Read and Grow Rich
Greetings from Acapulco! It's cloudy, wet, and humid, not exactly great beach weather, but it's a perfect time to follow up on last week's article and answer a great question from a reader. Keep those questions coming!
In last week's article, titled "Deadly Hurricanes and Dangerous Assumptions", we discussed at length the reasoning behind shorting the Great Britain Pound and going long the Japanese Yen (GBP/JPY). The idea was to short the weakling of the group (GBP, which has been falling relentlessly) and go long the Japanese Yen, which is the only currency other than the U.S. Dollar that has been performing well recently. Please note that when that article was written on September 1 (published on September 2), the GBP/JPY pair was trading at a major support level, at about 195.50, as indicated on the Figure 3 chart from last week's article. Also indicated was a potential catalyst for a break of that support level, in the final sentence, "The Japanese Yen tends to perform well when equities markets perform poorly, so if recent stock market weakness persists, look out below."
Look out below, indeed. Now it is Friday, September 5. Take a look at the "Last" price on the weekly chart, and I guess it's safe to say that support has broken. The last price just under 188.00 indicates a gain of about 750 pips this week. The low price of 186.01 indicates that at one point, the weekly gain was about 950 pips. It's time to ring the register. Hey, it beats working for a living!
I've already heard from some of you who sold GBP/JPY short after reading last week's column, and while I appreciate all of your kind comments and praise, I want you to know that you deserve all of the credit – congratulations! Whenever we take a trade, the credit or the blame always goes to the person who hit the button or clicked the mouse. Trading is not a good business for those who do not take responsibility for their own actions, but it's a great business if you have the ability to stand up and admit when you're wrong – and there is nothing wrong with taking credit when you're right. If you hit the button, then you deserve the credit for those times when you win, just as you deserve the blame for those times when you lose.
More Ammo for GBP Bears
In the Forex market, there is a clear connection between technical and fundamental analysis that does not exist in the stock market. The technical weakness in GBP/JPY that was indicated on the charts is backed by fundamental information. At the same time that the chart was breaking down, the OECD released its predictions for growth in the third and fourth quarters of 2008. The OECD is the Organization for Economic Cooperation and Development, which describes itself as an "international organization helping governments tackle the economic, social and governance challenges of a globalised economy". Interestingly, they picked Japan to have the strongest growth of any G7 country, while predicting a recession for the United Kingdom. The U.K. was the only G7 country to receive that distinction.
Under these circumstances, it shouldn't be too surprising that the Yen has the British Pound on its heels, and one could say that the Yen is fundamentally - and technically - stronger than the Pound. Even if the OECD's predictions turn out to be inaccurate, they are a respected organization and their opinion carries some heavy weight. For more on the OECD, visit their website at http://www.oecd.org.
