Market Analysis

Trade Leader Alex Kazmarck of SpotEuro presents forex market analysis.

Update

A quiet market to start the week with fx markets in a tight range and equity markets higher, with the S&P hitting all-time highs. The US and UK holidays now behind us, I expect the markets to liven up.

I see a few opportunities in the short term for entry on the USDJPY, the EURUSD, and the AUDJPY currency pairs. I’ve highlighted some technicals below.

Technicals

If you’ve missed an opportunity to short the EURUSD, the 1.3760 and 1.3800 levels are excellent will provide an entry point for new shorts. The latter should act as strong resistance given it supported the euro for the last 15 days in April prior to rising and failing at the 1.40 figure. The aftermath was a strong push to the downside with the 1.3600 level acting as short term support. The retracement, as noted on the chart, may occur during the next few days ahead of the Eurozone CPI flash estimate on June 2nd and the ECB rate announcement and press conference on June 5th. The 1.3905 is 50% of the aforementioned retracement of the sharp move lower from May 8th through the 15th of May. Another opportunity with more risk is to sell on a break of 1.3600. Stops should be set from 1.3850 to the 1.40 top, depending on leverage and risk tolerance.

EUR/USD chart

The AUDJPY also had a setup in early May. A break of the wedge on the 19th of May was followed by 200 pips further to the upside. Since then, price has retraced to the 50% fib of 94.58 and is now looking to turn over and perhaps find another 200 pips profit for short positions. One caveat is that this is a play on USDJPY and AUDUSD of which I expect both to move lower in the short term, but with the Aussie underperforming, which would lead the AUDJPY lower. The upside to this trade is that there is a small chance the AUDUSD will fall while USDPY rises. Stops on the AUDJPY should be north of 95.00, with 96.00 acting as reversal for further AUD gains; though very unlikely.

AUD/JPY

Finally, the USDJPY, which has been trading within the 101 and 104 levels for most of the year. While I see longer term fundamentals supporting the dollar, the short term view may see the 100 figure tested. While I am uncertain of this, I am inclined to wait for a break or for more clarity. Currently, the 101 is 50% fib of the rally that took place in the final quarter of last year. The 100 level is 61.8% fib that could lead a strong supportive role within a larger move in favor of the dollar. Possible ways to trade this setup is a short on a break of 101 with take profit at 100. Another possibility is to buy any weakness from the current 101.90 level with stops below the 101 level. I would be more excited to buy between 98 and 100 for a longer term move.

USD/JPY

Summary

There are many trade setups that occur on many different time frames. The main reason for failure within this business is the lack of risk management, and more often than not, discipline. If a trade setup does not work, it’s imperative to follow one’s trading plan. This is even more important when one includes the use of leverage.

Summer is usually a slow time for markets, but with volatility already at 20 year lows, this summer could be more interesting than the ones before. With the Fed tapering and interest rates on the rise, along with the market discounting other risk factors, especially China, I suspect this summer won’t end without an increase in volatility.

Narrow ranges and light volumes are the subject of a recent blog post by Brett Steenbarger in which he talks about the impact of such market conditions on trader performance. Brett’s specific focus is on stocks, but as I’ve written before, low volatility has been a feature of multiple markets such as interest rates and the USD.

Specific attention has recently turned to the VIX. As can be seen in the daily chart below, the so-called Fear Index has reached its lowest level since the first part of 2013. When the VIX is low it tends to make some market observers nervous, getting them looking for stocks to take a tumble.

VIX and S&P 500

We’ve seen quite a few low VIX readings in the last couple of years, and they have indeed generally been followed by some kind of market reversal. While those downside moves have at times been quite sharp, they’ve never done any real technical damage and the overall trend has remained positive. In fact, the high volatility episodes have tended to be relatively brief, which is often a good indication of a strong trend. Still, a quick 5% drop like we saw the S&P 500 experience early this year is something which can rattle traders- perhaps even more so in a situation like we’re in now where at least part of the market is quite sensitive to the idea that we’re due for a reversal.

While I certainly can envision the S&P 500 experiencing a sharp sell-off at some point in the not too distant future, I’m not overly worried at this point about a major top developing. The market psychology doesn’t really feel excessively positive to me here. I will, however, be keeping an eye on how the ranges in the currency and yield markets eventually resolve, as they will certainly play a part of the future direction – and amplitude – of the stock market’s path forward.

Trade Leader Or Kahana presents technical analysis of the AUD/USD.

AUDUSD painted a bearish pattern on the weekly chart followed by a big bearish candlestick. Looking at Woodie's CCI monthly chart you can see AUDUSD is at the beginning of its downtrend. Last week the pair affirmed a bearish candlestick, which indicates the resumption of its weakness. The graph also created a technical pattern called 'Double Top.' The decline will start as a correction and might develop into a trend reversal.

