FX Indices Review for 03/12/12

NB: Both indices closed for the week at similar levels to where they opened. Thus, this analysis is very similar to that of last week.

USDX

Monthly: Ranging upwards. A bull support trend line is still in place. The October candle was an ‘indecision’ style Doji, or almost a reversal style hammer pattern. The November candle has closed as an inverted hammer pattern. These are considered bullish reversal signals when they appear in a downtrend. The bull supporting trend line will be the key level to watch in the coming week.

Weekly: Trend up overall. The H&S pattern still looks to be printing on the weekly chart. The ‘neck line’ of this pattern looks to be at about 78.81 which is equivalent to the 38.2% fib retrace level from the last major swing high back in mid 2010! Price would still have to break through the weekly 200 EMA though first. The weekly candle is hard to see but is almost a spinning top, typical for indecision candles 

Daily: Ranging/upwards.  Price has broken down from trading within the upwards trend channel. There is some work to do for this pair if it is to keep falling. It will have to break down through the weekly 200 EMA and the monthly pivot, even before it gets to the monthly bull support trend line!

Daily Ichimoku Cloud chart: Price is still moving in a downward direction through the daily Cloud.

4hr: Trend down. Price has ended the week very near to where it started the week! Price looks to have conformed to a ‘bear flag’ pattern. There also seems to be a 4hr ‘H&S’ pattern forming up here now too. The neckline for this 4hr ‘H&S’ is the 80.13 level which is the weekly 55 EMA. 

4hr Ichimoku Cloud chart: Price is trading below the 4hr Cloud. 

EURX

Monthly: Trend down overall. November is the 4th bullish candle in a row though. Price has held above the broken bear trend line that was in play since mid last year. A bull support trend line is in place.

Weekly: Trend ranging to up. The bullish ‘inverse Head & Shoulder’ pattern seems to be holding up. This dovetails in nicely with the bearish H&S pattern I see forming on the USDX. Price has actually closed back above the ‘neck line’ of this inverse H&S pattern now which is a rather bullish sign. Price is also holding above the bear trend line from the symmetrical triangle pattern that has been in play since mid 2011. This is also another bullish signal. The only bearish warning here is that the weekly EURX candle has formed a 'hanging man' pattern and these, in an uptrend, point to a bearish reversal.

Daily: Trend up / ranging. 

Daily Ichimoku Cloud chart: Price is trading above the Daily Cloud.

4 hr: Trend now up. Price has been bullish for 3 weeks since it broke out and up from trading within the downward trend channel. Price started the week consolidating in what looked like a ‘Bull Flag’ pattern. Price has broken out and up from this pattern and is now holding above this and, also, above the neckline of the bullish ‘inverse H&S’ pattern.

4hr Ichimoku Cloud chart: Price is trading above the Cloud on the 4hr chart which is congruent with the daily chart.

Thoughts: Fundamental events, or rather news releases, have driven the markets over the last week. This is likely to continue next week and until there is some clear resolution with the ‘Fiscal Cliff’ debate. Technical trading will be at the mercy of these unpredictable events. There is also ongoing concern about Europe but this has paled somewhat recently in the wake of the ‘Fiscal Cliff’. One point to remind traders of here is that Monday will be the first trading day of the new month. These days, over recent years, have been more skewed to ‘risk on’ than to ‘risk off’. Also, it is NFP Friday next week too.

From a technical perspective though , the bearish move on the USD with the H&S pattern and the bullish move on the EURX with its ‘inverse H&S’ patterns still seem to be unfolding. There are two signals that are contrary to all of the combined 'risk on' signals though:

1. the print of a bullish reversal ‘inverted hammer candle’ on the monthly USDX chart.
2. the weekly 'hanging man' EURX candle; a bearish pattern.

Ichimoku thoughts: The Ichimoku Cloud charts for both indices now look like they are setting up for optimum conditions for ‘risk on’ trading. This has not evolved fully yet and, until such time, we still have divergence so expect choppy markets to continue. 

I will look for 'risk on' trades if:

• the USDX remains bearish  AND if
• the EURX remains bullish and holds above the weekly charts ‘inverse H & S’ pattern neck line.

I will look for 'risk off' trades if:

• the USDX returns to being bullish AND if
• the EURX returns to being bearish.

As always, Fundamentals, by way of Euro zone dramas and news announcements, continue to be triggers for price movement on the indices.  These events can always have the potential to undermine all Technical analysis.