Plunging Stocks Send Dollar/Yen Sharply Lower

U.S.equity markets are down sharply ahead of the New York opening amid concern the Euro Zonedebt crisis will disrupt the global economic recovery and undermine demand forhigher-yielding assets. This weakness is driving investors into the safety ofthe Japanese Yen.

U.S.equity markets are down sharply ahead of the New York opening amid concern the Euro Zonedebt crisis will disrupt the global economic recovery and undermine demand forhigher-yielding assets. This weakness is driving investors into the safety ofthe Japanese Yen.

Technically, the Dollar/Yen broke through an uptrending Gannangle/50% retracement cluster overnight, sending this currency pair sharplylower. Based on this month’s main range of 94.98 to 88.25, a pivot price wascreated at 91.61. In addition, uptrending Gann angle support from the Marchbottom at 88.14 came in at 91.58. The plunge through this cluster overnightindicates that stops must have been under this setup. The current chartformation indicates that 91.61 is the new resistance and 89.86 is the nextdownside target.

The GBP USD had very little follow-through to the upsideafter Wednesday’s closing price reversal bottom. The overnight weaknessindicates that the reversal bottom is likely to be negated if 1.4237 fails assupport. Downside momentum may increase on the move, setting up a furtherdecline to the 2009 bottom at 1.3501.

Fundamentally, the British Pound is not only feeling thepressure from the collapsing Euro, but traders are also beginning to factor inthe austerity measures the new government is going to propose. Some tradersfeel that the weak economy may force the Bank of England to continue to buygovernment assets in an effort to pump liquidity into the economy. This saturationof Sterlingshould keep downside pressure on the currency.

Risky assets are under pressure this morning, driven lowerby the weak Euro. Investors continue to pare positions in equities andcommodities due to the lack of clarity in the Euro Zone. Traders are unsure whois calling the shots. At this time, both politics and economics are playingmajor roles in policy decisions.

Earlier in the week, Germany took action to curb nakedshort selling. This move has madeinvestors nervous about holding risky assets because it amounts to changing therules in the middle of the game. Investors aren’t sure what will happen nextand are liquidating positions in order to prevent getting trapped in the marketshould another major regulatory change take place.

The action by Germany is creating uncertainty inthe marketplace. Institutions and major market participants don’t like what istaking place and are standing aside rather then fall victim to the whim of thepolicymakers. This is helping to trigger the excessive volatility the marketshave been experiencing. Large traders are watching carefully for inefficienciesin the markets, and stand ready to pounce on them when the opportunity arises.Until a quality set-up is spotted however, continue to look for whip-saw liketrading action with a bias to the downside.

High correlations between the major asset classes are alsoencouraging institutions to stand aside. Coupled with little or no liquidity,this is a deadly combination because it leads to volatility. Basically,institutions are having a hard time finding assets to use as hedges since theyare all moving in the same direction. In addition, the fear that a governmentmay come along at any time and say “you can’t go short” is effectively saying“you can’t hedge anymore”.

With liquidity sparse because institutions are on thesidelines, continue to look for wild swings in the marketplace until governmentregulators can convince them that the trading rules will remain the same andmarket relationships return to normal.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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