FX Updates. - Let the pictures talk!

Some interesting price action on the forex markets. - I am not going to add to much comment here, but will instead present some mostly 'Big Picture' charts of EURUSD, EURGBP, EURAUD and USDCAD, with a few observations added. - The chart which looks the most interesting is the EURAUD in the wake of the surprisingly strong move by the RBA. 

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A look at EURAUD FX.

This currency pair has been one of the more interesting trading currency pairs in recent times, with plenty of movement, direction, and liquidity. A few weeks ago it made a breakout of a daily basing pattern, this week it has retested the breakout of this pattern, and bigger picture it resides close to some potentially key pivotal points. - At present this makes it in my opinion a relatively cheap option to get long, however there are a number of forces at work both macro and technical which have the ability to push the market either way.

The first chart I will look at is the spread of short-term rates, both nominal and inflation adjusted, on AUD and EURO. The rate differential between these two has been a favourable argument for being long AUD versus the EUR in recent years, currently the pick-up in carry is 3.25% in favour of the AUD. This is a powerful incentive to favour holding AUD, Looking at the charts below, which shows this in negative terms, in order to match the quote terms of the currency pair, and comparing these spreads to the charts, it is easy to see how this aspect has heavily influenced this pair for some time. - However, it also appears that the last move lower in recent months is a bit of a discrepancy in this relationship. I would also like to add that there seems a high possibility that the spread may start to move higher soon, both nominally and inflation adjusted, RMDfx has posted a good article highlighting the risk of this, which can be seen here. Whilst the EURO debt crisis has the ability to unhinge the EUR, as per yesterday's post (See here) the EUR continues to show resilience.

Looking at the technical picture, a couple of things jump out at me:

The monthly chart above shows a potential bullish 'Morning Star' type pattern over the past few months, though follow though this month would be needed to keep this alive. 

On the weekly picture, there seems to be a number of potentially bearish developments, but also a potentially bullish pattern, which highlights the current pivotal nature of price action. The chart below shows the weekly picture. I have highlighted the major descending trend-line, this recently capped the move higher in the currency pair, and also the consolidation band through last year, which acted as significant resistance on the recent rally. The recent rally has also highlighted a potential 'Bearish descending scallop pattern, (I have included an example of this below), however this could also be a Bullish ' Rounded-Bottom' basing pattern. (example of this below also).

Finally looking at the daily chart (See below). - The current pullback has also extended to some key pivotal areas: Noticeably the peak in February at 1.2618 which once broken then became support, the 28.2% retrace of the February to March rally at 1.2613 and what appears to be an approximate rising trend channel base, though this is still not mature enough to confirm as a true trend channel in my humble opinion.

Summing up: I believe this may soon start to continue its recent upside move at some point soon, however the caveat for me is to not make a meaningful break below 1.2600 as there remain some strong bearish pressures still, I believe a negative breakdown through 1.2600 may bring these back into play. - On a risk/reward basis, I believe makes the long trade here a relatively cheap trading strategy, if one considers using a relatively tight stop below 1.2600. - Te upside may struggle as it runs into resistance, but a break above 1.2910 recent high, could propel this much higher, particularly if the RBA soon take a more dovish stance.

USDJPY EURUSD AND EURAUD UPDATES

USDJPY

Further to my recent posts on USDJPY highlighting the prospects of significant gains (See here) and the more recent post highlighting the possibility of some consolidation for a few weeks (See here), I thought I would update my view as it stands. But first an interesting chart showing the US v Japan 2 year govt yield spread over the past year versus the USDJPY.

There seems to be a clearly visible correlation between these two.  Though I always caution against to much reliance on correlations, one can see that this correlation is suggesting that the USDJPY spot fx rate may have got slightly ahead of itself. - I myself am looking for a pullback possibly to the mid 81s on USDJPY at some point in the next couple of weeks, though in the volatile world of fx it could easily over-shoot a little. - Overall I remain bullish longer-term though I may have to review if USDJPY starts making value below 80.00.

EURUSD.

EURUSD continues to behave largely in line with how I thought it may unfold in the previous post. 1.34/35 is my pivotal area for this. -  My longer-term view on EURUSD is for bearish forces to re-assert themself, with 1.34/35 capping. However a clear break through 1.35 would suggest to me that this may be off the table for now at least and may bring 1.40+ into play longer-term. - I still find it hard to believe that people will be happy being long EURUSD in the bigger picture with so much strife still existing in the Eurozone. (How ironic that as I write that, as I sit long at the moment, but in fairness it is a short-term view with a trailing stop and take profit in the mid 1.34s. - However, it only takes many people getting short-term long and stopping out of shorts, to keep pushing this higher. - 'That is how this thing works'.)

The chart below shows the current EURUSD with a couple of interesting technical aspects. - Further to last week's post, I still believe we are re-testing the recent high and the breakdown of the trend-line, this line acted as resistance yesterday, and may continue to cap though rising quite sharply all the time. On the downside, 1.3290/1.33 appears as if it may be an important pivot, initially providing some support.

EURAUD

I called this a few weeks ago (See here), only to find a reason to talk myself out of my long (See here). 

For now, for me, this horse has bolted, with a good chance we could see 1.3100 area pretty soon.

EURUSD - CLASH of Wedges + Some futher observations on EURAUD, SP500, US 10 YEAR, USDJPY..

