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.

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.

EURAUD - POTENTIAL BASING PATTERN.

EURAUD Suffered a huge decline in the period from late Nov through to early Jan. Moving from just below 1.4000 to close to 1.2000. - The past 2 months however it has been in a large sideways pattern. - Bigger picture there is a chance this is part of a basing pattern which could see a decent correction higher for this pair. I would like to see if this could sustain a move over 1.2500, thus far it has failed miserably, a recent move up to 1.2600 barely lasted 24 hours before being hammered back down. - First stop if it can make a break (and hold) over 1.2500 would be near 1.3000. - If it can then hold those gains, there would be a shot at pushing on towards near 1.4000, though at this stage looking at that may be a step to far. - Breaking back below 1.2200 would probably consign this basing to the back-burner - for now at least.

Disclosure: I am currently long EURAUD. 

Please Note: In additional to occasional technical analysis, my main profession is as a 'Trader Performance, Psychology and Development Coach' working with traders in banks, hedge funds and proprietary trading houses. - If you would like to find out more about my work and how it could help you or your business, please email me on sgoldstein@bgtedge.com or check out my website www.mindsetofatrader.com. 

Also feel free to join my 'Linkedin' group 'Trader,Trading & Risk Psychology'.

First update for a while.

Its been a while since I've posted. However, though not on a daily basis I am going to try and make an effort to say some thoughts at least on a Bi-weekly basis.

EURAUD

Possibly the most overcrowded trade in the world. IS everyone rushing for the exits at the same time ??

Just some food for thought.: This may be interesting if it develops a major correction, as this has inversely corresponded well with the SP500 over the past couple of years. - [See Below]. - I will say no more for now, but it will be interesting to see how this develops (if at all).