Monday, 16 May 2011

FX Update

There has been a lot of volatility in the FX markets over the last couple of weeks and I expressed this in my post about trading bias: I am seeing a number of interesting developments currently and thus I thought this would be an opportune time to post.

Firstly, the USD index certainly seems to have put in a meaningful low on the Daily chart. The recent move has been strong and impulsive, with a sequence of very strong wide-ranging candles implying a shift in trend. The initial trade is done however. No doubt there is a huge short base out on this index and this really is the driver currently as positions are being unwound. Similar to March 09 in Equities, this is going to go as high as the short base determines. I don't know when that is.  I do have short term levels and potential targets coming in here but the key is understanding the shift in momentum in the bigger picture.

DXY Daily Continuous:
The break of the December 09 low proved to be a strong bear trap. Price has regained the 74/74.5 breakdown level with real strength. This is a strong, big-picture Double bottom pattern

DXY Daily Continuous:
Zooming in, the strong thrust off the low looks a lot clearer. Note the bullish divergences that formed prior to the low and the subsequent price confirmation. Price has formed a clear V bottom and broken out of a downward trendchannel. We have hit a target at the 38.2 but it remains to be seen if this is meaningful.

DXY 60mins:
This is the first bit of evidence I look at to suggest that the rally may be cooling somewhat. Price has made 3 higher peaks with my momentum indicator making 3 lower highs. This is a major warning sign and an ending pattern I see time and time again across markets. See USDCHF on the 5th May on the 60mins as an example of a 3 peak ending pattern.

EURUSD 60mins:
This is the similar pattern for EURUSD. It is still early days and we need to see confirmation from price given the downtrend. However, price is looking good for a reversal here especially at the major psychological 1.40 level. In the bigger picture, I would be looking for a good bounce back up into the 1.44/1.45 level to short but that is someway off yet. For now, focus on this potential breakout trade.

Price is also coming into potential channel support on the Daily. The mid line served to be a very accurate area for the recent high and now we are entering the low end of this channel.

I am seeing some signs of life from AUD which add weight to a slowing of this USD move. AUD has held the 1.055 level on several attempts and I believe this is a tradeable bullish area for nimble traders. Note the strong bullish divergences in place. A bigger picture triangle pattern may be forming so being nimble around here is key until 1.075/1.08 lifts.

AUDUSD 60mins:

Price topped recently on peak momentum. In my experience and in my extensive studies, markets very rarely top on peak momentum readings. There is often a subsequent "test" or a failed breakout leading to bearish market divergences. This has not happened yet. Price has retraced to the 38.2 retracement level and hit the rising 55 ema. I think this is a good area for swing longs. I don't think this is cooked yet in the bigger picture.

In quite opposite fashion to AUD, GBPUSD appears to be very weak indeed. After months of building a range under 1.63, price initially broke out only for higher prices to be violently rejected. Momentim has gone nowhere. This is a failed breakout and I will be looking for failed rallies and bear flags over the coming weeks to get short.

In sum, USD appears to have put in a major low but is potentially running out of steam in the short term. Some markets like EUR and GBP appear to have put in major tops whereas AUD could well have another assault at its highs and beyond. I think this is all in line with a major market topping process and dislocation as we approach the end of QE2 come June. These mixed signals across asset classes and the strength in the US 10YR imply real dislocation. Trading each market based on its own individual merits and setups is more important than ever now I believe.

The Top or Consolidation?

Going through my charts this weekend, I saw a number of consolidation patterns forming across a number of Equity markets. Certainly, the sell off in some assets such as EUR, Silver and Crude Oil does look impulsive indeed. Yet, Equities seem surprisingly resilient in the face of this. Dislocations like this are not a healthy thing no doubt and thus it could be argued that the equity market will be the last shoe to drop. I don't think we are at this point yet. The consolidation patterns I am looking at imply yet another surge higher and I believe this will coincide with even more dislocations and divergences similar to 2007. Either way, this will be quite a key week for markets as the low end of the range and supports will be tested. This need to hold.

S&P500 Daily: 
A simple Daily chart of the S&P500 shows 2 vanilla trendlines coming in right here. I have marked a target box here illustrating this potential zone of support from 1320 to 1330. The 55 exponential moving average is rising and also comes in right at this area. If we can see a bullish reversal out of here, I will be looking for a potential move up to the 1400s which may set up a "3 Indians" or 3 peaks topping pattern of some sort.

S&P500 60mins:
Short term, price is testing the low end of the recent range. I think we will see more weakness before a meaningful low ensues. An ideal bullish scenario would be a break of 1330 down to 1325 that fails to follow through. Any strong hammers or strength back above 1335 would be a good initial signal to get long, adding above the downward trendline in place. Note there is an open gap at 1320 and a potential A=C projection at 1319/1320.

Nasdaq 100 Daily:
The Nasdaq has been holding up remarkably well and I believe this is a strong bullish indication. We are building a short term consolidation pattern or flag at the top end of the range. Buy the breakout or short the breakdown. Simple as that and WAIT for your signal.

And to Asia. It appears to me that many markets are also tracing out consolidation patterns or triangles of some sort. Indeed, there has been no urgency yet in any of these markets to go higher or lower in fact. These patterns all imply more work to do before we can confirm that the uptrend is healthy once more.