Weekend Analysis

This is going to be a crazy week! We have a heiferload of economic reports coming out. The ECB and Federal Reserve will be holding policy meetings, the US non-farm payrolls report is due, and so are reports from both the US and Euroland manufacturing and service sectors. The U.S. economic data to be released this week will mostly cover activity that occurred in the new year and supposedly most, if not all of it, will be positive. Hold on tight because the dollar bulls might come out kicking! The dominant theme in the foreign exchange market right now is still INTEREST RATES. There are two questions to which the market is trying to find the answer to right now:

1. When will the Fed stop hiking rates?
2. When will the ECB hike rates again?

When will the Fed stop hiking rates?

Everybody pretty much knows that the Federal Open Market Committee (FOMC) will raise rates by 25 basis points to 4.5% this Tuesday. That's a given.

But for the first time since it started hiking rates in June 2004, the Fed will quit using forward-looking language that provided guidance on future rate moves. It's believed that the Fed will revert back to its old tradition of keeping markets guessing.This is Alan Greenspan's last FOMC as Fed chairman, so it's most likely that the Fed will try to be ambiguous as possible so Ben Bernanke, Greenspan's successor, will have the flexibility to do what he wants during the next FOMC meeting in March. They want to keep us on our toes.In the Fed's Dec. 13 statement, the FOMC said that "some further measured policy firming is likely to be needed." I'm thinking that the FOMC would simply change the statement to note that measured policy firming "may be needed.”Many market participants have already jumped on the bandwagon that the Fed is going to quit hiking sooner rather than later, which is a big reason why the dollar has weakened this month. I want to warn you not be so quick to conclude that the Fed has finished hiking rates.If the Fed plants some hawkish language about inflation in the policy statement, we could see a serious dollar rally.But if the Fed suggests that rates have peaked in January, then we will definitely see renewed selling pressure on the dollar. Fed officials have stressed in recent speeches that their decision on future rate hikes will be data-dependent. This is why the economic reports coming out are so important as this data will show the health of the economy and whether further rates hikes are needed. There could be a huge one-way move in the market as the release of all this economic data and the FOMC statement will finally clear up some confusion about the direction of the dollar. Place your bets now.

When will the ECB hike rates again?

This is a slightly easier question to answer. The ECB is expected to keep interest rates at 2.25%. That's a given. The market has already factored in a 90% probability of an interest-rate hike of 25bp in March. If the ECB simply keeps the rate unchanged and provides no new changes to their policy statement, then the market will just yawn at this event. BUT if they provide any hints of dovishness or any remarks of market growth weakness, then watch out, because the Euro could drop fast like a fat lady jumping off a 30-story building.

EUR/USD

Weekly Chart

We finally got some movement this week. But check out that last candle. Looks like a shooting star to me. And we all know a shooting star could be a possible sign of a bearish reversal. The pair was able to poke through its pink 50 EMA but failed to close above it so that moving average is still a resistance area. From the looks of it, I think this pair will fall and test the top of its old descending channel.

Here's a different look at the same time frame. I've applied Fibonacci retracement levels so you can see how the pair was able to close below its 24% Fib line. Yes I know it's actually 23.6%, but I'm going to round to the nearest whole number from now on because it takes too much energy to type out decimal numbers. Since the pair did close below its 24% Fib line, we're supposed to look for it to drop back down to its swing low around the 1.1650 level, but I'll have to see it fall and close back into its old channel first before I'm convinced that it has a chance of falling down that low again.

Daily Chart

First things first, let's find what trend direction this baby is in right now.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). After all that's happened over the past two weeks, it's still freakin' down you ask?!Absolutely. The trend is still down 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. Remember the trend is your friend. Okay now that we've identified the current trend which is down, let's take a look at another daily chart.