AUDUSD-Multi-Bearish

Woodie's CCI daily chart built a bearish Vegas pattern. This pattern is created when the 50CCI climbs to the +200CCI, folds down and creates another hill in the +100CCI area (sometimes more than one) and crosses the zero line. (This particular pattern has a lot of nuances, so don't try to trade it based on this information only.)

When the 50CCI is crossing the zero line it's better to wait for the first red bar in the Woodie's CCI to affirm the bearish trend.

The daily chart also painted a bearish flag. A flag is a technical continuation pattern which is created when a correction of a healthy move is held in a tight range (sideways). The weakness of the technical correction indicates that we should expect the trend of the flag pole to continue.

Sometimes I am waiting for a candle that closes significantly (the amount of pips depends on the time frame of the flag) below the flag's support, but in this case I am using Woodie's CCI for improved entries. Woodie's CCI helps me to avoid minor or moderate corrections. I am searching for an hourly Zero Line Reject (ZLR) to join the downtrend.

I set three targets for the short and medium term on the weekly chart:

A: 0.9200

B: 0.9128

C: 0.9052

Trade Leader Alex Kazmarck presents analysis of the USD.

Update

Happy Friday traders! The dollar has continued to perform well against the majors as the dollar index rebounded last week from the key 79 level. This figure has provided support all the way back to September of 2012. Currently, the USD rally seems sustainable with the Fed taper plans and interest rate expectations fundamentally supportive. While much hinges on the sustainability of the US recovery, I think it’s important not to forget that global downside risks remain and this could also be supportive of the dollar given its safe-haven flow status.

Technicals

The trade weighted index for the USD has been supported at the 79 figure as mentioned earlier. The recent failure to close below the figure and the momentum that carried it above the 80 level is significant. Currently finding resistance within a triangle, a breakout and close above the 80.50 figure could provide enough momentum to test the 83 level sometime during the next 12 months. A break below the 79 level is very unlikely, but if broken, it would most likely be caused by a deteriorating US economy and more QE from the Fed.

dxy  eurusd

The euro has taken a turn for the worse since expectations increased that the ECB will take action against the long period of low inflation. While it’s difficult to say if the market expects a decrease in interest rates or purchase of some form of assets (EFSF bonds?), the recent economic data justifies further action by the ECB in the medium term. So if the euro rebounds on the fact that the ECB takes a conservative approach and takes rates below zero, it’s unlikely to find momentum to set new highs. It broke channel support two weeks ago and will now find short term support at the 200 day MA (~1.3630) followed by 1.3500 through 1.3180 and somewhere between the 1.28 and the 1.30 figure during the next 6 to 9 months.

Summary

While I believe technical analysis plays an important role in trading, fundamentals are the driving factor behind supply and demand, which is what drives price in the long term. There remain a lot of global risks: China, geopolitical conflicts, economic uncertainty, and government interventions. Traders must remain prudent in forming tactical trading decisions around both technical and fundamental factors.

1 Comment

The other day Trade Leader Alex Kazmarck offered his thoughts on GBP/USD, suggesting the pound was probably due for a retracement in the near future. While I don’t disagree with his view on cable, in light of the comments from Bank of England boss Carney last week as to the timing of eventual rate hikes by the central bank, it’s is worth taking a broader view of sterling. I start with EUR/GBP.

The thing which stands out for me on the weekly chart below is the recent turn up in the width of the Bollinger Bands. The Bands have gotten extremely narrow of late – more narrow than at any point in the last several years, as can be seen in the relative width line at the bottom of the chart. That is a set up for a market to see a rapid increase in volatility, usually as the result of a new trend.

jf20a

Of specific interest to us right now where EUR/GBP is concerned is the way the Band Width has increased on the recent break of 0.8150. This tends to indicate confirmation of the move, suggesting we are at the outset of a new leg lower in the cross’s move down from last year’s peaks. With the market getting into the high trading density area down to about 0.8000, it would be no problem at all to imagine it slipping toward that latter level.

We also have an extremely narrow Band situation on the GBP/JPY. Here too the Bands have gotten more relatively narrow than has been the case at any point over the last several years. In this case, however, we haven’t year seen them start to widen out, which make sense since there hasn’t been any kind of range break yet.

jf20b

Supportive of GBP/JPY moving higher again eventually is the price pattern. It has the look of a bull flag or pennant, both of which are generally seen as positive continuation patterns. This is generally supported by the fact that more of the trading has been toward the upper end of the consolidation area than the lower, indicating stronger buying pressure. There is also a modest bullish seasonal pattern to the cross this time of year.

Switching to GBP/AUD, we have a similar if slightly different scenario. Here the Bollingers have also gotten narrow, though not to the historical levels seen in the earlier crosses. A look at the price pattern on the weekly chart shows us shorter periods of consolidation, and in fact a recent break down from the one either side of about 1.85 that happened earlier this year.

jf20c

Still, we do have relatively narrow Bands that are starting to widen out once more, as in the case of EUR/GBP. This is a potentially negative situation for sterling, as said expansion in the Bands is coming in conjunction with weakness in the cross. We have what is looking like a potential failed rally following the break down from the earlier consolidation, creating a lower high, lower low situation. The one positive element is the proximity of the highs from mid-2013 to act as support. They are not very far below the recent lows.

