The week ahead

USD Index is in a large congestion area which is morphing into a multi month symmetrical triangle. We need a break either way to establish the trend. Given the risk on rally we are in, I would have expected USD Index below 97 support area.

The EURUSD closed above 50% Fib retracement having broken out from a small Cup & Handle (clearer view on 4h chart) formation with a width of approximately 300 pips. Possible targets are:

1. Cup & handle width: counting conservatively from 1.3275, we get 1.3575 as a target. 

2. If Fib 50% is overcome, the next target usually is 61.2% retracement at 1.3627

3. Another way of looking at it is of two equal legs. The first leg is almost 700 pips (low to high), so we can assume the second leg to extend to approximately 1.3675 from 1.2975.

In short, anywhere between 1.3575 to 1.3675 we should expect a top, of major significance probably.

But there are 2 obstacles that make a move beyond 1.36 very difficult. One is the strong resistance at approximately 1.3530. Another is the downtrend line from August 28 2011 top. This line is currently at 1.3625 and comes down by 7 pips a day. The uptrend is a bit extended judging by RSI, so I will be waiting to short at those 2 levels described above with a min target of 100 pips. 

If GBPUSD can close above 1.5907, I will be looking to buy dips. The bad news is that RSI is diverging and that throws some doubts as to whether 1.59 handle can be overcome.

Commodities block is underperforming lately while equities continue to inch up. Anything suspect?!

USDCAD: underperformer of late. Need to clear that range

AUDUSD: currently it is in a continuation Flag formation. If price breaks down from the Flag and the second uptrendline, Ozzie will be heading to 1.0375 and failing to hold there to the upper boundary of the large symmetrical triangle pattern

 I will post trades on Twitter/StockTwits as usual.

Good luck 

P.S. If you are short Japanese Yen via JPY crosses, then it is time to take some money off the table. While I doubt we have seen the top in GBP/EUR/AUD vs JPY, vertical moves that we saw of late make me very nervous.

USDJPY and Yen Cross Rates look bullish

Before I start on rambling, I need to make a confession with regards to USDJPY: i get long term forecasts mostly wrong on this pair. This pair frustrates me and my P&L often. So, I mostly avoid it and trade JPY cross-currencies based on 4 charts instead.

I went through my previous bold bullish statements and they were based on the breakout from a multi-month base and/or a break of a major trendline. Bullish spurt followed after a breakout but then the pair lost steam and my bullish prognosis went down the trash bin. Since then, I try to avoid major trend reversal type forecasts on this pair. In short, trying to identify bottoms did not work because the trend was still down and still is actually.

This is my another prognosis attempt, not long term but near term, maximum a month. After that, we will see what the price action tells us. Hopefully, it will not blow into my face after a few days.

I have to admit that an FX Concepts hedge fund letter (Feb 9) on Yen prompted me to evaluate daily charts more closely. Having studied charts, I think I agree with them. The purpose of this blog entry is to give actual entry and exit levels for traders unlike FX Concepts letter.

This is the snapshot of USDJPY and cross rates daily charts.

1. USDJPY has been building a base since the end of last July. It is about to test the daily downtrend drawn from Apr 06 2010 and Jan 24 2012. The 2nd upper green line is the weekly major down trendline. Finally, the horizontal blue line at 78.28 is the daily resistance line. All those down trendlines and the daily resistance need to be broken to confirm the bullish reversal. The problem for this pair is this, the next major resistance is at 80.00 (not shown). So, even after a daily breakout through 78.28, the bullish move is likely to sputter just after 172 pips. FX Concepts thinks it will break through. As to me, I do not know or even I do not think it will be able to.

Anyway, the best way to express JPY bearish stance is via EURJPY, GBPJPY and AUDJPY as we are likely to get more bang (pips) for our efforts. These cross currency charts look very bullish and the strategy is to buy the dips.

2. EURJPY (bottom left) broke above ascending triangle and another strong resistance at 102.76. Any re-test of this now support should be bought. The next resistance is 105.20/45 not shown but this area is the minimum target.

3. GBPJPY (bottom right): similar to 2. Close above 122.50 today will give us the breakout from ascending triangle. It can test 122.50 tomorrow where our buys should be. The next resistance is 123.97/124.00. This pair is emerging from a multi-month double bottom (higher 2nd bottom). So, if my reading is right, it should go at least to 125.60

4. AUDJPY (top right) is the strongest looking of all. It broke out of the multi-month symmetrical triangle and 82.50 resistance which is a buy area should it fall back to test. It is now heading to the next resistance at 84.00/05 which I think is going to reject the first test and send it back closer to 83.00, the buy spot. It is then that we have to be watching to buy! DAily close above 84.00 leads us to the next target at 85.90/86.00.

