Thursday, May 20, 2010

About the DOW crash, Mr Roubini and a trade setup for tomorrow...

It seems to me every time the Dow Jones closes lower by a significant amount of points like how it did today Mr Nouriel Roubini, also known as Dr. Doom because of his dire economic outlook, manages to pop up on CNBC throwing salt in the wound, in a 'see.. I told you so' interview.
Mr Roubini, an American professor of economics, mainly famous now of predicting the recession a few years ago warning people about the credit crunch that wasn't taken too seriously at that time, is warning us again for some gloomy times ahead.
He speaks of a double dip recession because all the economic turmoil in the EU, China's slowing economy and Japan that isn't doing so well.
The Dow Jones Industrial Average dropped over 376 points today (-3.6%) , the biggest drop of the year, one of the reasons the German vote on the bailout coming Friday and several other factors like recent numbers about unemployment claims. In the last half hour of the trading session Debbie Downer came on CNBC to advise us all that cash is the safest place to invest. And look at that, he also happens to have a new book "Crisis Economics" that came in the picture.
This event has of course significant impact on the currency markets. The Euro spiked higher today almost touching 1.26 before retreating to 1.2496 where its hovering around at this time of writing. It looks like investors and traders are setting up for what is to come tomorrow.
The difficult part is that it's mixed signals, but some direction if you think about this likely scenario; I believe that the crash today was a overreaction in the markets and I have seen too many times a sharp rebound after such a huge dip. Especially now that the Dow Jones is trading around the psychological level of 10,000 points. There is a good chance the Dow will end up higher tomorrow, I know I am currently in the minority here with this statement. But if everyone was correct there would be no market to trade in right? This picture looks much more believable to me that what Dr. Doom has been painting for us. If the Dow indeed trades higher tomorrow, the EUR/USD trade will be significantly affected, more so then normal because it will be the start of some direction (finally). In that case, I'm expecting a lower EUR/USD price. Once I find a good entry point I'm going short this pair with a 30 pip stop-loss, targeting another 70 pips, just like I did today :)

The video clip of the interview with Mr Nouriel Roubini mentioned earlier in the post.

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