What that leaves us with is a key range for GBP/AUD of about 1.75 to 1.83. I think the way the market breaks from here will tell us the direction of the next major move.

So we have is a situation where the pound looks like it could yet make further gains against the euro and the yen, but might be set to lose ground against the Aussie. That fits a scenario where the markets perceive the latter to potentially benefit from a stronger global economy, but the former two to continue to lag because of lingering internal economic issues. Sterling thus occupies a middle ground.

Trade Leader Alex Kazmarck of SpotEuro presents analysis of the GBP/USD.

The last time I wrote about the GBP/USD was back in January, signaling some short term consolidation/correction and longer term continuation higher. Since then, the pair did exactly that, seeing some resistance while continuing to grind higher against the dollar. Economic expectations are for the UK to outperform both the US and the EU, and potentially be the first of the big three to raise interest rates. In this regard, the pound has been outperforming the majors and only during the past few days has it decreased in price as the dollar formed a broad rally. While I see longer term growth for the pound, it’s unlikely to make major headwinds during the summer doldrums.

Expectations

Since breaking the descending trend line in November of 2013, the GBP/USD has traded higher within an ascending channel; however, only seeing 4.75% appreciation during this time period while also seeing a decline in 3 month volatility to 20 year lows; it seems that the market has adjusted to the forward guidance provided by the central banks and their QE programs. The 1.70 figure is most likely going to play a pivotal role in terms of GBP direction. If this price level is breached and holds, momentum should be able to drive the price higher; however, I anticipate a range between the 1.6 and 1.7 levels.

GBPUSD DAILY GBPUSD LT

Better than expected economic data could act as a catalyst and will most likely be in the form of wage pressures or the Financial Policy Committee (FPC) deciding to impose targeted restrictions on mortgages and higher capital requirements in hopes of curtailing housing prices, mostly driven by foreign capital. Governor Mark Carney has been less than hawkish during the past few months, noting that the strength of the pound is restraining inflation. He’s said that the BOE shouldn’t be trigger happy on the property market and that the FPC and the MPC (Monetary Policy Committee) are alert to risks from housing. During today’s inflation report, he said that there is still significant slack within the labor markets and that he prefers to reduce this slack prior to any rate increases. These statements further support the unlikelihood of the pound moving much higher in the near term.

Summary

So while the market expects the BOE to be the first to increase interest rates, there are still downside risks that must be acknowledged. Without pressure to raise rates, the dollar momentum accelerating, it may be sometime before the 1.70 level gives way to further increases. During the next few months, it’s more likely that the pound sees a corrective structure back towards 1.64 and 1.62 figures. The break of the ascending channel near 1.67 should confirm this pattern.

Short term resistance – 1.6900 - 1.7050

Short term support – 1.6700 - 1.6600

Medium term support – 1.6400-1.6200

At the recent FOMC meeting we got another announcement from the Federal Reserve that it would again taper back again the amount of Treasury debt it was purchasing each month – the fourth such move. We also got word that the central bank expects to keep paring back its QE purchases in the face of an improving US economic outlook, which has market participants anticipating that the $45bln in monthly asset purchases still in place will be wound completely down as 2014 progresses.

So what do the markets think of all this? Well, not very much really. As can be seen from the daily chart of US 10yr yields below, rates actually took a bit of a tumble in the days following the FOMC meeting, though they have largely recovered recently.

Daily chart, US 10 year yields - click to enlarge

One would normally expect Treasury yields to be at least looking like they wanted to move higher in the face of an improving economy and the steady reduction in purchases by the Fed. Instead, however, we’ve had a couple of months of the market going basically nowhere. This is, in fact, part of a broader consolidation in rates which dates back to the middle of 2013 on the heels of the big rally up from the 2012 lows.

Weekly US 10 year yields chart - click to enlarge

It’s worth making note of how narrow the Bollinger Bands have gotten of late. As the lower plot in the chart above shows, the Band Width relative to the middle Band (20-period average) is basically in line with its low readings from about this time in 2010 and 2011. In both cases the eventual market moves which followed were substantial. If anything, this current consolidation is even more intense than those proceeding ones, which could be setting the market up for some really serious trending action in the months ahead.

First, of course, the range needs to be broken. The Bollingers don’t help much in the way of indicating which way things eventually resolve. The chart, however, does provide some help. We still have a higher high, higher low situation in the weekly timeframe. This generally biases things to the upside. If yields can push back above 2.80% it would establish yet a higher high in the pattern, which would be a further positive indication.

Admittedly, however, the recent action does have a bearish bias to it. Were the market to drop below 2.450% it would represent both a key support break and a widening of the Bollingers. That would be a decidedly negative indication – or at least the set-up for a nasty head fake by the market.