EURUSD finally dropping? Maybe not!

[Mercury]

The recent price action on EURUSD post NFP seems like the drop could be on but we've been here before.  In fact this market has gone sideways with massive whipsaw effects since Mar 2015 and remains, in my view, too hard to call with any degree of confidence.  That said I can't help feeling we are not done with this yet.  The Weekly chart shows a Triangle shape to the sideways move, which in classical charting terms should complete with a final touch on the upper line (pink E) before truly beginning the final leg down.  However it can also turn short of the E and the Green tramline is a decent candidate for such a turn, especially in the area of the junction with the long term weekly down-sloping trendline (purple).  At this stage it is hard to see a rally as high as the Pink E but one back to the Long term weekly trendline is not hard to imagine and fits with the possible route of the DX (see DX post).

 

The safest play is to wait for either the retrace I suggest is likely or a break below the Brexit lows for Shorts.  The braver short term play is to seek a Long at one of the near term support zones.

 

Anyone trading EURUSD?  How do you see it?

 



[donaldprice]

Could not help look at this since their is been some significant talk about € $ falling, however as Mercury pointed out on his charts 2 weeks ago, it has become increasingly convincing that we are still stuck in this triangle of which could finally terminate, hopefully for a good entry before the ECB announcement SEP 8th.

 

[FOREX]

Any view on the USD/JPY? No matter what way I trade it, it moves the other way.

[Mercury]

LOL!  I get that   I am sure we have all experienced that feeling.  I don't know how you trade Day or longer term, but when I find that happening I take a break and try to reassess the market.  Usually I find for me that this kind of pattern of trading is emotionally driven rather than rules based so taking a break and spending some time observing and analysing helps me reset.  I often analyse my past trading to try and find the errors that made me take these loosing trades in the first place and relearn old lessons...

 

If you are a longer term trader check out the USDJPY thread for some ideas.  If you are a day trader I can't help you much but maybe  has some perspective to offer if you engage with him (err her?).

[FOREX]

Thanks Mercury. I just keep trying to call the bottom. Just worried if it breaks below 100 there could be quite a drop. Upside is huge though.

[donaldprice]

Should not try and call bottoms, remember their is no such thing as oversold, markets can keep going on and on, you must dance until the music stops, as John Keynes once said "markets can stay irrational longer than you can stay solvent". The same goes for bubbles, just keep adding fuel to the fire because that is what the crowd is doing, the trend is your best friend. Best try and hedge that position or downside your position if it don't work out. Their are plenty of opportunities elsewhere every single day.

[donaldprice]

Interesting article from the FT yesterday, which you would expect a stronger euro, but the 115 seems the max for me, before completing the ABCDE triangle, the Fed most likely wont raise rates until after the US elections, but I would not say for certain, after all the US data has been positive, but of course the dangers could cause inflation target to reverse. But I am more of a technical, don't believe heavily in chaos theory too much. 

The foreign exchange market increasingly expects the euro to strengthen, posing problems for eurozone exporters and leaving the European Central Bank with a mountainous task to support them with policies that weaken the single currency.

The euro ended last week 1.5 per cent higher, regaining $1.13 for the first time since Britain voted to exit the EU.

Some FX analysts are now pushing their euro expectations even higher, driven more by scepticism that the Federal Reserve will raise US interest rates than confidence in the eurozone.

 Morgan Stanley said the euro could climb to $1.18, while UBS has a year-end forecast of $1.16. Jane Foley, G10 FX strategist at Rabobank, said her three-month forecast of $1.10 assumed the Fed would raise rates.

“If it becomes clear that they are not going to, then the chances are that the euro is going to be far more buoyant,” Ms Foley said, adding that Fed rate expectations were having “an unprecedented impact on the markets”.

A clearer picture will emerge on Friday when Fed chair Janet Yellen speaks at the central bank’s annual symposium at Jackson Hole, Wyoming. Market commentators say Fed officials have issued confusing signals about rate expectations, the upshot being that the market is pricing only a slim chance of a September rise, weakening the dollar.

The euro’s resilience has surprised investors, said UBS, defying numerous factors such as expectations of weakness in the face of Brexit, a stronger US labour market and interest rate divergence between the US and the euro area.

