The following is a newsletter article from Larry Levin of www.secretsoftraders.com and it touches on the ice berg of a major issue.  Some of this is opinion, although opinion from a successful trader who understands the markets.  That said, always read between the lines as numbers can be made to look pretty much any way the person making the argument wants them to look.  Yet the numbers themselves are there pointing to where we are, and they can’t be ignored.

Good article, and I agree with it.  So here is the piece from Larry Levin’s Nightly Newsletter

Bond Market to Feds: Drop Dead!

Today’s bond market action reminded me of the famous 1975 Daily News headline, “Feds to New York: Drop Dead.” At the time the federal government decided to reject a request for a NY city bailout, which prompted the headline.

However, times are different today: nobody is allowed to fail. Chrysler was allowed to keep its $11.4 billion “bailout” (that’s right US taxpayer – you were robbed!) and GM is said to be on the docket to receive ANOTHER $50 billion bringing its total to $69,400,000,000.00. Do you think GM will repay this money? Do you think AIG will repay? What about Shitigroup and Bank of America?

By the way, as of yesterday GM was worth about $800 million. Uh-huh, we’re giving GM $69.4 BILLION when its current net worth is almost 87 times less! What the hell kind of math is used to justify such nonsense? Oops, my bad – that’s Washington DC math.

Well, when you throw in the assured future handouts to insurance companies, commercial real estate firms, government run healthcare, State handouts, “free” college educations, etc the bond market is saying – no thanks. All of these so-called freebies are “budgeted” at today’s interest rates.

Like the fools that they are in government, they extrapolate funding this madness to infinity with ultra-low interest rates but forget that the bond market does not have to play along. The bond market is bigger than the President. The bond market is bigger than Tax-Cheatin-Timmy at Treasury. And although Helicopter-Ben doesn’t know it, the bond market is bigger than even the Federal Reserve.

Today the bond market may have said to all the aforementioned: DROP DEAD!

With today’s price collapse in the 10-yr Notes and 30-yr Bonds and commensurate yield spike, spreads widened. The 2yr/10yr spread is now at the widest spread ever. The 2yr/30yr spread is now just three basis points shy of its all time 1992 record. The 30-YR fixed mortgage rate on the eRATE real time mortgage quoter spiked a huge 28.2%! Yesterday it was quoted at 5.08% and today was quoted at 6.52%! Surely this was a knee-jerk reaction and will fall somewhat, but it should be a wake-up call.

So what happened? Today’s 5-YR Note auction went well – better than expected – and the bond market still crashed. Uh-O, good news and the market still drops thus increasing interest rates? That’s bad and why I say the bond market is getting tired of the bailouts. Remember, GM is only days away from filing BK and therefore another MASSIVE cash infusion.

Tomorrow brings us a 7-YR auction and thus perhaps more fireworks – or not. You see, it is the 7-YR that many believe is the cutoff between where the foreign central banks will slow or stop buying Treasury’s IOUs. The US is beholden to the kindness of foreign banks of China, Saudi Arabia and others. At the moment they seem willing to buy short term IOUs, but not the longer term junk, which is driving up interest rates.

Question: If long term rates continue to rise while Helo-Ben is powerless to stop them, how much of a so-called recovery do you thing there will be?

The government must STOP THE BAILIOUT MANIA NOW!!!

Ever since the Helicopter-Ben fueled up his money-helo, long term interest rates have been going up – slowly. That was not supposed to happen. Ben thought he could wave a magic wand and make everyone do his bidding. He was wrong. However, the bond market is massive and cannot be turned around like a Ski-Nautique boat; it’s more like an aircraft carrier. Therefore, I believe we have time to avoid the worst possible outcome: Jimmy Carter era interest rates. Call Congress and demand an end to the madness.

We should consider today’s action a shot across the bow. If the Treasury and White House do not cure their bailout psychosis, the USA will become the ultimate subprime borrower. “Change you can believe in.”

Sadly, I believe the current changes in the bond market have to do with; systemic structural weakness in the US financial system, the gross amount of government debt, and obscene fiscal irresponsibility. The lofty yield curve is a vote by the trading community that the US economy is a massive systemic risk, with a real possibility of core failure.

Here are a few articles I recently wrote for Investopedia/Forbes Digital – all free to access.