EURUSD FX
A couple of years ago I wrote about what I termed 'The clash of the wedges' on the SP500, the post can be seen here. We seem to have another smaller scale version of a clash of the wedges on the EURUSD. - Just for the record 'Wedges' are subjective patterns which usually indicate a temporary interruptions of the previous price trend, they can appear at terminations of trend, and can also appear to be occurring at the onset of new trends before the wedge actually morphs into a new trend. Technical analysts see a 'breakout' of a wedge pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line).

I have noticed a number of occasions in the past when the breakout of a wedge takes the form of a new wedge, thus evoking a 'clash of the wedges'. One would normally expect the outcome to favour the major wedge, though this is not always the case as can be seen on the lower of the two examples below. I have produced a chart showing the current EURUSD wedges and some further charts below highlighting a couple of previous examples each with a different outcome. - In the first example the major wedge dominated, though not before the minor wedge had put in a strong showing, and in the second case the minor wedge overcame the major wedge and emerged dominant. - At this stage, I would favour slightly the major wedge, to emerge strongest but it is certainty not a given, and in the meantime, there is every chance the minor wedge pushes the EURUSD back towards the recent highs around 1.34/1.35. - As I said I would slightly favour a re-emergence of the downtrend from there, however a solid break through the 1.35 highs is likely to favour further EURUSD strength possible towards 1.4000.

SOME FURTHER OBSERVATIONS AND UPDATES.

EURAUD FX - DIAMOND PATTERN UPDATE:  This may have made a breakout of thIs basing pattern today, though given my own antipathy to these formations (See post here) I would still heed caution on this.

US 10 YEAR NOTE FUTURES: Similar emergent price behaviour over the past years to EURUSD in 2009.(See below). If this continues to unfold in a similar fashion, we may soon some period of consolidation, before further significant losses emerge int he months ahead.

 

SP500: Finally, my recent comparisons of SP500 rallies of late, which hinted at possible top in early-March proved to be somewhat wide of the mark.- Which goes to show how one should always treat comparisons with previous behaviour somewhat cautiously. - Which ironically leads me onto some comparisons with previous behaviour on the SP500. - A couple of weeks ago the SP500 produced a weekly 'Hanging-Man' candle, the chart below shows a number of these patterns emerging after some sustained weekly rallies. In the highlighted cases the hanging man was followed by further strong gains usually for another couple of weeks, followed then by some fairly wide-ranging consolidations back in all cases to the top of the 'Hanging-Man' candle where support kicked in. - In this case, were this to occur again, then the top of the 'Hanging-Man' candles would offer good support around about 1370. - Note, these previous consolidations were merely resting places for the rallies to re-charge themselves for further gains later on. 

 

USDJPY FX:  Last but not least the USDJPY, I highlighted in a post a couple of weeks the significance of a close over the 95 Week SMA (See post here). Since then it has continued to solidify these gains. I have updated the USDJPY chart below to show activity since that breakout. - If previous break performance is to be echoed, then I believe in the next couple of week, we may see a re-test of the moving average. This could bring USDJPY back down to 81.00-81.30, where support/new buyers would be expected to hold it before further significant gains emerge over the course of this year, quite possibly carrying this much higher into the 90s at least. _any significant moves below 81.00 on a sustained basis may cause me to question the assertion of further USDJPY strength.

Finally bringing all this together: The outlook for T-Notes appears to suggest further losses in months ahead, the SP500 further gains, and the USDJPY further gains, however all appear to be close to a period of consolidation of recent moves, thus I would be on the watch out for some corrective/consolidation activity on all these markets over the next few weeks.

EURUSD and EURAUD appears to be un-synched a little from these risk asset classes of late and following their own direction. EURUSD may see some further gains towards 1.34/35, however I think this zone may be pivotal, with my current preference for the EURUSD waekness to re-assert itself. EURAUD may be making a significant base, but I remain cautious as to whether to trust this right now. 

The 'Trader,Trading & Risk Psychology' Blog is part of 'BGT Edge' a trader and investor coaching, development and education company. - To know more about how we can help improve your Trading or Investing Performance from a psychological or behavioural perspective, and how it could help drive you towards greater 'trading success' please email me on sgoldstein@bgtedge.com or check out my website www.bgtedge.com.

Update to EURAUD post, and why EURAUD may drain your psychological capital.

Last week I took a view that the EURAUD maybe basing. - Whilst I still hold that view long-term I have decided that right now I do not want to be part of it. I will explain below with the help of some charts and a little bit of trading psychology.

Having revisited the EURAUD pair, I have identified what may be a diamond pattern - See below :

Over the years I have come across many diamond patterns across many different times-frames, in my opinion they are one of the most awkward patterns to trade. Whilst I still think basing is probably occurring in the longer-term view, I would rather wait for a clear confirmation, than try and anticipate it.  Admittedly on occasion diamonds do behave well, in my experience however they are mostly like naughty children, they never do want you want, are very erratic and temperamental and will often ask of you - 'are we there yet?'... --- In other words, whilst they are forming and growing up, they will drive you mental, test your patience and exasperate your mental energy and psychological and real capital. In the meantime - whilst waiting for this to happen - other opportunities could go begging. And remember, if this does start to advance, then there will be plenty of time to get on a trend, with far better risk/reward set-ups.

I have below illustrated an example of a large-scale diamond formed at the top of the US equity market 1999-2000, I remember that whilst this formed that there was a lot of hair pulling-out going on.