The market is taking more note of stronger euro area economic growth, which is now above US growth for the first time in five years on a year-on-year basis, said UBS. Further evidence will emerge this week with the release of purchasing managers’ surveys and business and consumer data for August.

 

But a stronger euro may complicate the ECB’s growth projections, making the currency less competitive and stymying the central bank’s attempts to push inflation higher. After a strong run since the end of June, European stocks were looking more fragile at the end of last week.

Kit Juckes, macro strategist at Société Générale, said the risk for ECB president Mario Draghi was in maintaining the pace of the central bank’s bond-buying programme, because any backing away “could trigger a sharp move to the upside” in the euro’s value against the dollar.

 

The ECB could send negative interest rates even lower, said Morgan Stanley, but the impact could be limited “and might reverse quickly” because falling bank profitability meant tighter credit conditions, while exporters such as insurance companies were reducing their FX exposure. The consequences, said Morgan Stanley, were to “push the currency higher”.

According to Ms Foley, positioning data showed the market was betting against the euro, “meaning anything Draghi says has lesser effect”. As long as the market pushes back expectations of a Fed rate rise, Mr Draghi was up against “a massive headwind”.

[Mercury]

So you are long term Bullish EURUSD ?  And this is why you are worried about a drop through 100?  We are quite some way above parity just yet though so I am a little unclear on your thinking.

 

As for me I am long term Bearish the Euro but short term Bullish.  I think the market is in retrace (actually in a Triangle formation) that may top out anywhere between where we are now 11,300ish and circa 11,600.  BTW, this would mirror my assessment of GBPUSD, not that they have to move together but broadly they have been of late and I think EURGBP has a little further to go in the current rally.  After this it should be a one way trip down to parity and possibly beyond.

 

This is not about calling the bottom or top for me but simply mapping out a likely route and trading trigger indicators as they appear.  To do this you must have both an analytical method and a specific method for trade entry and exit.

[Mercury]

All true  but remember that saying has another line.

 

"The trend is your friend...

 

...until the bend in the end!"

 

Hedge funds are basically trend followers and they do well until the market turns and then they lose their shirts because their models are based on the trend continuing forever.  Amateur investors and traders are the same in my view as we can infer from the crazy bull market on stocks just now.  If you do not attempt to "call" the tops/bottoms then you get caught, potentially quite badly.

 

So I do seek to identify likely Tops/Bottoms and certainly major market turns within a trend.  Indeed one key indicator of same is the classic chartist Head & Shoulders pattern (or double tops/bottoms) but here is the critical thing, I am not trying to trade the absolute Top or Bottom but simply to recognise when it is being approached (and take appropriate defensive action on open positions) and identify when it has happened and the trend reversed.  This is the essence of swing trading for me.

[Mercury]

Chaos theory on a planetary level is something I can readily believe in  and the resulting fractal patterns that we see in nature.  On the other side the so-called Golden Ratio displays consistency and order in nature as well...

 

In terms of the financial markets I do believe they are all connected and if the butterfly flaps its wings in Brazil emerging markets then the effects are felt halfway across the World...  The Fed is more like a Mastodon than a butterfly so when that monster does something well the effects are obvious.  The issue we now face is the effects of the Mastodon doing nothing are also cause for reaction and speculation.  The US retail data is pause for thought on the state of the US economy, if anyone still needs that.  For me corporate earnings are the best barometer and that is suggesting storm clouds on the horizon.  In such a situation the Fed cannot raise rates.  I would bet that there will be no rate rise ad by the time there is a new president the markets will be falling and the new president will do a clear out at the Fed but all too late.  If it is the Donald that will happen even if the markets are no falling...

 

The FT article is the first MSM article I have seen reversing the widely held belief that the Euro is going down, I wonder when we will get such a reversal on GBP...?  Interestingly enough I have observed a small but consistent reversal in COT data over the past 3 weeks as well and it was this that supported my analysis of a retrace that allowed me to go Long the EURUSD.  The COT is still overwhelmingly Bearish I should add more than 2:1 so a retrace would kill off some Bears and allow room for further drop in this market after that as the former Bears lurch to the Bullish side once more.

 

As to level, well I wouldn't trust a think that larger banks like MS say, they are only interested in themselves and no one holds their pronouncements to account.  When I see more MSM joining the party and COT data shifting materially I will be selling my Longs and seeking a Short.  For now the top of my Triangle at 115-6 is my target. 