Trading The Non-Farm Payroll Report -
http://www.investopedia.com/articles/forex/09/non-farm-payroll-report.asp
- by Cory Mitchell

Intermarket Relationships: Follow the Cycle -
http://www.investopedia.com/articles/fundamental-analysis/09/intermarket-relations.asp
- by Cory Mitchell

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Have you ever wondered why the forex market acts the way it does?  At times there are seemingly large “random” movements, and technical analysis methods can seem very hard to “fit” to the data (especially on the short term).  Well, a very interesting book on the subject is “Bird Watching in Lion Country – Retail Forex Trading Explained”.  It clears away some of the myths about forex trading, exposes some of the hype, and leads you down a path where you are better able to understand and succeed in the market.

It is worth taking a look at: http://www.forex-trading-explained.com

To Your Trading Success,

~Cory Mitchell
Market Strategist

With the slow markets yesterday and earlier today, due to Easter holidays in many places (and hence no day trading signal last night/this morning), I thought it would be good to provide a little insight into one of the indicators I use…the RSI.

In the USD/JPY Swing Trade set-up below I mentioned a few things about oscillators – overbought levels etc.  I mentioned those because often they are viewed in the wrong way.  This article will take a closer at the the RSI indicator and what certain levels can actually tell us about what we are trading.  If you are going to use an indicator it is very important to know how that indicator works so you can understand when the information is valuable and when it isn’t.

I am not saying that common ideas about this indicator are wrong, but they need to be used in a context, and not simply used blindly.

RSI is an oscillator and commonly people believe they are only  valuable in ranging markets.  This is false.  An oscillator can give us a lot of information about trends as well.

So here is the first thing we need to know – The RSI moves within ranges during a trend a price.  The levels the RSI ranges between can indicate the strength of the trend.  In an uptrend the RSI should stay between about 30 and 90.   In a down trend it will generally stay between 20 and 70 (often 60).  This can let us know if a trend is reversing, as a drop below the 30 level on an RSI is rare in an uptrend.  If it ducks below 30 or fails to recover above 70, the uptrend has been stifled.  These levels will vary slightly depending on the market traded, so find the levels your market ranges between before using this. (If the market is ranging this information is not particularly useful)

This means if we are in an uptrend we will often have “overbought” type readings on the RSI.  Many traders exit positions because they think a price reversal will materialize simply because the RSI is showing a reading of 90 for example.  This is not necessarily the case.  The RSI looks at average up moves and average down moves, therefore, we can get a drop or reversal in the RSI without a reversal in price.  The RSI can move out of this overbought territory even without a significant fall in price.  This is because a brief sideways movement will bring down the “up average” calculation of the RSI, allowing it to fall to more normal levels, with price never really moving lower, but simply taking a breather.

An RSI that is continually in the in the 60 to 70 range shows – in a rough approximation – that prices are continually closing near highs and former bar highs a high percentage of the time…and this is great for the person riding the trend.  It is true a reversal will eventually occur, but the a trade should not be exited on the single premise that the instrument is “overbought.”  Rather we need to look at other factors… is price actually breaking?  Is the RSI range still showing strength by staying above 30 and hitting the 80+ range occasionally?  Is the RSI making new highs as price makes new highs (this is good)?

Just a few things to consider.  The RSI, and oscillators similar to it, can provide a lot more information than they are not commonly given credit for.  The above are just a few different ways to look at this indicator.  There are many other ways to use this indicator as well.  I will cover more of these in future posts.

~Cory Mitchell
Market Strategist
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The USD/JPY pair broke above the 99.50 resistance level a few days ago, and has since retreated. The retreat took the pair back to a low 99.30 – right near the top of the old resistance area. The fact the market held this level, combined with a strong day today which is pushing the price back above 100.00, provides a potential swing trade to the upside.

If the old resistance level continues to hold we have a potential trade.  Currently the pair is trading at 100.47.

We have two potential entries. The first entry is a daily close above 100.42. This is a more aggressive entry in that the market will have not yet proven it is going to resume the uptrend, but has simply given us strong indications that it will. That said, the risk in pips for this trade will be lower.

The other possible entry is a daily close above the recent swing high at 101.42. The higher entry price shows the market is continuing the uptrend (higher highs, higher lows), yet, our stop in pips will be increased due to the higher price paid.

Here are the setups for both trades:

1.     BUY on a close above 100.42 (this could be soon)

Stop at 99.25.  This is a risk of 117 pips (assuming an entry around 100.42).

Profit Targets at 104.80 and 109.00.  This is a reward of 438 pips and 858 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

OR

2.     BUY on a close above 101.42

Stop at 99.25.  This is a risk of 217 pips.

