The Bull Vs. the Matador

While the EUR/USD tried to make some big moves on Friday, we are still trading in a darn range! Look it's been a whole month! Scope out the chart below. I've drawn a light blue box around the past four weeks of activity. After the cornucopia of news that came out last week, I thought we'd break out of this crap but I guess not. All we got was more choppy trading.

Let's quickly review what happened this past Friday:

Uh actually the only major thing that happened was the U.S. employment report. November non-farm payrolls rose a slightly larger than expected 215,000. This is not a huge gain, but is above the average 185,000 monthly increase that had occurred over the two years prior the uninvited arrival of Hurricane Katrina. The October number was revised down to 44,000 from the originally reported 56,000. The unemployment rate remained unchanged at 5.0%. Most encouraging of all was the rise in manufacturing payrolls and stronger annualized hourly earnings, which was 3.2% vs. 2.9% from the prior period – its second gain in a row. These numbers were pretty much expected though so off course all we got more crappy choppy trading.

The Week Ahead

Don't be surprised if all that happens this week is that this choppy and sideways movement continues. Why? There is hardly any significant news coming out and everybody will be thinking about next week when the Fed is scheduled to meet again on Dec. 13.

The Fed is off course, expected to raise the fed funds rate another .25%. What everyone is trying to figure out off course is whether they're going to change language regarding how much more the rate will increase. I will talk more about this later during my next weekend analysis. For now, just be aware that Alan Greenspan, the Greenback God, and his posse will be meeting next week.

Concerning the United States, the week ahead offers only a few economic reports, all which are unlikely to move the markets very much.

Monday starts with the non-manufacturing ISM index which is expected to show a continued strong level consistent with the service side of the economy. If you're not familiar with the ISM Services Index, learn more about it here.

On Tuesday will be factory orders.Factory Orders measure the monthly change in the value of new orders for goods. A rising trend indicates a growing economy. Factory orders will show the effect of a surprisingly large rise in durable goods orders. Strong capital goods investment is expected to continue given the underlying fundamentals of solid corporate profits, robust balance sheets, low borrowing rates and demand.

Thursday will be unemployment claims. Unemployment claims measure the number of individuals who filed for unemployment insurance for the first time over the past week. A rising trend indicates a deteriorating labor market, which can weigh on the economy. Claims are expected to be lower than the previously reported period.

And that's pretty much it. As you can see, it could be a boring week. But like we all know, anything can happen still between now and Fed meeting. If the market does make big moves this week, it will do so based on last week's news (late reaction) or in response to a bunch of stuff that you won't find on the economic calendar.

The U.S. Dollar: Bull vs. Matador

Alright since there isn't much going on this week, I'd thought this would be an excellent time to introduce two new special guests. I'm always interested in learning from other peoples' perspectives and one of the most popular conversation topics right now is where the U.S. dollar is headed.

In my personal opinion, I think the current economic situation still favors the U.S. currency and that relative yields continue to suggest a stronger dollar. But who cares what I think, let me tell you more about my special guests.

I wanted to get opposite opinions of the dollar. This usually means finding a bull and finding a bear. The problem is bulls and bears can't really talk. A bear growls and I really don't know what sounds a bull makes. So I decided to get the closest thing I could find to a bull and a bear…

The Bull
	Michael Jordan This man needs no introduction. Michael Jordan is the considered the Bull of Bulls. He's killed many bull fighters who've tried to stop him from achieving his goals. Hell, he's considered the greatest Bull ever. If you've been living under a rock and don't know who MJ is, click here.

The Matador
	El Cordobés I couldn't find a bear but I got the next best thing. The best bullfighter in history, El Cordobés! If you're up against the most famous and greatest Bull, then it's only fitting that I pit him against the most famous and greatest bullfighter. If you want to know more about El Cordobés, click here.

Michael Jordan versus El Cordobés. Bull versus Matador. It doesn't get any better than this folks. I couldn't wait to put them in the same room and hear their thoughts about the dollar. Here's a transcript of what happened:

PD: First of all, I'd like to thank you both for coming out. I am excited to hear from you both about the U.S. dollar.MJ, I know you're optimistic about the dollar and feel that it is only going to get stronger.

