Weekend Analysis

Last Thursday, the Euro lost more than a full cent when the ECB removed the word 'vigilant" in its focus on fighting inflation. The very next day, it regained a cent and half when that same word "vigilant'' came out from Trichet's mouth and also noted that there were ``encouraging'' signs that economic growth is accelerating. Apparently, the ECB still sees upside risks for inflation and less downside risk for growth. His comments renewed market expectations of forthcoming rate hike sometime this quarter. But is he just pulling our chain?

Keepin' It Real

The foreign exchange market has pretty much focused on three trends recently:

1. weaker US growth
2. stronger Euroland growth
3. Asian reserves diversification

All three of these have weakened the dollar, but I think it's a bit overdone. Right now, I'm not really concerned about the US economy. While the doom and gloom media are out in full force talking about how the housing slowdown is going to blow up the US economy, nobody really know what's going to happen yet. The US consumer loves to spend and while I think some we'll see some decrease, it's not going to be a dramatic plunge. As for the Euroland, yes it's showing signs of growth, but it's not going to be higher than the US. And regarding the Asian countries (mainly China) diversifying out of the dollar and into euros and yen, it's all talk right now. China isn't going to do anything to mess up their export-dependent economy right now. Why would they mess up a good thing?

I think the market will snap back to reality and believe the dollar will likely re-strengthen due to relative interest rates and relative growth rates. And just for safe measure, I'm going to also add that I could be totally wrong.

The Week Ahead

In the US, we'll see the release of the first manufacturing industry regional indicators for 2006 and consumer prices for December. The main event will be the CPI report. The market will also focus on industrial indicators, the TIC data, and speeches by FOMC members.

As for the Euroland, the only events worth talking about are the release of CPI numbers from Germany on Tuesday and from the Euroland on Thursday. If any of these numbers are higher than expected, expect the Euro to rise, as the data will provide further support of rate hikes by the ECB.

EUR/USD

Weekly Chart

If you're an Elliott Wave fan, check out this chart. While I don't trade using Elliott waves, I do like to try and see if I can find them. It looks like the first 5-wave impulse pattern is complete and we're now in the last 3-wave corrective pattern. But are we still in wave a? Or is that wave complete we're at the beginning of wave b? I have absolutely no clue. I'm going to wait and see.If you're familiar with the Elliott Wave theory or just need a refresher, read our lesson, http://www.babypips.com/forex-school/elliott-wave.html

Let's take a look at another weekly chart. All I'm using are 3 moving averages, support and resistance level, and a descending channel. The moving averages are labeled by color. The grey horizontal lines are my major resistance (ceiling) and support (floor) levels.Last week, I thought this pair was actually going to drop back in its old descending channel, but it ended up bouncing off the top, which I've highlighted in yellow.Check out that doji candlestick. Remember, a doji conveys a sense of indecision or tug-of-war between buyers and sellers. Neither bulls nor bears were able to gain control. This particular doji caught my eye because of the previous candlestick. It was a long bodied green candle with hardly any wicks which tells me there were a lot buyers. Since a doji formed and not another long bodied candle, there wasn't any follow-through the following week meaning there's still some hesitancy amongst the buyers.What's going on here? Where did all the buyers go? There is either no more buyers or the rest of the buyers are standing on the sidelines for now. I doubt the supply of buyers have been exhausted so it's most likely that they're just chilling and waiting.
But what are they waiting for? Something to get them to buy off course. Whether it be a piece of new economic data or a message from above, it seems buyers (and sellers) don't really know what to do right now.The only good long trade I see here is if the pair manages to close above its pink 50 EMA. I would target the blue 100 SMA and place my stop loss below the pink 50 EMA. I don't see any short trades until the pair is able to fall back into its old descending channel.

On this chart, I've applied Fibonacci retracement levels .I've also removed the descending channel so it looks cleaner. Take a hard look at the Fibonacci retracement levels.Everybody and their mamas are looking at these Fib levels. Why? Because finding the swing high and swing low points are no-brainers. The swing high is the high of EUR/USD ever and the swing low point is well the lowest point on the chart.Last week's candle tried to fall back below the 23.6% Fib line but ended closing back above it. This tells me that the pair wants to rise and at least touch its 50 EMA. If it's able to close above its 50 EMA, look for it to rise to the blue 100 SMA or 38.2% Fib line, whichever is closest.Notice how the blue 100 SMA and 38.2% Fib line are close together which I've highlighted in purple. That is a strong resistance area.

I've removed the Fibonacci retracement levels and replaced them with Fibonacci extension levels on this chart. I wanted to show how accurate Fibs can be. Look at how the 50% Fib extension level acted as very strong support (highlighted in purple).The purple 200 SMA is nearing that same 50% Fib extension line so that same support area is going to get even stronger.

