and Thursday. Enter the flight to safety meme; flight to safety = strengthening yen in this case. Though the pending report is US related, when the flight to safety meme takes hold a herd mentality ensues and several yen based currency pairs can be influenced.

On Thursday afternoon (18 minutes after Japan open), a classic breakout from consolidation pattern emerged in the $GBPJPY. The consolidation phase had been in effect for over 7 hours creating pent up energy. The breakout direction was a continuation of the previous short term trend. The direction was compatible with the fundamental news thesis being played out on the world stage (fear –> flight to safety). Pullback to my moving averages, short taken and I was in the game (point A in figure).

With the NFP report 15 hours away, my objective was to have a comfortable buffer leading up to NFP report time and if possible to add one more short position; both were accomplished (point B in next figure).

In the second ring: News release

The US NFP employment number was disappointing. The consensus estimate of 188K jobs lost was exceeded by 75,000; venti bummer. $GBPJPY spikes down 100 pips, I’m out with 376 pips (point C in figure).

In the third ring: WTF?

Remember from my previous post: “I don’t trade the news but rather the short term trend created by the news”. “Be prepared for the punch bowl to be taken away at a moments notice”. This next graph shows why.

After the spike down, there was a 2 hour consolidation mind freak followed by a swift up move which basically gave back 17 hours of short biased gains. To add insult to injury, the up move took about an hour! Even if you were correct about the 100 pip down move post NFP report, without a safety buffer to the upside you could have been stopped out by an initial whipsaw.

For me, the “news” was brewing a day earlier. The path of least resistance was clear from both a fundamental and technical perspective. Price action confirmed the fundamental bearishness which is why I sent out the tweet “This should be easy money tonight peeps”.

Most market participants that were going to be profitable on the NFP report trade were already in their position well before the report came out and covered into that momentary “euphoria” upon news release. 90% lose and 10% win.

The show must go on!

Ironically, as I write this, $GBPJPY is now 100 pips above my initial short entry position because Japan’s finance minister is now concerned about Yen’s strength and the resulting negative impact to their exports. For a good part of last week Yen was a hero and now it is starting out the week as the villain.

Fine with me, villain it is until it isn’t. This is fundamental and technical analysis micro-style. The Ringling brothers, Barnum and Bailey would be proud.

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