EC, you're obviously pessimistic about the dollar and regularly like to show people what you think the real value of the dollar is by using the greenbacks as toilet paper.

Am I correct on both of these assumptions?

MJ: Yes, I do think the dollar will to continue to appreciate.

EC:Si. (Yes).

PD:MJ, let's start with you. Why do you think the dollar will further strengthen?MJ:Well, all you have to do is take a look at what happened just last week. The employment report was on point but it was also above average the 185K monthly average before Katrina hit. This is an excellent indication of how strong underlying economic growth is and shows just how resilient the U.S. economy is to external shocks.

The U.S. economy has handled both the huge run-up in energy prices over the past year and the devastating blow from the hurricanes and is still growing at a pace above long-term trends.

Look at the rest of last week's data. They all reflect broad strength.

Aside from the hiring trends remaining up, the ISM manufacturing survey, the upward revision to 3rd quarter GDP, durable goods orders, consumer confidence, the retail same store sales, and even new home sales have all been reported higher than expected in the past two weeks. That covers just about every major sector of the economy.

PD: So MJ, what you're saying is, because the U.S. economy is doing well, you think the dollar will go up?

MJ:No.

PD: No?

EC: No?

MJ: Let me explain. Because the U.S. economy is going strong, I believe that the Fed will continue to raise rates, and that is why the dollar will go up. It's all about the yield differential baby. If the economy started to show signs of slowing down, then the Fed might think twice about raising rates, but judging by the tone of last week's economic reports, it sounds like the Fed is going raise rates a couple more times.

PD: I see. (For the readers who aren't familiar with yield differential, learn more about it here.)

MJ: What do you have to say about that El Cordobés? You know that I'm right and you're wrong. You just wanted to come here to get my autograph and have a picture taken with me. Admit it.

EC:You're right. I do want a picture taken when I stab you with my sword like I have done with the bulls I have faced in the past. You can sign the picture using your finger with your blood as ink as you lie on the floor dying.

MJ: I seriously doubt that senor. I'm not like any other bull. I'm a special bull. A bull that can fly. People call me Air Bull.

EC: More like bull full of air! I will cut off your wings and use them as decorations for my cape.

MJ: Well I will dunk on you. Or maybe score on you with my unguardable turnaround jumper.

PD: Gentlemen, can we stop the trash talking for a second and get back on topic?

EC:Lo siento (I'm sorry) PD. I will put my sword away for now.

PD: Muchas gracias (thank you). So, El Cordobés, what do you have to say about MJ's comments?

EC: The best way to respond to that is with a question. What usually comes out of a bull?

PD: What?

EC: Bullshi..

PD: Whoa, hold it right there. I get it. That was pretty clever. But seriously…

EC: Okay okay, MJ does have some valid points. The U.S growth is looking strong but inflation developments have been almost non-existent excluding energy prices. And if there are hardly any signs of inflation, then the Fed will have no reason to continue to raise rates. And like MJ says, it's all about the yield differential.

PD: You are talking about the core CPI?

EC: Si. I don't want to throw out facts and figures that will put you to sleep but essentially there's good evidence that outside of energy prices, there has been very little increase in inflation.

Also, aside from weak inflation development, there are clear signs of weakness in both private consumption and the housing market. Both of which are tied together. These two things greatly affect the economy. And if they're weakening, the economy will eventually follow. This will happen sooner than later.

PD:Could you explain by what you mean by private consumption and housing market? And how they are tied together?

EC:No problemo. Private consumption is just a big word for consumers spending their money on goods such as cars, Starbucks coffee, Prada purses, and those ugly Air Jordan basketball shoes. Anything you buy that isn't considered investments.

I could spend hours on the housing markets, but I will focus on the declining housing prices. The housing prices have been growing extremely fast over the past couple of years. I'm talking about a $200,000 house appreciating in value to $300,000 in one year!

There are lot of reasons for this but one of the main reasons were the low interest rates due to the low Fed funds rate. When it's cheap to borrow money, then more people will take out loans to buy houses. And if more people are buying houses, then house prices go up.PD: You're talking about the basic supply and demand equation.

EC: Exactly. So what started to happen was the value of peoples' houses started to rise even if you weren't selling it.

