Weekend Analysis

There's a bunch of U.S. economic data coming out this week so maybe the EUR/USD will get off its butt and move. The biggest piece of news coming out is the initial estimate of U.S. GDP for the fourth quarter of 2005. Consumer spending is expected to have been weak so I'm expecting a disappointing number. The market expects GDP growth to be revised downwards to 2.9% from 4.1% growth in the third quarter. If the number comes out higher, this will be extremely bullish for the dollar since it provides support for the Fed to continue hiking rates. And vice versa.

Other notable news will be leading indicators for December on Monday and home sales figures on Wednesday and Friday.

Remember it's all about interest rates still. The release of these upcoming economic numbers will be looked at as either supporting further rate hikes or ending further rate hikes.

The home sales figures will be watched more closely than usual because of all the media hoopla surrounding the doom and gloom of a housing market crash that will cripple consumer spending and hence the U.S. economy.

I could be totally wrong though. The market could be another choppy one with no clear direction like the past two weeks while the market awaits the FOMC meeting next week on January 31st.

If you're not familiar with what's going on with interest rates or the housing market, check out the special report I wrote covering the main issues that will affect the U.S. dollar in 2006 called the “Da Skinny on da Dollah fo' 06”.

There's really not much coming out from the Euroloand this week. ECB board members did make a number of statements last week. painting an overall picture of more growth to come but with increased concerns on rising energy prices. This means that the board members are leaning more towards future rates hikes which is a change from Trichet's most recent press conference where he provided dovish statements.

There will be more speeches from ECB members this week but I expect more balance compared to the predominately hawkish tones of last week. Be prepared though. Any new clues they give regarding possibly raising interest rate or keeping them on hold can create huge volatility.

EUR/USD

Weekly Chart

Ah another week has passed, yet it's the same result. If you take a look at the last two candles, this pair hasn't made any progress. The bears tried to make their move, but the bulls simply fought back, resulting in a standoff. Neither buyers nor sellers can seem to gain the upper hand. The buyers seem to be extremely cautious these past two weeks. There wasn't even an attempt to surpass the most recent high of 1.2176. Looking at this chart, I'd say the pair is neutral for now. It doesn't really know what it wants to do right here. This is what I think will happen once this pair decides to wake up. If it's able to close above its blue 100 SMA, I see this pair rising to its pink 50 EMA. If it's able to drop back in its old descending channel, I believe it will attempt to reach its purple 200 SMA.

I've added some Fib retracement levels here and look how they provide further support for my guesses err I mean forecasts. Right now, resistance is its pink 50 EMA and support is its 23.6 Fib line. Like I said before, if the pair closes above its pink 50 EMA, look for it to rise up to its blue 100 SMA which just so happens to be its 38.2% Fib line, making this area a very strong resistance level. If the pair is able to close back below its 23.6% Fib line, I'm looking for the pair to fall to its swing low which just so happens to be near its purple 200 SMA. A strong support area.

Here's another way to draw Fib retracement lines. I applied them to the pair's more recent swing. Can you see the support and resistance levels? How lovely. Look at how the 61.8% Fib line and the pink 50 EMA are the same resistance area.Since the pair closed above its 50% Fib line, I expect it to try and rise up to its next Fib line at 61.8%. Then start dropping again. If it doesn't fall, the pair will have its sights set on its blue 100 SMA.If the pair does fall, it will have a tough time when it nears its 23.6% Fib line and top of the channel. It will probably consolidate bouncing around between its 38.2% Fib line and 23.6% Fib line for awhile. If it continues its fall, its next rest stop will be the swing low and top of the channel. Okay, let's pretend any further rise in price with this pair is done and it starts falling. Let's also pretend that I was correct with my analysis from the previous paragraph. The pair is now trading at its swing low of 1.1649 and it closes below it! Where does the pair go from here? One way to answer that question to use good ol' Fib extension levels…

If it closes below its swing low, it will fall to one of those levels that you see on the chart. You could set any of those levels as good places to take profit.

