5 trades in the FOREX market

FX: This is our first public posting of the New Year. As such, we need to give a recap of our trading strategy.

Most of you know that we had closed out our long USD/CHF initiated on January 3, 2005 at 1.1430 at 1.3140 on December 27, 2005, effectively riding out our well forecasted rally for the dollar in 2005.

Readers may also recall that we were geared up for a bullish month of January in the US Dollar as that has historically been the strongest month on a seasonal basis for the past 30 years. But we had also issued a report in the last week of December saying to watch the 1.1970 level in EUR/USD because our colleague John Netto had issued a major buy signal on out of the money euro calls.

So when the US Dollar fell like a stone on January 3, 2006 we immediately revised our near term outlook, and purchased long AUD/USD at 0.7350. Two weeks later we reinitiated long USD/CHF positions at 1.2720 for an expected bounce to 1.2900/50. We said traders should play that bounce and then expect one final plunge.

After the forecasted bounce in USDX towards 90.00 ushered in new weakness we said in this weekend's report that "key support at 88.00 offers traders the best opportunity to position long if (and only if) the 88.00 (cash) level holds up." However, we also noted yesterday that "EUR/USD and USD/CHF fell shy of their expected targets yesterday so marginal weakness in USDX could be tolerated in the coming days before a major bottom is reached."

EUR/USD did see a marginal new high, but USD/CHF did not see similar new lows. Meanwhile, USD/JPY is up strongly and we added to our long position today at 115.60. AUD/USD is holding its ground near last week's highs and our short USD/MEX position is still doing well.

We still look to buy more USD/CHF at 1.25 but we also know that failure to hold this level would mean that the US Dollar is looking to retest the September lows before a major rally. Either way, we are doing fine with our core positions initiated on January 3.

To clarify, we list below our trades with some updated comments:

Jan 3: Short USD/MEX @ 10.63 -- Looking to add at higher levels possibly.
Jan 3: Long AUD/USD @ 07350 -- Bought more on the dip to 0.7450.
Jan 6: Long USD/CHF @ 1.2720 -- Looking to add at 1.25.
Jan 9: Long USD/CAD @ 1.1660 -- Trying to hold the 1.15 lows.
Jan 12: Long USD/JPY @ 113.70 -- Want to close out at 116.30/40. This pair is still holding up.

Gold: No change: Gold continues to show its strength. The theoretical price is somewhere north of $800, but we see a completed "five wave" move at $564 that needs a retracement before the next strong "wave III" move takes off. It will take a move below $542 to suggest a larger retracement at hand.

Stocks: No change: The S&P 500 threw itself over trendline resistance at 1285 last week and sunk in a sharp reversal. We said the January rally appeared to be the finishing touches on a two-year long ending diagonal pattern. But, "For the bears to steal the ball we need to see a top in the S&P500 around current levels and a 'five wave' move down below 1275 and then key support at 1245. Once accomplished, we'd expect more selling pressure to follow." So far the reversal is going strong and we think traders can look to go short with risk limited to 1,300. We are still waiting for a completed "five wave" move lower to confirm a top.

Go short with risk above 1,300.

Bonds: We have said for two weeks that "The corrective move in yields looks finished. Yields should head higher (bonds lower) over the coming weeks. But the 10-year note will have to move below 109 to get the downside rolling. Only a move above 110 negates this scenario." Yields are trying to move higher and notes are testing the key 109 area this morning.

No trading position at this time. Still looking to sell on a confirmed move below 109.

Crude Oil: No change: Oil is back in the news as prices are rising again. We said many months ago to expect a correction back to $55 followed by a renewed rally to $80-$100. From Friday's WSJ an astute market observer noted, "The speculators have been negative on the market until recently, so there's more than enough room for them to come back into the market and push prices higher." We tend to agree.

We recommended long at $55 but have no trading position as we do not play the energy markets directly.

Jes Black

FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
www.fxmoneytrends.com

Jes Black is the fund manager at Black Flag Capital Partners and Chairman of the firm’s Investment Committee, which oversees research, investment and trading strategies. You can find out more about Jes at BlackFlagForex.com.

Prior to organizing the hedge fund he was hired by MG Financial Group to help run their flagship news and analysis department, Forexnews.com. After four years as a senior currency strategist he went on to found FxMoneyTrends.com - a research firm catering to professional traders.

Jes Black's opinions are often featured in the Wall Street Journal, Barron's, Financial Times and Reuters. He has also written numerous strategy pieces for Futures magazine and regularly attends industry conferences to speak about the currency markets.