Although my “DRIVE THRU” blog is NOT back officially until September 15th, I thought that I would open up this week’s FX REVIEW to all, to show that life goes on even when I am on a summer break.
A very strange week of trading for me, it was very dis-jointed.
At the start of the week we had USD weakness, then followed a couple of days where I was basically away from my screens suffering with a migraine from hell. In that time weakness continued then it was followed with 24 hours or so of USD strength as it returned. Then, more USD weakness into Jerome Powell’s Jackson Hole speech. It didn’t end there more currencies ended the week close to key support / resistance levels, in fact after Powell’s speech was released the USD weakness move basically stopped as we chopped in tight ranges into the close for 7 hours!
It was by all accounts a strange week for several reasons, ignoring my migraine.
The most liquid pair in the FX market and as far as I am concerned the main instigator of most moves, the EUR/USD is caught between a rock and a hard place.
I have been extremely cautious over the past few weeks. Let me just re-iterate, without going into too much detail as it is all previously well documented why: -
- The TRADE WAR tariffs are NOT as yet working out as fast as TRUMP thought. As insane as this sounds, I firmly believe he never thought that the rest of the world, especially CHINA would fight back. I really believe, TRUMP convinced himself that if he said “I am the U.S. President do as I say” – he would get his own way.
- TRUMP is off the rails. I know he looks Teflon coated but the circle around him is reducing and getting closer tweet by tweet. The squeeze is on!
When I was in the corporate world, I used the following phrase a lot – “Give him or her enough rope and he or she will hang themselves”, I believe this applies to TRUMP. He speaks before he thinks.
- ITALY is a major concern to the EUROZONE and a CONTAGION threat. The Genoa bridge disaster, which was 100% avoidable, has only brought the ITALIAN issues closer to a breaking point. ITALIAN yields will hit, the populist political issues are now only exacerbated following the Genoa tragedy and the budget constraints WILL in my opinion be blown about vis-à-vis EUROPEAN UNION rules.
- The EUROZONE is going alone with IRAN. The U.S. pulled out of the nuclear treaty. This will not end well.
- NAFTA: TRUMP believed he could isolate MEXICO and CANADA with a divide pressure and split approach to force two bi-lateral agreements. Knowing that TRUMP is under increasing pressure in D.C. the MEXICANS have held firm on NAFTA being agreed three-ways.
I would say that this stance has absolutely gob smacked the TRUMP administration.
All of the above affect the EUR/USD whether directly or indirectly related. There is always a DOMINO EFFECT in the FX market.
All of this in a thinly traded market place in a range bound environment has “DO NOT BE BLOODY STUPID” written all over it.
So, they are my reasons, agree or dis-agree?
Let me take you a bit further with what I am looking at regarding the EUR/USD. The USD (DXY) index is a basket of currencies as shown below on the pie chart that I picked up from the “baby pips” website.
EUR/USD = 57.6%
USD/JPY = 13.6%
GBP/USD = 11.9%
USD/CAD = 9.1%
USD/SEK = 4.2%
USD/CHF = 3.6%
At over 57% of the basket I think that you would have to agree that whatever the EUR/USD does the DXY would follow suit.
Below, I show the USD INDEX (DXY) daily chart. WE closed the week below the trend line that started in April this year when the DXY started to climb following its sell-off following the TRUMP INAGURATION.
As you can see from the chart we fell lower from the ascending wedge pattern, which is quite usual. We stopped on Friday last week at the 23.6% Fibonacci retracement (Almost a bearish engulfing candle... but not quite).
Here are my questions: -
- Could we bounce higher from here? Yes, we could it's a shallow retracement but as you can see from the chart there is a lot of horizontal resistance, which will now act as support.
- Could we fall lower? Yes, the 38% retracement with the BLUE STAR on the chart comes in at 94.04. This would be a more usual retracement level and much healthier for the market.
- Could we go beyond the 38% retracement? Yes, dead right we could. The 200 DAY SMA is shown at the GREEN STAR at c.92.50.
So, what do I think? I just don’t know. It’s OK not to know. If I knew, I guarantee you I would no longer be posting FX every weekend, there are better things in life to do! From the above list of possible scenarios, I could argue a case for any being the outcome.
So, let me dive a little deeper, and take a look at the EUR/USD for some possible clues.
The EUR/USD charts shown below are views taken from either the 240 MINUTES, the DAILY and WEEKLY CHARTS.
- RANGE MEASURED MOVE:
The daily chart below reflected my thoughts at the outset of last week. The pair had hit 1.1300 and bounced. I expected a re-test of the breakdown point of 1.1500. As you can see my range target of 350 pips from 1.1850 to 1.1500 produces a measure move objective of 1.1150.
- BULL FLAG MOVE:
Towards the end of the week with 1.1500 tested, broken and re-tested my attention was drawn to a BULL FLAG pattern as shown on the 240 minutes chart below. The measure move is 1.1850.
- JACKSON HOLE SPEECH DAY – CUP & HANDLE PATTERN:
Completing my research pre-Jackson Hole, the 240 minutes chart below gave me a reasonable CUP and HANDLE pattern with a breakout at 1.1620, with a measured move objective of 1.1850.
We spiked to 1.1640 which, WEEKLY FX PREMIUM subscribers will recall was my STOP LOSS level on trade reference FUN1057 pre-Jackson Hole.
- FIBONACCI RETRACEMENT:
Looking at the June 2018 highs of 1.1850 to the August 2018 lows of 1.1300. 1.1640 represents the 61.8% Fibonacci retracement level. This was where we peaked and stopped.
This level is probably the most significant level of retracement for me, as it either confirms or denies moves.
So, what does all this analysis mean, and does it help in deciding which way the EUR/USD and DXY will move this coming week?
My only answer on this matter is 1.1640 is now a huge level in my opinion. The 240 minutes closing candle for the week as you can see highlighted on the CUP and HANDLE chart is a SHOOTING STAR, which is generally considered to be a BEARISH REVERSAL candle.
Technical traders will say 61.8% retracement failure SHOOTING STAR candle, the path looks lower.
However, here is another chart.
- MORNING STAR FORMATION (NOT PERFECT):
The weekly chart below showsan almost perfect morning star candle formation. The purists will argue over the middle candle being a hammer. From my perspective, this only strengthens the formation.
This a STRONG reversal formation which usually indicates that the down trend is reversing. Being weekly candles, this view is even stronger in my opinion.
So, what next?
The WEEKLY CHART is very strong. I am a FUNDAMENTAL trader first then technical. I have strong reasons, as noted at the beginning of this article to be BEARISH the EUR/USD, but the technical and my macro views are simply not aligned.
Will I trade the EUR/USD long this week?
Only WEEKLY FX PREMIUM subscribers will find out!
The Pip Accumulator
BLOG VERSION: #291 FREE NEWSLETTER
DATE: 25th August 2018