For example, I bought a house for $100,000 and all of a sudden it's worth $200,000. Now I have an extra $100,000 of equity in the house. So I went to the nearest bank and got a home equity loan. This is basically a loan where you use your house as collateral. If for some reason you couldn't repay the loan, the bank would take possession of your house. So I took out a $50,000 home equity loan and now I'm thinking I'm rich! I have all this money. What am I going to do with this? Well most people decided to spend their money on cars, Starbucks coffee, Prada purses, and those ugly Air Jordan shoes. And this is big part of what has been fueling this strong U.S. economy growth for the past couple years.

PD: Interesting. So people are using their house as ATM machines?!

EC. Si. But the housing prices have started to flatten out and even fall. Part of this is because the Fed has been raising rates so it's getting more expensive to borrow.

PD: So you're saying the ATM machines are running out of money?

EC: Si. And when you run of money, you stop spending, which is what is going to happen to the U.S. consumer. And if the U.S consumer stops spending, then the economy will go into a recession, and the Fed will actually have to decrease rates. And we all know what that does to the dollar.

PD: Wow, EC. You are filled with much doom and gloom.

EC: Hey I'm just keepin' it real. And I haven't even talked about the trade deficit!

PD: Yikes, we'll have to save that for another time. This discussion is going to last longer that I expected. Let's get together again soon and talk further. I'm sure MJ also has more to say and we'd love to hear your take on the trade deficit El Cordobés.

MJ:I'll definitely be back. And my shoes aren't ugly. They're nice like my jumper.

EC:I will see you two soon. I am not finished. I am going to chop MJ down like all other bulls. Chao!

EUR/USD

My theme for this week is “the trend is your friend dawg, so don't backstab it by trying to trade against it yo”

The trend for EUR/USD is down because the U.S. dollar is bullish as we've just learned from our interview with 50 Pip, so let's find us some cheap and low-risk short entries!

Weekly Chart

Let's take a look at the big picture here. Remember the head and shoulders pattern that we talked about more than three weeks ago. Look at how strong resistance is at the neckline.

The other thing I want you to notice is that last candle. That is one ugly looking candle. A doji. This represents the indecision between bulls and bears last week. If you bought or sold the pair at the beginning of the week, you would have basically ended up where you started. This pair can't figure out what it wants to do.

I've thrown up the Fibonacci extension levels on this bad boy. Again, you can see how sideways the movement has been for the past four weeks. Look how the Fib lines are acting as support and resistance lines. Beautiful! I am still looking for a weaker Euro. If this pair can manage to break and close below the 50% Fib line and the most recent low of 1.1640, I am going sell the farm! My stop would be above the 38.2% Fib line and my profit target would be the purple 200 SMA. This pair has been range-bound for so long that if it closes below its most recent low, that would provide the needed catalyst to resume the downtrend. Off course, if the pair manages to close above the neckline and the 38.2% Fib line, look for it to shoot up to the pink 50 EMA.

Daily Chart

Identify the Current Trend

The daily chart is what I use the current trend of the pair. The way I figure what the direction the trend is very simple. I use exponential moving averages (EMA) for my primary trend identification. I use 89 period EMA of the highs and 89 period EMA of the lows. This is my short-term trend.My long-term trend are 144 period EMA of the highs and a 144 period EMA of the lows.I use big long moving averages instead of shorter time periods because there's less whipsaw.I've found these periods to work well and they're also Fibonacci numbers.Uptrend
When both of the shorter 89 EMAs cross above both longer 144 EMAs, then the trend is up.Downtrend
When both of the longer 144 EMAs cross below both of the shorter 89 EMAs, then the trend is down.

On the chart above, notice how the trend is down (both 144 EMAs below both 89 EMAs). The trend is still down as long until both 144 EMAs cross above both 89 EMAs. Okay now that we've identified the current trend which is down, we don't need that chart anymore, so let's take a look at another daily chart.

