Trend analysis for the week beginning August 11th 2013
Last week’s fundamental policy decisions and high impact news events, were mainly dominated by: the service and manufacturing PMIs published by Markit economics, press conferences by governors of many of the leading central banks, trade balances for countries such as Japan, China and the USA and a flurry of diffusion sentiment indices.
The week’s key fundamental policy and high impact news events
This week’s fundamental agenda is mainly focused on: the preliminary calculation for Japan’s and several European countries’ GDP figures, the USA and the UK’s inflation and unemployment numbers, Germany’s ZEW sentiment index, retail sales for the USA and the Philly Fed manufacturing index. There’s also the smaller matter of how the UK’s BoE MPC voted in relation to keeping their asset purchase facility intact at the current figure of £375 billion.
During last week’s trading sessions the majority of the major currency pairs, the commodity pairs, indices and commodities maintained their trajectory and momentum. There was little in the way of major new events, or fundamental policy decisions, to cause any major trend reversals.
Having listed the fundamental news events that are scheduled for this week we’ll now preview the coming week using technical analysis on the major currency pairs, commodity pairs, indices and commodities. During our analysis we’ll focus on the most commonly used indicators plotted on a daily chart only, although we may reference the weekly chart also.
In our analysis we’ll use the Heikin Ashi candlesticks/bars for price action, the daily pivots, combined with the key levels of support and resistance and simple moving averages such as the 200 and 50 SMA. We’ll use several of the preferred indicators from the more typical indicator groups namely: the MACD, the DMI, Bollinger bands, stochastics, the RSI and the PSAR. Many of these indicators will have their settings adjusted in an attempt to ‘dial out’ what’s often referred to as “market noise”. We’ll also refer to the Fibonacci tool.
EUR/USD has continued its bullish trend which began on or around July 10/11th. This major currency pair has, since breaking the 200 SMA to the upside on July 11th, closed up more than 550 pips over the calendar month from the July 9th print of 12800. Many technical analysts will be looking for an organic retracement based on using the Fibonacci tool to the 23.6% retrace of circa 13250 from the current high of 13400. The suspicion that EUR/USD may be due to retrace is emphasised by the upper Bollinger band being breached. However, looking at the current swing trading indicators many traders would feel empowered in simply keeping with the current long momentum trend. The DMI, on an adjusted setting of 20 has made higher highs over recent days as has the MACD. PSAR is below price, whilst the RSI is currently reading over 60. The stochastics on an adjusted setting of 10,10,3 are yet to cross and despite moving out of the overbought zone have failed to fall further. The majority of swing traders would be advised to wait for confirmation, from many of the preferred swing trading indicators, that this current swing high has ended before commuting to a short trade. Perhaps as a minimum traders should be looking for the PSAR to appear above price, and the DMI, MACD to become negative and the RSI to fall below the median 50 level before swinging short. Traders who have ridden this long trade since early July must adjust stops accordingly. Perhaps using the PSAR to place their trailing stop in order to lock in the gains so far. 13,300 would be the obvious stop level given that it’s also the next key round psyche number to the downside.
GBP/USD began its current upside trend in a similar time frame to EUR/USD on or around July 9th/11th. Similar to EUR/USD the pip gains have been significant, from 15,000 to the current price of 15,500. Once again many technical analysts will be using their Fibonacci tool, drawing the retracement from the low of July 9th to the high of August 8th and predicting a fall to approach the 23.6% level, or the psyche number of 15,400. It must be noted that effective use of the Fibonacci tool requires re-drawing on a daily basis.
Looking at the other indicators reveals a similar situation to that of EUR/USD, a currency pair that tends to have historical strong correlation with cable. PSAR is below price, the MACD and DMI are positive, making higher highs over recent daily sessions and the two most recent Heikin Ashi candles are closed with upward shadows. The upper Bollinger band has been breached, stochastics (on an adjusted setting of 10,10,3) are at the mid level of circa 50, whilst the RSI is currently reading 62. Traders would once again be advised to lock in any profits during this run up by the effective use of trailing stops, perhaps using the PSAR as a gauge. 15,450 could be regarded as the obvious stop placement or 15,400 given that It coincides with the 23.6% Fibonacci retracement. Traders might consider staying long cable as the logical position until several of the key swing trading indicators have registered negative. Perhaps as a minimum RSI to cross the median 50 line, the PSAR to appear above price and the DMI and MACD, using the histogram option, to print fresh lows.