Look at that chart art! All I've done here is re-added the orange Fibonacci retracement levels. Now both Fibonacci retracement and extension levels are marked on the chart.Why do I this? Because this is one of the ways I find support/resistance levels.For example, if the pair closes above its pink 50 EMA, I would buy this pair and take profit at the 38.2% Fib line (next resistance level) or the blue 100 SMA whichever is closest. My stop loss would be place below the 23.6% Fib line (support level).If the pair closes below the 23.6% Fib line, I'd sell the pair and take profit at the 38.2% Fib extension level (next support level). My stop loss would be placed above the pink 50 EMA or the 23.6 Fib line, whichever is farthest.

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 shorter 89 EMAs cross below both longer 144 EMAs, then the trend is down.

On the chart above, notice how the trend is down (both 89 EMAs below both 144 EMAs). The trend is still down as long until both 89 EMAs cross above both 144 EMAs. Okay now that we've identified the current trend which is down, let's take a look at another daily chart.

I've added my three moving averages and drawn my major support and resistance level denoted by the thick black horizontal lines.
I want to point out a couple of significant areas on this daily chart.

1. Notice how the pair is trading near its most recent high which was 1.2003 way back on October 5, 2005.
2. Look at how close the pair is also trading near its purple 200 SMA.
3. Notice how the most recent high (which I ‘ve marked with the thick black horizontal line) and the purple 200 SMA are around the same price area.

This could be an interesting week. If the pair is able to close above the black line and it's 200 SMA, this could bring the rest of the dollar bears out of hibernation! Keep a close eye on this area. I personally think the pair will stay below its 200 SMA and fall but I'm no fortuneteller.

I love channels. Check out how the pair basically teleported (gapped up) out of its old black descending channel and is trading in its new blue ascending channel.Right now, the pair is trading sideways between the top of the blue channel and its top Fibinnel. The top of the channel is acting as resistance for now so we'll see this week if it's able to break out and try and test the 200 SMA and recent high that I talked about on the previous chart.

Here's another look at the daily chart with just the three moving averages and Fibonacci retracement levels. You can see that the pair pretty much traded between the 38.2% and 50% Fib lines throughout last week but managed to close above the 50% Fib level. Notice the confluence of the blue 100 SMA and the 38.2% Fib line. Good example of strong support there. On this chart, it looks like the pair will rise up to the purple 200 SMA. But will it?We could see further dollar weakness if the plethora of this week's US economic data come in softer than expected, namely, industrial production, TICS data, Housing, Philly Fed and the Univ of Michigan sentiment survey. We will probably see the pair test the 200 SMA and the 61.8% retracement at 1.2230. Right now, support is held at 1.2000, the 38.2% retracement level.

If you throw the last two charts together in a pot, this is how it would look.
Do you see how the pair now has to break out of the blue channel in order to reach the purple 200 SMA? Watch this chart. Based on the last candle, it looks like this pair will test the top of the channel again. It might even spike through the channel and hit the 200 SMA. Who knows. Check out the confluence of the purple 200 SMA, 61.8% Fib line, and top of the channel, this area will most likely act as a strong resistance area. If the pair can break and close above this area, look for it to possibly rise to its recent high of 1.2588 on 01/08/05! A good short trade idea is to wait for the pair to close below its pink 50 EMA and target the 23.6% Fib line. Your stop loss would be place above the bottom blue-dotted Fibinnel.

4 Hour Chart

This is one ugly chart. Look how choppy this pair has been trading. It has been trading either between the channel bottom and bottom Fibinnel or between the top Fibinnel and channel top. Barely anything in between.
Let's zoom in on this chart…

Check out that ascending channel. It looks like the pair will try and test the top of the channel again. If it fails to break upward, look for the pair to fall back down to its pink 50 EMA and even the top Fibinnel. A good short trade would be to wait for the pair to fall and close below its purple 200 SMA. I'd take profit at the channel bottom and place my stop loss above the bottom dotted Fibinnel line.

1 Hour Chart

Look at the sideways channel the pair has been trading for the past couple days. The thick black horizontal lines are the major support and resistance levels, while the thinner horizontal lines are what I consider important support/resistance levels based on the past price action.Check out how the price just blew through all three moving averages this past Friday. It looks like the price rise has run of steam for now. I'm looking for it to fall back down to its purple 200 SMA.A good short trade would be to wait for the price to close below all three moving average and take profit at the thinner support line. Your stop loss would be place above the highest moving average.

Here's another way to look at this chart. I've drawn Fibonacci retracement levels where the swing high is the top of the sideways channel and the swing low is the bottom of the sideways channel.Scan your eyes from left to right and observe how those Fib lines act as effective support and resistance levels. Since the pair failed to close above its 76.4% Fib level, I'm looking for the pair to at least fall back to its 61.8% Fib level. If you want to be aggressive, you can short this pair now. Your profit target would be the 61.8% Fib line and your stop loss would above the most recent high of 1.2141. If you're greedy you can bag even more pips by cashing in later on the 50% Fib line and even the purple 200 SMA.

Comments (0) | Email to a friend | Printer friendly version