With the holiday season now behind us at last ( thank goodness ) the markets are finally returning to some sort of normality, as the UK and Europe struggles back to work after the long break and winter snows ( which as always bring everything to a halt!) – it always amazes me how we never hear of these problems in Scandinavia, Norway, Sweden, or Canada, and yet bring a few inches of snow to Northern Europe and the entire infrastructure grinds to a halt! So what has been happening over the Christmas period, and what can we expect for the rest of this week ? Let’s start in the forex markets, followed in my next post I will take a look at equities, which are expected to perform strongly this year, and finally round off with commodities.
Let’s start with the dollar index, which as always gives us a good guide as to the likely direction for the US dollar, which suffered a pullback in the run up to Christmas, breaking below the 40 day moving average, but appearing to find support at a previous bottom in the 79 region on the daily chart. In the last two days, this has been reinforced by a recovery with the index currently trading at 79.817, as we approach the short term moving averages ( 9 and 14 day ) which are now bunched together with the 40 day up towards the 80 price level. This region also coincides with a deep area of price congestion created throughout December, and for a rally in the dollar, we need to see this level breached with momentum, along with a consequent break and hold above the 81 price level. The next obstacle is then the 200 day moving average which sits in the 81.702 region, and a break here will be key to any longer term trend to develop, with the final leg being the price congestion between 82 and 83. If these three elements fall into place, ( as I expect) then we should see a strong move higher for the dollar in the short to medium term with a possible test of potential resistance at the 85.50 region in due course.
This analysis has formed the basis for my dollar related trades over the next few weeks, and moving to the euro vs dollar, I have built up a long term position in the currency in anticipation of a break below the 200 day moving average at 1.3079, which to date has helped to prevent a fall below this key level. In the last few days we have seen several signals which suggest that a retest of this level is likely once again soon, with the Christmas ‘rally’ for the euro running out of steam at the 1.34 price area, where the previous rally stalled, and subsequently was followed by the shooting star candle. This pattern appears to be repeating once again, with the shooting star candle of yesterday sending prices lower today, coupled with the hanging man signal of Monday this week. The key level however is the 200 day moving average, and if this is breached, then expect to see the euro dollar fall further, possibly as far as the 1.25 region in due course, which is where I will be taking some profits if achieved.
So what of the other majors ? The GBP/USD is following much the same picture as for the EUR/USD, with the 200 day moving average once again playing a pivotal role, currently sitting at 1.5410, and has so far prevented a further decline in Cable, and also coincides with some heavy price congestion which is helping to provide a platform of support in this region. Since early November however, the pair have been developing a longer term downwards trend in a series of lower highs and lower lows, and should this pattern continue as expected, then we should see a move below the areas outlined above with a possible retest of the 1.5000 region in due course. A feature of the last few weeks has also been the 40 day moving average, which prevented a further rally at the 1.5866 region and now appears to be repeating this pattern again in the 1.5653 region, so look for further bearish sentiment in due course.
The USD/JPY continues to look weak, having broken below all four moving averages in the run to the end of the year, with both the 9 and 14 day moving averages breaking below the 40 day moving average giving us a bearish signal, and as the pair attempt to rebase from the 81.15 level, which may prove to be only a temporary respite before we see further continued strength in the yen. As always we need to exercise caution in this pair, since it does not follow the traditional pattern of US dollar strength or weakness, and is driven more by underlying bond markets, than a simple correlation with the US dollar. In addition, the pair are also heavily influenced by traditional buying and selling of the yen with Japan’s economy built on the major export markets around the world, and consequent flows of yen as a result. Finally of course the yen is aslo seen as a safe haven status. However, from a technical perspective any break and hold below the established base at 80.77, will signal a further leg down in the longer term bearish trend.
The USD/CHF is one of those pairs that we tend to trade in an automated way, expecting a fall in the EUR/USD to be reflected in a rise, but as I outlined in a previous post on correlation, this is one that has long since broken, due to the safe haven status of the Swiss Franc, which investors flocked to in search of safe paper based assets. The question now of course is when will the bottom be reached? I never try to forecast a top or a bottom, but only what the chart is telling me. In the last two days we have seen the USD/CHF bounce back from the low of 0.9319 to currently trade at 0.9542 this morning and any hold above the 9 and 14 day moving averages would certainly be a signal of some short term bullish momentum, but the journey back is likely to be a long one ! However, for a speculative trade with a small contract size, this could provide a good return, but the key levels are now a break and hold above the 40 day moving average, coupled with a breach of the resistance at 1.000. If these factors combine, then I will be thinking of opening a test position at this level on a long term trend trade, with any further recovery above through the 1.025 region adding further weight. The key this week will be whether the week ends with a bullish engulfing candle, and if so then this could be the signal we are awaiting, and as such giving us an entry signal on the weekly chart. If this is coupled with a break and hold above the short term 9 and 14 week moving averages then this will provide further confirmation.
The USD/CAD finally broke below parity in the run up to Christmas, and despite the minor recovery of the last few days, is now looking increasingly weak, particularly with the depth of resistance now immediately overhead. In addition, we are now trading below all four moving averages once more, with the 9 day in particular now appearing to present a barrier of resistance in the rally of Tuesday this week, and as such we can expect to see further short term weakness as a result. A move below Monday’s low on the daily chart of 0.9888 will then open the way for momentum to the downside in the longer term, and once again I will be considering this as a longer term trade should this occur.
Finally let’s look at the AUD/USD, and here again we may be seeing a potential turn in the recent longer term bull trend of the last few months, as US dollar strength returns to the market once more, if the pattern outlined on the US dollar index, does indeed materialise. The key here is to consider the weekly chart, and should we end this week with a bearish engulfing signal, then this will give us a clear entry point for a longer term trade. This was a signal we followed last time back in early November, but the trend failed to develop with the consequent pullback above parity once again, with the 14 day moving average providing the platform of support. So the key this time is to wait for the signal, and then enter our positions once the move extends below the 9 and 14 day moving averages, with an eye on the deep resistance at 0.9335, which could prevent any further progress for the move in the longer term.
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