AUD/USD reversed trend in dramatic fashion on August 5th after the RBA governor and the committee surprised the FX market (and the wider markets), by only reducing the Aussie base rate by 0.25% when many analysts and market commentators had predicted at least a 0.5% reduction. It appeared that the market had priced in a 0.5% reduction as the Aussie rallied versus its major currency peer/s. For the remainder of last week’s trading sessions the market remained bullish Aussie due to the improved economic data published by China, Australia’s largest trading partner, for its commodities and its commodity based currency. Given the short sharp rise in price many analysts will turn to the Fibonacci tool to look for a retracement towards the 23.6% level or circa 9100 from the current close of 9250.
Looking at the indicators preferred for swing trading the DMI and MACD have recently become positive, the RSI is above the median line at 55. The middle Bollinger band has been breached to the upside, whilst the stochastics have crossed and have moved out of the 70, commonly marked down as the oversold territory. Traders would once again be advised to stay with the current trend, manage stops carefully, whilst potentially looking for a reversal of many of the indicators mentioned before contemplating a short swing trade. Interest rate based reversal momentum moves tend to have greater ‘life’ than other fundamental, or high impact news events.
The DJIA has, over the course of the past three weeks, exhibited the pattern of a security that is struggling to make any further gains to the upside. Having broken ground by way of historical highs it would appear that market makers and movers are struggling to bid up the index to further new highs without some significant fundamental news being the cause.
As each month passes, with an extra $85 billion of monetary easing by way of the Fed’s programme, the impact on the USA equities markets of the extra stimulus appears to be diluting. The DJIA began to reverse on August 6th based on no particular negative news, but more likely an exhaustion of the current sentiment and momentum. The index has begun to develop the pattern indicating the possibility of a new downward trend developing.
PSAR is above price, the RSI is below the median line of 50, the MACD and DMI are negative and printing lower lows on the histogram, the middle Bollinger band has been breached to the downside, the stochastics, on a 9,9,3 setting, have crossed and exited the overbought zone. The most recent Hiekin Ashi candles/bars have been closed with downward shadows. The fifty day simple moving average is in sight should a significant break to the downside occur. Traders would be advised to look for a reversal of these current indicators before committing to shorting the index. Perhaps as a minimum the PSAR appearing below price and the DMI and MACD becoming positive.
WTI oil has continued to be a difficult security to predict over recent weeks with severe fluctuations on a daily basis. Currently the security is bearish, but a pattern is possibly developing suggesting a further break to the upside. The DMI is positive and has made higher highs over recent days, the MACD has made higher lows, the RSI is at 55 and the stochastics on a setting of 9,9,3 have crossed to the upside. Traders would be advised to monitor this security carefully, perhaps if the PSAR appears below price exiting their short positions and considering a swing long.
As witnessed over recent weeks gold has failed to profile the safe haven status witnessed during other market conditions. The RORO (risk on risk off paradigm) has evaporated and gold has lost its safe haven status. As to whether or not this is a temporary measure, or a continued reflection of the monetary stimulus vis the Fed, remains to be seen. Gold appeared to be developing a bearish trend, however, during the last daily trading session of last week the security began to take on the pattern of a security setting to break out to the upside. The MACD became positive and made higher highs on the histogram, the RSI is above 50 printing at 53, the stochastics on a 9,9,3 setting have just crossed to the upside and the middle Bollinger band has been breached to the upside. Price is now precariously positioned close to the 50 SMA where it has ‘sat’ in s tight range for several days. Traders short gold would be advised to monitor their positions carefully to observe further evidence that price may break out to the upside.
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