FX Speculations

Keep up with all of my trades at the DailyFX Forex Stream .  I publish what I do and when I do it there.

I am watching the World Series and looking at various charts (as usual).  The EURUSD monthly and EURUSD price action since September look identical.  Head and shoulders patterns could be unfolding.  The monthly is on top. 

Mark Twain once remarked that “History doesn’t repeat itself – at best it sometimes rhymes”.  This is an accurate description market patterns and technical analysis in general.  Market patterns are recognizable because they repeat (or more accurately rhyme).  Patterns repeat because they are the manifestation of human psychology (emotion), which has not changed since the evolution of humans.  All tops, for example, share some similarities but are inherently different (just as all heat of the moment confrontations between 2 people share similarities but are different).  The first chart is the EURUSD top in July 2008 from above 1.6000.  The second chart is price action since the top on Sunday night.

In July 2008, the high to low of the first leg down took 8 sessions (3 sessions to a day, Asia, Europe, US).  The current high to low period took 9 sessions.  

In July 2008, the correction took 10 sessions and retraced exactly 61.8% of the initial decline.  The current correction is in its 3rd session.  The 61.8% is at 1.4918.  

My point is to be patient and wait for the correction to play out (so that we can make sure that it is a correction in the first place) and pay close attention Tuesday (which will be sessions 10, 11, and 12 since the low) especially if the EURUSD is near 1.4920.

This is part of a note that I sent to a client this morning.  I felt it important enough to share with everyone.

Media outlets, whose job it is to attract viewers, naturally focus on what is popular.  Right now, there is no question that the demise of the dollar is popular among financial news types.  What does this really mean?  By definition, this indicates a sentiment extreme…in this case, a bearish sentiment extreme toward the US dollar.  Trends and reversals of trends are a product of sentiment (psychological) extremes.   A USD bottom always occurs when nearly everyone is bearish and the outlook looks bleakest.  No market is a better example of this than the FX market.  Due to its size, it is the perfect candidate for study from a psychological perspective….

I’ve attached a chart that plots the weekly USD index along with search volume for US dollar in google.  Spikes in US dollar occur at turning points.  The chart speaks for itself.  It will be interesting to see next week’s number, which is probably even higher.  Needless to say, a turn is just around the corner. 

The Currencies, Gold/silver/crude, and equities pages have all been updated as of today.

Iran says that the USD is a detriment  and you couldn’t watch CNBC today without ‘dollar bashing’ analysis.  Every man, woman, and child seems to know that the dollar is weak and getting weaker.  Even Bill O’Reilly and Neil Cavuto are talking about USD weakness on O’Reilly’s show right now.  Some of my friends who are not involved in the capital markets are emailing me and asking if they should go long gold and the Australian dollar now.  Bottom line, psychology is clearly one sided.  Of course, it can remain so for a while.  I’m taking a step back for and sitting flat for now.

Out with an 80 pip loss on that EURUSD short.  The USD trend either remains down or a larger correction is underway.

The short entries were hit at 1.4575 and 1.4615.  I want to give this time so as to insulate the trade from noise.  Let’s see how things open up Sunday.  I wouldn’t think about taking any profits until 1.4350 at the earliest.

I am damn glad that I didn’t go long euros.  A push above 1.4680 would have been required in order to trigger a long anyway, but sometimes I jump the gun.  In fact, I probably would have gone long had I not gone to the Springstein concert last night…so thanks Bruce.  A short term channel was broken to the downside today and an even shorter term channel defines the trend right now.  Resistance levels are now 1.4575 (former support), 1.4600 (50% Fibo), and 1.4615/20 (former support and 61.8% Fibo and short term channel resistance and former channel support).   Clearly, the last level is of the most interest.  I’ll stack orders between 1.4575 and 1.4615 with a stop above 1.4680.  I’ve got a first target in mind of 1.4400.  Nimble short term traders (or action junkies) might want to trade from the long side overnight and target the mentioned resistance.

In Elliott, analysts will sometimes refer to ‘the look’ of a pattern.  Look at the rectangled area on the chart.  Doesn’t it ‘look’ like one more rally would complete 5 waves (and a larger 3rd)?  Notice how the action before is a choppy mess.  It is clearly corrective, perhaps a triangle.  We know that triangles precede terminal moves but this move may not be over yet.  v of 3 and then 4 and 5 would complete the pattern if this count is correct, which could take a few weeks.  There is so much bigger picture bearish evidence right now (COT and last week’s candle for example), that I am truly scared to go long but this short term pattern at least enables those that do go long to control risk and gun for a potentially significant profit.  I am off to see Springstein (Boss!!) at Giants Stadium.