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US Equities Rally Before Continued Sell Off? October 2nd 2015 Forex Market Analysis

October 02
06:32 2015

Over the course of the last 2 days we have a see a relief rally in the equity market. In my opinion this is just a short term rally that will soon be met with continued selling for the next push towards the lows. In my opinion the question of the next direction in the market was answered on that 50-70% retracement of the first initial drop. If you were reading previous forex market commentaries you know that ever since the August 24th drop in equities and even the day prior I was talking about the 50-70% pullback of the first drop as the crucial area. Historically all market crashes have made this retracement and what happens when the price gets there is what determines the next direction more often than not. In 2011 and in 2014 when we had a major sell off the market blew through this retracement area and continued towards new highs, this one was different.

What really held the most importance for me was the major stop run of the highs as you can see in the chart. That stop run was then confirmed by further downside. In order for my bias to change I would have to see a break of the stop run highs. As long as the price remains below the stop run highs I will expect further downside. On a shorter term basis I think the market is retracing into NFP before making the next move. I expect tomorrow to be a wild ride. If we do get a sell off tomorrow Monday could be very ugly…

EUR/USD Retraces Up To And Holds 200 EMA

Going into today I had a open directional bias as the previous move was just shy of our cycle size criteria as well as a few other reasons. Today the EUR/USD did provide one really nice entry from one of yesterday’s pre-selected manipulation points. After the entry during the New York trading session the Euro went sideways and we took an exit at 5PM Eastern for break even. 

Today I will be treating the Euro the same. I don’t think yesterday gave many conclusive answers as to market cycle bias and therefore I will let any valid stop run from a manipulation point make the decision for me. Remember you have Non-Farm Payroll later today and as such you could have a strange market. 

EURUSD Chart 10-2-15

Pound Continues To Remain In Tight Range

The GBP/USD has been gently sloping to the downside but fails to provide any continuation off of the previous first push down. Yesterday we were looking for the second push to the downside in the Pound and as you can see it failed to produce that move. Even though we did not get the second push to the downside we did have a very nice short setup on the Pound from yesterday’s second pre-selected manipulation point. At the same time the EUR/USD was setting up the GBP/USD provided a classic stop run reversal short. This trade missed the full take profit by a few pips and was closed out at 5 PM Eastern for a 3% profit based on 2% risk.

As a full disclosure I personally took only the EUR/USD short as my personal trade plans has me in only one trade at a time. This is a personal preference and not a rule of the strategy in regards to when they both setup in the same direction. For today I will change my bias from only looking for the second push down to an open directional bias. The reason I’m doing that in the Pound failed to provide the continuation yesterday and Non-Farm Payroll has a way of shifting direction bias anyway. With that being said any valid stop run from one of the pre-selected manipulation points will be valid.

GBP/USD Chart - October 2nd 2015

Forex News For October 2nd 2015

UK Construction PMI 4:30 AM Eastern: As you can see by the chart UK PMI, like yesterday’s UK data, has been gradually trending to the downside. Because talk of a rate hike was on the table any major negative news could be met with more aggressive selling as no hike would become more likely. PMI has the ability to create a sizeable spike of 15+ pips. With that being said it has a strong history of starting to reverse the spike within 5 minutes of the news release. As such this is better used as a contrarian trade opportunity based on historical price action following the release. This month 57.5 is the expected number.

UK Construction PMI - October 2015

US Non-Farm Payroll 8:30 AM Eastern: Over the last year there has been two profitable news trading strategies for Non-Farm Payroll. The trading strategy that is used depends on the news and whether or not there is a conflict or not. Lets go over the first setup as it is the most straight forward. First you need to have a 40K deviation from the expected number or larger. After the price spikes in the direction of the news you will typically get no more than a 30-40% retracement of the initial spike. Any entry in the direction of the spike on this 30-40% retracement has been paid out nicely over the last 12 months. 

The second option is when we get a conflict with the headline number and this is by far my favorite of the two trade setups. The key with the conflict is it needs to be around equal and preferably larger than the headline deviation. Take for example last month. Last month NFP came out -44K worse than expected. The EUR/USD and GBP/USD spiked up as they should. The revision to the previous month was however +30K better than expected and Average Hourly Earnings as well as the Unemployment Rate were both better than expected which negated the positive headline number. Within 2 minutes the market had retraced the initial 40 pip spike and in less than 20 minutes the EUR/USD proceeded to fall 100 pips. The reversal was far more aggressive than the initial spike which is why I prefer this type of trade setup as it has great potential. It is also a high reward to risk ratio forex trade setup.


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