[donaldprice]

Although you can find some useful or more like interesting information on the FT, I do find that too often because it is a pro-European paper, one has always got to be sceptical of what they say and my belief is that most answers are on the chart in-front of you. But if one was to ask about what potential fundamentals could add to the momentum of € $ I don't think the FED interest rates will play a significant part, more like future continuing trouble from the Eurozone economies and even greater concentrated doubt on the effects of this endless cycle of monetary policy. But you could spend many hours looking at fundamentals and yet still not get close to make good decision making ideas, hence why Einstein's famous quote  simplicity is genius and complicated strategies are the definition of insanity.

[Mercury]

Building on the idea that this pair are in a retrace Triangle (Daily chart - see previous post) with a likely target of 11,600ish as the final Triangle upper line turning point the hourly chart is showing me a possible Flag formation in the making with the current move down set to either rebound back up off the lower Flag boundary and/or Pennant breakout support zone retest (second time) OR break through into a Bearish move.

 

As a watch out to anyone thinking to take a Short on breakout to the downside there is additional support just below at the apex of the previous Pennant, which coincides with the Weekly chart Fib 50% and the Wave A top.

 

One to watch but for my money this looks like a Long opportunity in the short term IF we get that bounce.  I would only consider a Short on a break of the lower support line.

 

Thoughts anyone? Is anyone trading this pair?

 



 

[donaldprice]

Hi Mercury, I still think that we have one more leg up as I see the current trend as W4, therefore for a short-term trade a long position is more favourable in my opinion of which then the big drop may be approaching.

[Mercury]

I agree  my target of 11600 remains in play, especially if we see a break of the potential Flag formation.  A dovish Yellen on rate rises would provide this short term impetus (on GBP also...)

 



[donaldprice]

Am I seeing an ending diagonal on the 1 hourly. Although I don't particularly pay much attention to divergence on the hourly, more on the 4 hourly for long term trading, could not help notice this pattern. 

 

[Mercury]

It could be  and I have the same positioning but let me ask you, what is the bigger time frame structure within which this sits?  I cannot me a EWT3-4 as you are, I think, suggesting.

[donaldprice]

Hi Mercury, those previous 3-4 where previous estimates, therefore please ignore them. However I am keeping a close eye on the 61% level on the 4 hourly from the previous impulse wave, and await to see if their is a bounce. Not too sure we have seen the beginning of the sell-off that we are looking for just yet.

[Mercury]

Yeah  I had the same when I thought the recent move move might be a wave C but cannot be now.  I am not sure which Fib 62% you are referring to.  By bigger picture agrees with your assessment that the next big drop is not yet on.  This market has been in an extended retrace consolidation period since the Mar 2015 and has taken a clear Triangle formation a break of which should spell the next significant run (Weekly chart).  Normally I would expect a fifth touch on the upper Triangle line (pink E) before the drop begins.  As such the moves between the Triangle lines are all in A-B-C form and this current one, if it completes, could be the same.  On my Daily chart I have a possible A-B, with the latter where the market is right now.  I could see the Fib 50% (off the Aug 2015 high) coming into play as support for the Wave B but either way a break of the hourly chart possible ending diagonal is tradeable.

 

Of note in all this is that the lower Weekly Triangle must be broken to signify a Bear move, until then we are trading in consolidation, which is prone to whiplash and hard to track on hourly charts.

 

One thing I noticed is that you say you use 4 hourly divergence.  This is interesting to me because I use Daily and Hourly, the former to gauge the big picture trend and the latter to hone in on trade entry.  Why do you prefer the 4 hourly?

 



[donaldprice]

Hi Mercury, I have found that for my trading strategy that prefer to use weekly-daily for main trends 1hourly to 15 minute for entries and 4 hourlies to spot divergence, of which quite often seem longer lasting as I do prefer trades that last a while and therefore take advantage of strong swings. The hourly is useful, but then again its a combination of time frames that help with your basket of decision making.

[Mercury]

Looks like a potential ending diagonal break and retest int he making just now.  With the Fib 50% so close this represents a low risk (close stop) Long to me and a target of the upper Triangle line in the 11600 region.

 

If GBP and EUR rally vs the USD is this because the USD is weakening or the others are gaining?  If the former can the Yen continue to weaken as we approach that pivotal point?