Saturday, May 11, 2013

FX Indices Review for 13/05/13

Monthly: Trend ranging upwards. The monthly 200 EMA is still above current price, at around the 84 level, and helping to keep a lid on this! The new monthly candle is printing an bullish engulfing candle.

Weekly: Trend up overall. The weekly support trend line is still supporting price. The weekly candle closed as a bullish engulfing candle. The current chart still looks to be printing a possible bearish ‘double top’ though. Price would really need to close above the 84 level to void this. The 84 level is a significant S/R level as it is also in the zone of the monthly 200 EMA. You can see from the weekly chart just how choppy the last 10 weeks now have been.

Daily: Trend up/ranging. Price has punched back up above the 82.59 level after the better than expected US jobs data and it closed the week above this support. The 82.59 level represents the 61.8% fib retrace level from the last major swing high back in mid 2010 and is still proving to be very significant.

Daily Ichimoku Cloud chart: Price traded in the Cloud for most of the week but moved up, and out, after the positive jobs data.

4hr: Trend choppy. Price trended sideways to down to start the week but rallied on Thursday after the positive US jobs data.

4hr Ichimoku Cloud chart: Price traded in the Cloud for most of the week but rallied up above this after the jobs data. It finished the week trading above the Cloud.  This is aligned with the daily chart and suggests bullish for USD or ‘risk off’.

Monthly: Trend down overall but 7 of the last 9 months were bullish. The April monthly candle closed as a bullish engulfing candle. The very new monthly candle is printing a small bullish candle.

Weekly: Trend up. Price failed to move above the monthly 200 EMA back in January. This level had been major resistance so it was no surprise that price paused here. Price action had been quite parabolic for ‘risk on’ until recently and has, subsequently, pulled back to the mean of the support  trend line;  something that is not out of order as part of any continued longer term bullish price action. The weekly candle closed as a small, but bullish, candle. The current weekly chart print still looks to have evolved as a ‘bull flag’ pattern. Price has now broken up and out from this flag pattern suggesting that perhaps the retracement period might be over and that the bullish movement might continue. Price is still sitting above this breakout level but under the key 108.5 S/R level.  Price has struggled to move up above the 108.5 level. The significance of this 108.5 level can be seen if you cast your eyes across the weekly chart.

Daily: Trend ranging. Price has chopped around this week again between the 107.5 and 108.5 levels. Price finished the week with a bullish candle just under the 108.5.

Daily Ichimoku Cloud chart: Price chopped sideways between the Cloud and the 108.5 level all week. Price really needs to break above the 108.5 level to motivate any real ‘risk on’ momentum for currencies. Price managed to close the week sitting just above the Cloud and, yet again, just below the 108.5 level.

4 hr: Trend ranging. Price has chopped around between the 107.5 and 108.5 levels for the last 5 weeks now. I have shaded this channel to make it easier to see. Price finished the week in the upper half of this channel. There really needs to be a break out from this channel, either up or down, to motivate any new momentum based trend.

4hr Ichimoku Cloud chart: Price has chopped around, with an upwards bias, all week to eventually move out of the Cloud. Price finished the week above the Cloud.  This is aligned with the daily chart and suggests bullish for Euro and ‘risk on’.

Choppy markets + Ichimoku: The Euro and USD Index charts are, for me, like my trading ‘weather’ map. One look at them and I can quite easily tell what type trading will be most appropriate. Where a surfer will assess a weather map to determine whether to take out their long or short board for a day of surfing, I assess my Index charts to determine the best type of trading for the given conditions. For the last three months my assessment of the index charts has revealed choppy trading conditions. Such conditions are better suited to shorter time frame trading during the US session than to longer term (eg 4 hr) chart trading. The Ichimoku charts are still divergent and this suggests continued choppiness. I know not to expect any longer term trends given the current set up on the Index charts. This, at least, removes some of the frustration from the current trading environment.

I continue to believe that this extended period of choppiness is related to the current market ‘topping’ action that is being seen across many global stock markets. Many Stock markets seem to be at a major junction and are experiencing choppy action ahead of the next major new momentum move. To me, this feels like the thunder building before a major storm. I just don’t know whether the storm will be a general ‘risk on’ or ‘risk off’ event. So, even though I have no idea what that directional move will be, when it appears.... I will trade it.

Many traders are lamenting this extended period of choppiness. I sat in a webinar with Todd Gordon yesterday and he started his presentation by emphasising this very point and scrolling though a number of currency charts highlighting the number of days/weeks that they have been trading in choppy/sideways action. 

The EURX: The EURX has held up surprisingly well this week given the ascent of the USD. I am amazed to see that it is still sitting just under the 108.5 resistance level. This holding pattern with the EURX confirms for me, for the time being at least, that this USD rally is not like previous rallies that were driven out of fear. I believe that a ‘fear driven’ USD rally would have seen the EURX fall much more than it currently has. I will be watching both indices carefully to try and gauge the next wave of market sentiment.

Until recently, the EURX has been a proxy measure for the mood for ‘risk appetite’. The EURX has now pulled back down and tested the support of the major monthly trend line. Price has now bounced off this major support level and rallied for 5 of the last 6 weeks. This is no guarantee that this trend will continue though. The next major hurdle for the EURX is the 108.5 level. This level is proving to be a significant challenge though and has managed to contain price for much of the last three weeks. However, any break and close above this 108.5 level would suggest that there might be some follow through with this bullish reversal and a swing back towards a more typical form of ‘risk on’. This remains the key level to watch in the coming weeks.

USDX: The USD index usually trades inversely to that of other typical ‘risk’ instruments such as stocks, the Euro, AUD and CAD etc. Lately, though, the USD has been rallying along with stocks. I continue to watch stocks and currencies to see if we might be heading into a new period, or paradigm era, where the USD might be seen as the new 'growth' or 'risk on' currency. It seems that the US economy is being perceived as being in a better state than the Euro zone and, so, it is not too surprising to see opportunity being sought there. I mentioned mid week that this seems more like a ‘least worst’ situation.  I'm not sure how long a USD rally can tag along with a stock rally though. One would expect that a higher USD will eventually hurt stocks. I'm on the lookout for further clues as to any shift in sentiment.

Final word:
I am waiting for Ichimoku Cloud alignment. I see this as being somewhat similar to any other seasonal business. You just have to wait, patiently and, as the saying goes, ‘make hay when the sun shines’.

I am also waiting to see how the upbeat sentiment that prompted the latest USD rally translates over the coming days/weeks with stocks and currencies. Will stocks and currencies both shift towards an upbeat ‘risk on’ sentiment too? Or, will they revert to a 'risk off' move with any continued USD rally? I have no idea but I will be watching for clues and, once a clear new trend emerges, I’ll try to grab some of it.

Note: The analysis above is purely technical based on the current chart set ups. As always, Fundamental style events, by way of any Euro zone based dramas and/or news announcements, continue to be unpredictable triggers for price movement on the indices.  These events will always have the potential to undermine all Technical analysis.

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