Sudden Unexpected News
The financial markets have been on somewhat of a rollercoaster ride over the past two weeks since the Japanese earthquake and subsequent nuclear crisis occurred.
The US Dollar had been trading in a sideways range against the Japanese Yen and was actually beginning to show signs of being ready to break out to the upside. I discussed this in my Trading Tutors Newsletter article on Friday March 11th, titled “Patience is a Virtue”.
Well that proverb, which I believe is extremely important not only in trading but in life as well, has proven to be good advice over the past fortnight as the US Dollar ran hard to the downside and then equally hard to the upside.
First, let’s take a look at the position of the US Dollar against the Japanese Yen (FXUSJY in ProfitSource) BEFORE the earthquake. This is shown using the Split Screen mode in ProfitSource in Chart 1 below.
click to enlarge
As you can see, the 1 day swing chart, 2 day swing chart, 3 day swing chart and weekly swing chart were all showing an uptrend, with higher swing tops and higher swing bottoms.
On Friday afternoon Sydney time, the US Dollar was moving higher and looking strong until the massive earthquake struck Japan.
In WD Gann’s book “The Truth of the Stock Tape,” a must-read for all Safety in the Market students, Gann discusses the effects of “Sudden Unexpected News” on the markets.
He talks about several different kinds of news events that occur in financial markets. Firstly, earnings reports on stocks. Gann says that in most cases, some of this news is already “discounted” into the stock price as there will always be people who know about this news before it is announced to the general public. There will also be people expecting the news and pre-empting the market in hopes of a favourable outcome.
Secondly, Gann talks about wars, using the example of the First World War, when Germany attacked the United States on February 3, 1917 with U-Boats. This individual event was unexpected (the attack on America), yet the spectre of war had been hanging around for several years.
Thirdly, he talks about events such as earthquakes that are “wholly unexpected and unforeseen by either the public or the insiders”. He goes on to say that “when news of this kind comes out, that the market has not had time to prepare for, its full weight and effect must be felt after it comes out.”
The Japanese earthquake would obviously fit into the third category here, being an unexpected event, but we have seen many earthquakes before that have not had such a drastic and immediate effect on the market. The difference here was the extra uncertainty added in to the equation due to the potential nuclear disaster that could have occurred after the damage to several of Japan’s nuclear reactors.
Gann says that in these sorts of circumstances, “it is always well to sell out long (positions) and cover shorts and wait”.
Looking at Chart 2 below, you can see that the US Dollar had a wild run in excess of 1000 points (500 points down, 500 points up) immediately after the earthquake and at time of writing (Wednesday, March 23, 2011) it is currently hovering around the 81 level.
click to enlarge
In times like this, it is wise to follow Gann’s advice, to stay out of the market and wait for your next time and price pressure point.
Sure, there was some money to be made as the markets went wild, but it required close watching of the market for the week and iron discipline with stop loss management.
I will be discussing the positions of the major currency markets this Saturday, March 26th in a special, one-off, half day online seminar and looking at where the markets may be headed from here.