Weekly Update July 13, 2009

Adapt Your Trading Style

‘A stagnant situation can be boring for some, yet very profitable for others’
The U.S markets continued trade within range last week, closing Friday’s session at critical levels. News headlines had a major impact on the trading sessions, as U.S officials mentioned that they could be ready for round two, using further stimulus to combat the economic situation.
Tuesday’s session turned out to be the most volatile one, as the government released its PPIP program, another scheme which derives from the TARP program to help clear the toxic assets off bank’s balance sheets. Furthermore, President Barak Obama mentioned that another stimulus package could not be ruled out, especially due to the slow rate of recuperation.
The news had an immediate effect on the markets sending traders into safe-haven, as according to some further stimulus could be devastating for the U.S economy. On one hand, further stimulus would increase the U.S’s debt and could devaluate the Dollar sending it to lower levels. On the other hand a weaker Dollar could be the U.S’s solution; especially as President Obama mentioned that he intends to turn the economy around, diversifying its structure. As mentioned by the President at the start of his cadency, one of his major aims is to build an economy, that’s profits are not only through its financial sector, either through exporting real goods.
One must note that a weak Dollar might not be so good for financial investments yet it can be good for the U.S economy, because it makes American exports cheaper and therefore helps close the trade deficit.
The uncertainty regarding the economic recovery was characterized by lackluster sessions for the remainder of the week, as the broader market presented doji like candlesticks, closing just above critical support levels. The S&P500 finished the week with a mild loss of -1.93%, while the Dow Jones closed it’s forth week down, with a loss of -1.62%.

Currencies continue to range
Despite optimistic news from individual European countries, most of the currency pairs, continued to range, due to a stagnant Dollar. The Dollar index finished yet another week around the 80 level, after presenting a couple of volatile sessions. As mentioned in previous weekly reports, the Dollar index and the S&P500 are now key factors that should be closely observed; should they both break out of range, trends will begin to appear on the individual pairs.
The Euro and Pound both bounced higher during the week but quickly loss their steam going forward. The Pound was backed by the BOE’s interest rate decision to keep their rates unchanged at 0.5%. What surprised most investors this time was that the BOE changed their statement, mentioning that even though further quantitative easing could be used at their next meeting in August, they have decided not to give the markets another dose of medicine, as they would like see how the economy absorbs their recent efforts.
According to recent economic data, certain sectors for example, manufactured goods, are still show declining prices, while others are mildly improving. The recent cause of events has led the central bank to believe that price are beginning to stable and could significantly improve by 2010.
By taking a glance at the chart below one can see that the rate of decline in the United Kingdom has significantly dropped over the last few months.

Stop fighting the trend
When observing the charts one can see that a majority of them are presenting ranging patterns. While certain traders might be used to their own swing strategies, the markets are dynamic and will often call for numerous strategies in order to trade under different market scenarios. Those who are still swing trading, might find it hard to trade in a ranging market, therefore entry points around support and resistance levels could be ideal under the current circumstances. Remember that a stagnant market can often be a very profitable one, and sometimes only requires slight adjustment to your current strategy.

The week ahead
Forex traders could encounter an increase in volatility next week, especially as the S&P 500 is trading around critical support. In addition countries including the U.K, Canada and New-Zealand are all expected to release their inflation data. For GBP/USD the data released on the 14TH will be especially important as a result deviating dramatically from the market’s current expectations could put pressure on the Pound. If CPI figures drop far more than expected, it could trigger the BOE to resume their quantitative easing at their next meeting. A tolerant figure could drive the GBP/USD up to resistance.