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.If you want to lose as little money as possible, it's always best to try and trade with the trend, and not against it. Okay now that we've identified the current trend which is down, let's take a look at another daily chart.

I've Fibonized the chart with retracement levels and it's easy to see where the short-term support and resistance levels are. But first take a look at that ugly consolidation which I've highlighted with an orange box. This pair is indecisive right now.On the last candle, the pair closed above its 50% Fib line for like the 17th time. Usually, if this happens, I'd look for the pair to rise to its purple 200 SMA, its next resistance area, but with all this consolidation that's been going on, I don't know what it's going to do.
Until this pair is able to:

1. Break and close above its 61.8% Fib line OR
2. Break and close below its 38.2% Fib line, 100 SMA, and 50 EMA – the 1.2000 area,

I don't see any good trades. Let's take a look at some more daily charts.

I've removed the moving averages for now and added trend channels instead. Look how nice the pair is trading between the top of the ascending channel and top Fibinnel..How long will it continue to do this? It's getting annoying.I do see a good short trade though. If the pair is able to close below its bottom Fibinnel, then I would sell this pair and take profit at either its 23.6% Fib line or the bottom of the channel. My stop loss would be above the top Fibinnel so pay attention to your risk-to-reward ratio. I especially like this trade because it's with the trend.The only thing I'd be cautious about is that I'd be shorting a pair in a channel that's rising. It's like an oxymoron trade.

If you don't like oxymoron trades, here's a better and safer trade idea. When the pair is able to break and close below its blue ascending channel, sell the pair and target its swing low.

Here's another daily chart you might want to pay attention to. Why? Because there's probably thousands of traders who believe this pair is going nowhere but up and have these same Fib retracement lines drawn looking for a place to go long. You will see that when price approaches any of these levels, buyers will come in believing that they're buying at the bottom where the pair will resume its upward march.Keep in mind though that if you did this, you would be trading against the trend which is down right now. Remember the old saying, ‘the trend is your friend”?Well trying to find a place to go long here would be the same as backstabbing your friend. And this could be either a good or bad thing depending on the quality of your friendship.Just be aware of the possible consequences. He could pull that knife out his back and turn around and stab you with your own knife (suffer a loss). Or he could die from the stab wound and on his gravestone you'd put “the trend is your friend except when it ends”. What the hell am I talking about here? I don't know.

Check this chart out. This pair has been in this range for a couple months now. Notice how many times the pair tried to test its resistance area around the 1.2175-2200 area and failed. Will it eventually break above it or will it give up and plummet? I have no clue. We'll just have to wait and see.

4 Hour Chart

This is pair is still trading nicely in its ascending channel. You can really see how consolidation is the main theme for this pair right now. It continues to trade in a range while it tries to figure out what it wants to do next.The lower limit of this range is determined by the 01/12/06 low around the 1.2000 area, while the resistance area is around the 1.1280 area, and the 1.2205 provides the upper extreme.From reading other analysts' perspectives, most view this consolidation period as a pause before it breaks out to the upside. Do I agree with them? Only if they end up being right.

Here's another ascending channel that you could draw. Based on this chart, it looks like the pair wants to attempt to reach the top of the channel again. The channel on the previous chart is shown using dashed grey lines. Which is the right channel to draw?Both off course. Just make sure whichever one you choose to trade on is the one that you stick with. Looking at both charts, I don't see any short trades until the pair is able break out and close below the bottom of their channels. I don't foresee that happening this week. I could be wrong though.If you want to be impatient and greed, you could wait for the pair to close below its blue 100 SMA and bottom Fibinnel, then sell the pair and target the purple 200 SMA.Reading a chart depends on one's perspective and as you gain experience, body weight, and grey hair, you'll get better and better at it. One day, you'll become like me…a master of the secret art of reading a chart. You'll be able to take one look at a chart and in nanoseconds, a bunch of trade ideas will pop out and you'll make a fortune. Ah, in due time oh padawan learner, in due time.Alright I'm becoming delusional. I better stop writing for now.

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