Finally, at what levels do we bail out? In other words, where will the stop losses be?
EURJPY: 101.60   GBPJPY: 121.60  AUDJPY: 82.00

I know stops are pretty wide versus the current price, therefore I will only buy the dips based on 4h. This is when RSI is likely to fall back to 60 level or below. No need to enter into a trade in a hurry with a crap reward to risk.


Below is the latest FX Concepts newsletter on Japanese Yen written by Jonathan Clark. It is the largest FX hedge fund out there. FX Concepts and UBS TA team are calling for a a top in risk assets mid to end March or even early April. Time will show.

Japan’s Ministry of Finance recently released the details of its intervention to sell yen and buy dollars at the end of October and early November. On October 31 the Bank of Japan bought $107 billion and during the subsequent four trading days it bought a total of $13 billion. By way of contrast, the intervention on August 4 was $58 billion. The scale of intervention was enough to scare the market so significantly that there has been no need to

further intervene since that time.

Intervening multiple times in a month is a tactic the Japanese have used in the past. One of the most aggressive times was in the months following the Great Hanshin (Kobe) earthquake on January 17, 1995, which was the most devastating in 72 years as 6,400 people lost their lives. The yen strengthened 24% in the three months following this tragic event and the Japanese intervened more than 20 times in the month of March alone. Following the yen’s peak on April 19 of that year, it fell 46% during the subsequent 40 months. Japanese monetary authorities have the ability to hold down the value of their currency when global markets are optimistic, as buying dollars increases reserves and if unsterilized it is a form of monetary easing, which further undermines the yen. Recently, some of the major yen crosses such as EUR/JPY, GBP/JPY and AUD/JPY have begun uptrends that argue the yen will be weak against at least the other major currencies, and the dollar will too. However, a peak is likely in late March, when we expect the risk rally to end. Once again, the yen will strengthen, forcing the MoF and BoJ to intervene despite the disapproval of other G7 members.

The cycles were calling for dollar/yen to form a medium-term low next week, but it now appears it has already been seen. This projects an initial peak during the week of

February 27 and it should challenge the resistance at 77.80. If this level breaks on a closing basis, we will become more excited about the upmove and our initial target is the

79.00 area. USD/JPY should then pull back for a week, but provided it lacks much weakness, the uptrend will resume into the end of March and our further objective will become the 81.75 area. Although we can see a scenario under which the uptrend becomes stretched and lasts into May, this is less likely. By the end of March, dollar/yen will probably turn lower and decline into the third quarter of the year and once again the Japanese monetary authorities will be forced to fight the move, with 75.50 a likely place.

Back on line

I have been tweeting every now and then but it has been a few weeks since i last blogged. The times are changing and we need to change as well. The result of changes in my life is that I am about to be a free spirit and focus more on trading, blogging and tweeting. This coming week, blogging will probably be infriquent but afterwards, I plan to be more active. Overall, I plan to tweet more as and when i see tradable opportunities.

So, lets get to the Euro and Sterling charts. If you do not want to read any further, just watch the breakouts (either direction) from Pennants on 4H charts :)

EURUSD

Overall, EURUSD is in downtrend as 200MA (not shown) is heading down. The distance between the price and 200MA got as large as 1300pips at the Jan 16 low, so the pair is working on reducing that distance. So, we have to be on the lookout for the downside trend resumption at some stage

However the pair is within short-term countertrend and currently, the Euro appears to be consolidating above Dec swing high and 50MA (not shown) before a possible upside breakout. The pair hit a major resistance (1.3217/30 range) and is just below Fib resistance or at Fib resistance if one draws it a la DeMark (here it would be highest close to lowest low). The expectation is for the Euro to test Fib 50% resistance at 1.3440 and this is where the high probability downside trend resumption is likely. This is my broad scenario.

Shorter term chart reveals the pennant this pair is confined to. I am expecting upward continuation but if it breaks to the downside, then shorts are in order. It will also mean that I might have to review my broad scenario described above.