Profit Targets at 104.80 and 109.00.  This is a reward of 338 pips and 758 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

Downsides of the trade:  The upside of the trade is that we have seen a pull back and thus far a successful hold above the old resistance level (now a support level).  The downside is that that this pullback was relatively small compared to other pullbacks we have seen in this pair.  With the pair still showing some signs of being overbought (this is not a bad thing in and of itself, it is actually a sign of recent/current strength) the danger is that we could still see a pullback possibly back into the 98 area.

-On the flip side, strong trends generally always show oscillator type indicators nearer to overbought levels.  Also a small pull back can be a sign of strength as the market was not able to push prices much lower before moving back higher.

These comments are made not to confuse, but rather to help you gain an understanding of the thought process you should go through before you a choose to incorporate a certain strategy into your trading plan.  For information on building a trading plan please see my article in the March issue of Technical Analysis of Stock and Commodities magazine, or you can find an abbreviated version here on the site: http://vantagepointtrading.com/tips-and-tricks/trading-plans

The amount of pips multiplied by the number of lots should not exceed 3% of your total account balance (less is even better).   For example if you have a mini account, each pip movement is approximately $1 US.   If you have $10,000 in your account you can risk 3% of $10,000 which is $300.  That means you can take 2 mini lots for the first trade and risk $234 (derived from 2 X 117).  If you take 3 lots your risk would be $351 which is more than 3% of your account balance.  If you take the second entry you can only take 1 lot.  Bottom line control risk on every trade if you want to stay in this game for the long term.

~Cory Mitchell
Market Strategist

PLEASE READ THE RISK DISCLAIMER BEFORE TRADING: http://vantagepointtrading.com/legal-disclaimer
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Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open a Standard account and receive up to a $1,000 bonus.

Open a SuperMini or Standard account now and receive a 100% cashback worth up to $300.
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I am here to personally help you out if you open an account, and need help with strategies or figuring out the trading platform.

View last post for this trade here: http://vantagepointtrading.com/archives/1071

Original post can be viewed from that post. Entry was at 1.2719

This trade has already realized a 500 pip profit on part of the position. Profit targets hit so far are 1.2430 (a 289 pip profit). We have also hit the target at 1.2200 (a 519 pip profit).

Currently we are trading at 1.2290 – well onside. Yet the large drop has also caused a short term oversold condition (13 on RSI), while prices have so far held above the former swing low. This does not mean we are about to head higher but it makes it less likely we will head lower in a hurry.

Bring in trailing stop to 1.2377. But we want a close above this level. If you use a different time frame on your charts than I do, at least make sure the US market close is above this level.  If we do continue lower, next profit target is 1.1850.

(square box is our entry, circles are profit targets hit so far.  Black line is current trailing stop – based on a closing price)

~Cory Mitchell
Market Strategist

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With some major rate action coming from the FOMC announcement on Wednesday, I am going to update the Longer Term trade setups I have mentioned.

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First, recently I wrote of a potential trade in the USD/JPY pair.  The trade was a potential upside breakout.  See original post here: http://vantagepointtrading.com/archives/1061.

This set up did not develop, as we have fallen well off the upside resistance area between 99.50-100.00.  The pair is currently trading at 96.30.  The Cup and Handle chart pattern is still present, but currently we have retreated to the lower range of the handle.  Thus this trade was never triggered.  Take this trade out of your “pending” trades inventory.

A completely new signal may be close at hand in this pair, which will be posted shortly.

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The USD/CAD trade (last update is here http://vantagepointtrading.com/archives/938 and you can link to original post from there) was triggered on 03/13 with a closing price of 1.2719.  This was our entry point.  Currently this trade is over 200 pips in the profit.   The first two profit targets have already been hit.  Stop should now be moved to breakeven.

PLEASE NOTE, for my own analysis my daily bars close at 24:00 GMT.

~Cory Mitchell

Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open an account and receive a cashback bonus (up to $300 or $1000 depending on the account).

The GBP/JPY is moving back up towards the 1.4200 level, a level which it has tested on a few occasions and has been pushed back down. This is a level to be aware of.

A confirmed break above 1.4200 would mean potential profit targets at 1.4600, 1.5400, 1.5900 and then 1.6400. These profit targets will be updated to more exact levels if the trade materializes.

As we move closer to the breakout point, a stop level will also be given. The stop will likely be in the area of 250 pips, although may end up being smaller than this.