Look at how the pair fell back in its ascending channel. More important, notice how it fell and closed back below its purple 200 SMA. This is huge. A couple days ago, the pair closed above its purple 200 SMA which was an extremely bullish sign because it had been a very long time since it last did this. But now that's its back below it, this is the pair's short-term resistance area. I have two trade ideas that I like when looking at this chart and they both are trading with the current trend:

• Wait for the pair to rise back up and when it touches its purple 200 SMA again, sell the pair. Take profit at the top blue-dotted Fibinnel line and place your stop above the top boundary of the channel. You could go for the middle Fibinnel if you're greedy.
• Wait for the pair to close below the bottom Fibinnel line, then sell the pair. Place your stop above the top Fibinnel line and cash out where you see the big pile of money – the bottom boundary of the channel.

Alright, I've applied Fibonacci retracement levels on this daily chart. Here are some more trade ideas:

1. When the pair closes above its 62% Fib line and top of the channel, buy the pair. Grab your cash at the 76% Fib line and place your stop below the purple 200 SMA.
2. Wait for the pair to fall and close below its 38% Fib line and sell the par. Cash out when the price hits the bottom or the channel or if you're feeling greedy, you can go for the 24% Fib line. Place your stop above the 38% Fib line.

Notice how I've drawn the Fib retracement levels from swing high to swing low on this chart which provides a bearish bias.

On this chart, I've drawn Fib retracement levels from swing low to swing high, providing a bullish bias. So let's try to find a place where we can buy this pair since I believe it will hit one of its Fib lines and resume its uptrend.This is what I've come up with. I'm going to wait for the pair to fall and touch its 38% Fib line (1) and then go long. I will take profit at 24% Fib line because that's where the pile of cash lies. My stop will be placed below its 50% Fib line. I really like this stop because the pair will have to pass through its blue 100 SMA and pink 50 SMA for me to get stopped out. Off course the market will go where it wants so here's a short trade idea as well. Sell if the pair closes below its 62% Fib line (2). Go for the big money at the pair's swing low. Place your stop above the blue 100 SMA. You might want to trail your stop so you can lock in profit as you go.

4 Hour Chart

I've thrown this chart in to show you what usually happens when this pair breaks out of its sideways channel. Notice how it was trading in a range between 1.2030 and 1.2165 – a width of 165 pips. When a pair finally breaks out of its channel, it will usually break out around the same width of the original channel it was in. I've highlighted this on the chart in purple. So let's fast forward to what's going on right now. The pair has fallen back into its old sideways channel and also closed below its blue 100 SMA. This is bearish. I'm expecting for this pair to fall back down to at least its purple 200 SMA and maybe even the bottom of its channel. As you can see, this is where I've placed the pile of cash. An aggressive trade would be to short now, target the 200 SMA, and place your stop above the blue 100 SMA. If this pair can close below the bottom of this channel, I look for it to fall down to 1.1900.

GBP/USD

Weekly Chart

Here's the weekly chart for cable. Check out that last candle. It rose above its top Fibinnel and attempted to reach its pink 50 EMA but got clobbered by the bears and ended closing below its top Fibinnel. I see this as a bearish sign. This week, I believe this pair will fall to its middle Fibinnel line. Support is still its purple 200 SMA. Any upside movement will be capped by its 50 EMA and 100 SMA for now.

Daily Chart

The trend is still down. Remember, both 89 EMAs have to cross above both 144 EMAs for the trend to change. It hasn't done that yet so the trend remains down.

Here's another perspective of the daily chart. Notice how the pair used to trade in the black descending channel but broke out and is now trading in its blue ascending channel. Look how the top of the channel as well as its purple 200 SMA acted as strong resistance. Right now, the pair is resting on its top Fibinnel line. Will it continue to fall? If it does, it'll have a tough time around the middle Fibinnel line since both the blue 100 SMA and the pink 50 EMA are present forming a very strong support area. If the pair falls and closes below its bottom Fibinnel line, I'm going to sell this pair and take profit at its next support area (S) which is the bottom of the channel. I will place my stop above the middle Fibinnel.

Here's another daily chart where I've removed the channels but added Fibonacci retracement levels. Check out how it tried to test its 62% Fib line but failed. I see this as a good sign for the pair to fall some more. Do you see the support area that I've marked in purple with an “S”? This is a good support level containing the 38% Fib line, the 100 SMA, and 50 EMA. If the pair closes below all three of these, I will short the crap out of this pair and target its 24% Fib line. If you're feeling greedy, you can go for the bigger pile of Benjamins located at the pair's swing low. Just make sure you trail your stop so you don't turn a winning trade into a loser.