On the daily chart, we're still in a descending channel. Right now, the top Fibinnel is acting as short-term support. The two grey horizontal lines are my support and resistance levels. I feel the upside is pretty much capped for now around the 1.1850-60s and off course there's strong support around the 1.1650-40s

Look at how accurate the Fib extension levels are as support and resistance! I wouldn't surprised if the pair simply traded between the 61.8% Fib line and the 75% Fib line again like it did two weeks ago between 11/10/05 – 11/16/05.I still don't see any good short trades here until it can close below its most recent low of 1.1640. We're making some progress though. On Friday, it managed to close below the 61.8% Fib line. But the candle still closed near its open forming a hammer so we'll have to be careful here. The pair could rise back up.

Here are the Fibonacci retracement levels from its most recent Swing High to Swing Low. Again, look at the accuracy of the Fib lines as support and resistance lines. Especially that spike up to the 50% Fib line. How awesome.
Notice the purple circle. That is a super strong resistance area. If the pair closes above that, El Cordobés will be extremely happy.

4 Hour Chart

This a 4-hour chart that I posted last Thursday where I was trying to figure out whether that falling channel I drew was actually a real channel forming. I still think the channel is a little too steep, but the pair is still trading inside of it. I will keep an eye on it.

Forget the rising and falling channels for now. Look at the horizontal lines. The pair is actually trading in a sideways channel still.Also notice how the blue 100 SMA is acting as resistance right now.

Okay this channel looks more believable. The rising channel is trying to “rise” up out of the sideways channel. Too bad, it's not working right now. The blue 100 SMA and 50 EMA are short-term resistance right now. The orange line, which is a Fib line on the daily chart, is also a resistance level. Looking at the most recent candles, it looks like the pair has consolidated again. I don't see any good looking trades on this chart unless off course it can close below the grey horizontal line of 1.1640. But I've been saying that for almost every chart now.

1 Hour Chart

I pointed this out last week but it doesn't hurt to point it again. Check out the symmetrical triangle pattern. For you perfectionists out there, the triangle with the thinner red lines is a more “accurate” triangle. But I still like my thick red triangle. Anyways, check out the breakout to the downside at the end of the triangle. That's freakin' awesome. Just another solid example that chart patterns do work.I didn't need the triangle to tell me that a big move was coming though. All you had to do was look at the moving averages. Notice how they converged and started intertwining amongst each other like a rope. This usually provides an early sign that a big move is about to occur.Right now, the pink 50 EMA is short-term resistance. The 100 SMA and 200 SMA which are around the same price provides an even stronger resistance level. If the pair closes above the 50 EMA, look for it to at least rise up to where those two moving averages are.You can even try a long trade here. I know it's against the trend but your risk is low if the pair closes above the 50 EMA but not too far away from it. Just put your stop loss 10 pips below the 50 EMA. If you can risk 15 pips to make 30 pips, go for it. Just always keep in mind your risk-to-reward ratio.

Oooh I like this chart. The pair is in a descending channel. A perfect short trade here is to wait for the pair to close below the bottom blue dotted Fibinnel line. Why is it perfect? Because in order for it to close below the bottom Fibinnel line, it would have to close below its most recent low of 1.1640 off course.Notice the grey horizontal lines. I placed them on all the .00 levels such as 1.1900, 1.1800, 1.1700, and 1.1600. If you didn't know already, these levels usually act as natural support and resistance levels. If you scan the chart, you can see that I'm not making this up. Just make sure you're aware of this and to pay attention to them also.

I've drawn Fibonacci retracement levels to try and see how far up the pair might retrace. As you can see, it has already hit the first Fib line. Will it rise and attempt to reach the 38.2% line? Well as you can see, it's going to have to fight the top of the channel and the 50 EMA, so it'll be a tough climb.But I think the pair will actually break out of the channel, reach the 38.2% Fib line, then drop back into its channel like a good boy. Why? I just have a feeling. Maybe it's wisdom. Or foolishness.It could even rise back up to the two moving averages although I believe the 1.1750 area is going to be a tough cookie to crack. Place your bets now.In a nutshell, for the days and weeks ahead, I'm still looking for a weaker Euro. A break below the most recent low at 1.1640 will provide the kick in the butt to get the downtrend moving again.The major resistance level is the 1.1900-10s area but I feel the neckline on the weekly chart around the 1.1870s level will prevent the pair from even reaching that high. But I could also be dead wrong. The market will do what it has always done…whatever it wants.