~Cory Mitchell

Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard.

The Federal Deposit Insurance Corporation is a member bank funded insurer that covers cash deposits up to $250,000.

There has been talk recently that if the fund has become depleted and is in danger.  So the questions become: Are deposits at risk? And how will the FDIC rebuild its depleted reserves?

The second question is easy.  The FDIC has already increased fees to bring up their reserves.  But this action is not likely to make a huge impact in the short term.  So the first question becomes center stage – are deposits at risk?

With more than two dozen banks having failed already this year, the FDIC will run out of funds if the situation does not stabilize.  It is no question they are facing a threat, but the likelihood they will fail, and depositors will not receive their deposits up to the prescribed amount, is extremely remote.  So the short answer is no, deposits are not at risk.  The FDIC has a $30 billion credit line and the government has said that they will back the FDIC if it gets into trouble.

The FDIC is essentially backed by the government.  This means the government can provide indefinite funding to keep the organization afloat.  Since the government theoretically can print as much currency as needed, the government would not let the FDIC fail.  A FDIC failure would likely result in a run on the banks, further bank failures and a crippled US economy.  The government would not allow this to happen – not through a FDIC failure.

But while the dollar amount of deposits seem to be safe, for it will be covered by the government backed FDIC, the cost of funding and all the other bailouts which the government is printing more currency for does not come without its own price tag.   The more currency that is printed and in circulation then theoretically the higher chance there is for inflation to creep in and a weakening of the currency.

So far, despite mass spending, the USD has done well against other currencies such as the EUR and GBP.  This is likely due to the fact that this bailout problem is not country specific, but rather global in scope and thus other countries are also being forced to save some of their business.  The USD currently appears to investors as the lesser of evils and somewhat of a safe haven.

While generally headlines have been grim it would seem that deposits are safe, and during these time savings rates are also at their highest levels since 1995.

The Dow Index also rallied sharply on Tuesday, finishing higher by more than 350 points or 5.5%. Positive comments from Citigroup may have played a part in the rally.

~Cory Mitchell

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The pair did make a break above the strong resistance level of 1.3000, but failed to hold above it by the close (24:00 GMT is what I use for daily bars). The upper shadow does show selling pressure, similar to what we saw on the last two attempts at this level.

But even though the pair did not stay above 1.3000 calling a reversal is at bit premature, as is calling for a move back higher again.

So we will wait. And while Mondays action did push the rate above 1.3000, I am still using the trading signals I originally published here http://vantagepointtrading.com/archives/924

~Cory Mitchell

GBP/USD has definitely broken below the 1.4000.  Currently trading at around 1.3770 it is moving towards the target of 1.3500.  A break below 1.3500  would signify a major move over the long term to 1.3000 and possibly down to 1.2000.  Of course there will be more entry points if this were to materialize.

A closing price back above 1.4000 would signify the pair is not ready to head lower.  Then we would watch for a topside breakout, as detailed in the original post of this analysis (pasted below)

~Cory Mitchell

Original post below.

GBP/USD Longer Term Analysis (From March 6, 2009)

After a long down swing starting in Aug of 08 the pair has consolidated, and is currently in a more ranging environment.

In regards to the GBP/USD pair, here are the levels to watch for.  I post this before the US releases their employment data on Friday.  This is always a big market mover and could be the catalyst which begins a sustained move in either direction (although this is speculation).  Thus, we need to watch certain levels.  For this analysis I referring to a daily chart, and thus a longer term outlook.  Even day traders should be be aware of these numbers though.

As I write this the pair is trading right around 1.4200.  A move above 1.4600 would be an intermediate breakout and would signify a test of major resistance at 1.5000.  A move below 1.4000 would test the lows and support level at 1.3500.  Ideally we want to see a day close above 1.4600 or a close below 1.4000 before I could consider it an actual break.

Moves to either of these intermediate levels could potentially trigger a new trend.  If 1.5000 is moved through, a major resistance level, it offers a target of 1.6500.  A break below 1.3500, a major support level, offers a target of 1.2000.

~Cory Mitchell

If you are interested in getting into trading, or if you are disappointed with your current broker, check out mine at Forexyard. You can open an account for as little $100, and right now you can get a 100% cash bonus if you open a live account (ie. Deposit $300, get a $300 cash bonus = $600 in your account!). I am here to personally help you out if you open an account, and need help with strategies or figuring out the trading platform.