GBPUSD

Same story here too. Countertrend within a larger downtrend. I will deem the larger downtrend over only when the pair closes above 200MA (1.5950) while a weekly close above 1.6150 in particular will confirm the new uptrend. In the mean time, I will stick to the downtrend. I am not quite sure about this one but I am inclined to think that this pair is also consolidating and the next move should be up. Major daily resistance at 1.5905/20 range and then 1.5950 (200MA) is likely to act like a magnet. At 1.5882, the pair has already tested the very edges of the major resistance. More should be forthcoming. However, current uptrend appears exhausted, at least temporarily, as Stochastics are diverging. Does it mean consolidation will take longer and be wider? We will see.

As you can, this pair is in exact situation like EURUSD. Last Friday, short term uptrend was broken & has been tested on the same day. Upside breakout from this pennant invites longs but with diverging daily Stochastics, one has to be prepared for shorts should the pennant be broken to the downside.

Next, I will post on Ozzie and Loonie which so far look very bullish (USD bearish)

Good Luck

Crude Oil (WTI) and Silver

If you perused yesterday's FT, you would have across an interesting report on Oil titled "Oil demand falls for first time since 2009". In short, demand fell in the USA and EU but rose in Asia. However, rise in Asian consumption that was not enough to offset the slowdown in developed world. More importantly, Asian consumption was not that strong either with Chinese oil imports slowing. Base case is a small rise in demand in 2012. Worst case flat growth if global GDP stalls. Overall, International Energy Agency is worried about downside risks to the global economy and to oil demand. However, while demand for oil is sluggish/falling there are geopolitical risk (Iran/Hormuz Strait) that are keeping oil strong. So, oil market seems finely balanced on fundamental side.

On the other hand, charts are telling me that we are about to have a big move which has a great potential to boost P&L when traded sensibly. Daily chart is showing an Ascending Triangle with ascending trendline and 50MA coming right below current price. So, bias is bullish unless proven otherwise. A daily close above 103.35 will confirm the bullish trade.

But when you zoom in to 4H chart, it however looks ready to rollover. Oil broke through a small trendline, tested and fell further and now looks ready to accelerate down. So, get ready to short in case it breaks down through this green line (blue on daily chart). Stops should be at $101.00

Yesterday Silver broke through the downtrendline (daily chart not shown but you can see a green line on 4h chart) but finished the day with a Doji. It is testing the trendline as I write. On this chart you can also see a Bearish Wedge. So, be prepared for a short as well. If short tirggered ona break below the rising trendline, stops should be at $30.60

 Good luck out there

P.S. Short EURUSD at 1.2983, then cover at least on 50 pips profit, then reverse/long plan so far is working. If you bought at/around 1.2910 as suggested, put the stop to breakeven or if adventurous at 1.2887.

More trade ideas

Euro took out .12910 resistance and looks likely to close above this level today. Next target is the next resistance at 1.2983. Overnight, buy the dips is my plan. Fundamental news-wise, if Greece can not agree with its creditors, expect broad risk-off and the fall in EUR. If this happens, than I say markets are giving you a chance to buy euros from lower levels.

In my earlier post, I mentioned that to play long GBPUSD, I need to see a daily close above 1.5422 which it duly did. There is a daily swing high at 1.5500 and a daily downtrend at 1.5518ish. So, expect this pair to stall around 1.5518 area.

Advance in Euro and Cable is coming at the expense of Loonie and Ozzie.

Loonie broke to the downside form its symmetrical triangle. The width is 700 pips which gives a minimum target of approximately 0.9500. Support at 1.0074 held today but I am not sure it will hold out for long. If it rallies back above broken trendline, then you get a chance to re-short at better levels. Daily close below 1.0074 is needed to see downside acceleration Expect support/upside bounces at 0.9900, 0.9790 & 0.9755.

Ozzie has yet to break out from its symmetrical triangle now at 1.0460. So far it is struggling at a very significant resistance at 1.0425/40

By the way, today Nasdaq100 closed at 2441 with July 2011 high now left behind and which is almost 11 year high (Feb 2001). Dow Jones Industrials also closed above its downtrend

EURUSD update

In my previous post, I argued that the Euro may go all the way down to 1.26. Well, it came down 25 pips short of that target. Anyhow, the intermediate down trendline (IDT) is broken and the near-term future is looking up for this pair. Overall, this pair may move as high as 1.3175 but keep in mind that when trendlines are broken, the security may simply consolidate instead of rallying. In other words, it may fail to go past 1.30. This is the risk to be aware of.

The road ahead is fraught with obstacles. There are three very strong resistances that stretch back to 2009. As you can see, in spite of their age, they acted as a strong support on the way down. Now, you can expect them to act as strong resistance on the way up.