4 Hour Chart

This is the same 4-hr chart I discussed from last week. All it is are the three moving averages I use plus Fibonacci extension levels. Look how you would've made big money cashing out at the 62% Fib line. Check out where the pair is now though. It dropped like a rock and has closed below its Fib extension levels and its pink 50 EMA and blue 100 SMA. Here's an excellent trade idea: I'm going to short now at 1.7676. My stop loss will be its pink 50 EMA which is currently at 1.7765. My profit target is that big pile of moolah…its purple 200 SMA which is currently at 1.7568. Remember, values from moving averages are constantly changing so make sure you adjust your stop and profit target accordingly.

USD/JPY

Weekly Chart

Look at that beautiful ascending channel this pair is trading in. The pair has been falling but it seems to have found good support at its 200 SMA and the bottom boundary of the channel. Last week, it closed above its bottom Fibinnel line. You could actually buy this pair now and go for the top Fibinnel. Place your stop below the bottom Fibinnel line. Let's look for a more specific trade though.

This weekly chart looks even more stunning than the last. Those Fibonnaci retracement levels look so sexy when price obeys them. We can see that the pair fell, hit support at its 38% Fib line, then rose and closed above its 24% Fib line. This is a bullish sign for me.A good trade idea here is to buy now. Go for the swing high which is 121.38. Place your stop at least at on the 38% Fib line. A safer stop would be below its most recent low which I've highlighted in purple. My low is 113.41 but depending on your broker, it could be different for you.I'm risking about 380 pips here to pocket about 410 pips. It's a little over a 1:1 reward-to-risk ratio and I think it has a good chance of winning. The only thing else I can foresee happening is that the pair might fall back below its 24% Fib line and trade sideways between the 24% and 38% Fib line for who the heck knows how long before either rising up again or falling even further.

Here's another weekly chart where we can guess where this pair will move this week. Will it trade sideways between the swing retracement low and the 24% Fib extension level? Or will it continue its upward movement and rise to one of those cash piles?

Daily Chart

Ah look at this. While the weekly chart is in rising channel, the daily chart was trading in a falling channel.But wait a minute! The pair broke and closed above the top of the channel!Is it done with its falling channel? Maybe and maybe not. If it is, where is this pair headed? We know it's up but how far up? To find that answer, let's look at another daily chart.

We could draw Fibonacci retracement levels to see where it will go next. The pair found solid support at its 62% Fib retracement level before continuing its upward movement. Right now, the pair has closed above its 38% Fib line so I expect to rise up to its 24% Fib line. If it keeps going up, its next stop is its swing high.

Here's another daily chart using Fibonacci extension levels. Right now, the pair has broken above its 24% Fib line. It should rise up to its 38% Fib line next.If you're an impulsive shopper, you can buy now. Your profit target would be where the pile of cash is at its 76% Fib level and your stop would be placed below the 24% Fib line, preferably also below the 100 SMA. You would be risking about 200 pips to make 580 pips.This trade is not for the faint of heart. As you can see, it has a huge stop and will require a ton of patience since this trade might take weeks before it hits its profit target.

4 Hour Chart

I don't have any trade ideas for this chart but I did want to show you that it's currently trading in a rising channel. Because you all are brilliant, you probably observed that the pair is in a rising channel on the weekly, a falling channel on a daily, and back to a rising channel on a 4-hr chart. This is why I have such a bullish feeling for this pair. It's trading in a rising channel for two out of three time frames and on the daily time frame, the pair has actually broken out of its falling channel ready to blast up to the moon. Or not.I've highlighted areas where the pair will find support if it decides to fall. Usually if the pair breaks out of a channel, it will attempt to fall back into the channel and that's why I've marked support at the top of the channel. It will most likely fall and test that boundary. It'll probably bounce off it but if it does pierce through it, it will still have the purple 200 SMA to battle with and then the top Fibinnel.

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