Second, according to the COT report, there are record amount of Euro shorts out there. So, at least part of this move, if not most, can be attributed to the short squeeze. I think the squeeze ain't over yet. Therefore, the first resistance at 1.2910 is unlikely to hold for very long.

Strategy: it is safer to play longs especially putting on longs during dips. Longs on breakouts can be difficult to trade though. One way to play the long side is to buy the pair when it comes back to test the IDT. Another way, if you are conservative: wait till it tests the IDT, then buy as the pair rallies back up above previous/recent swing high. As I write, the recent swing high is the 1.2910 resistance. Alternatively, if you bought at a test of IDT, you ADD to your position above previous/recent swing high.


Once long, the outline of a plan looks as follows:
I am expecting back and forth action between resistance lines with an overall upmove, so the plan essentially involves buy low/sell high and vice versa. Thus, close your longs once the pair hits the next resistance at 1.2983 (I am assuming that EUR breaches 1.2910 resistance). Then reverse/short - 50 pips profit target is achievable. Then, reverse/long at or above 1.2910 (I assume it holds) to play for the possible breakout above 1.2983/1.30 towards 1.3175. At 1.3175, if seen, you short again and this time downside move should be more than 100pips if not more? Keep in mind, the whole correction may actually top at 1.2983/1.30. I will update as we go along.


Alternatively, observe cross rates: EURGBP, EURJPY, EURCAD, EURAUD and EURNZD. You will see good action in those pairs as well. In particular, I like EURCAD and EURAUD longs.

Currencies and risk in general at a make or break point.

If you are into seasonalities and cycles, then equities should dip from tomorrow into this Friday and possibly Monday.

According to the Stock Trader's Almanac 2012:
Tue 17th: Dow up 14 of Last 19,
Wed 18th: horrible since 1999, Dow down big 9 of last 13
Friday 20th: Dow down 10 of last 13 with big losses (over 1%)
Mon 23rd: also very likely to be down day.

Anyhow, with currencies at a break or make points, I wonder whether we should fade current USD sell-off and go long USD instead into Friday. At the end of this week, then we reverse and go long risk into Feb, which is seasonally bullish. This is just an outline of a plan. So, I will need to watch, whether currencies support my plan. At the end of the day, I will trade what I see.

Loonie is testing its daily downtrendline. The close below is bearish. It does need to overcome resistance clusters at 1.0074 however to give the final confirmation.

AUD is also testing its daily symmetrical triangle. Great chance for a low risk short. But you can see it has broken out of the bullish smaller ascending triangle within our symmetrical triangle. So that you are aware.

This is a channel the Euro is in. It is visible on a daily chart as well. All it needs to do is close above it. Unlike Loonie and Ozzie, it is not yet testing the downtrendline.

Finally, another laggard: GBPUSD. Broke down from bearish descending triangle and now testing the bottom. Even if it closes above it today, stay away till a daily close above 1.5422 is my policy. It is just too many clusters of resistance.

The day is not over yet, so I will be looking for reversal candles and non-confirmations on RSI to get long USD. Reward to risk is high with stops nearby. :)

EURUSD targeting 1.26

I hope all of you had a Merry Christmas and a fantastic New Year’s eve celebrations. I will you all health (paramount), lots of luck and profits in 2012.

Now, back to business:  EURUSD is selling off. See news here and here. Hungary is also blowing up btw.

This is a longer term chart of EURUSD. You can see that Major Up Trendline  (middle blue line) was broken in September 07 and retested in October 26^th . I subsequently drew another Major Up Trendline connecting June 03 2010 bottom to October 03 2011 bottom. Following a fake break on October 24^th, this trendline was decisively broken on December 11 as well. I am repeating the obvious but the Primary Trend is down and the rallies should be sold.

Green horizontal lines are Fib retracements:  61.8% retracement at 1.3046 is left behind but on January 2^nd it was re-tested and successfully rejected.  The next Fib support level is 78.6% at 1.2535. The blue horizontal lines with EURUSD levels on them are support areas based on 2010 and early 2011 weekly swing lows. The next support area comes at 1.2609 which is over 70 pips above 78.6% Fib retracement. In short, you can see that we have an air pocket between now and 1.26. If EURUSD closes today below 1.29, then we should be aiming at 1.26.

The only fly in the ointment is non-confirming RSI which at this point I am willing to ignore. Like in Sep to Oct 2010, it is closely hugging 30 level which for all intents and purposes says we are in a downtrend.

There is another analysis I liked on Zerohedge. According to it, on balance we are likely to see a bounce before plunge.