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Fundamentals: A Technician's Best Friend

Fundamentals: A Technician's Best Friend

Todd Gordon, Technical Strategist

Talking Points:

  • Traditional Moves in Related Asset Classes
  • A "Textbook" Example in USD/JPY
  • Fundamental Factors That Validate the Long Side

Are you a technical trader, a fundamental trader, or both? It’s a very important decision every trader must make. Personally, I’m a hybrid trader…but there’s a caveat.

My first love is technicals, but when it comes to fundamentals, let’s put it this way: I don’t use them until it’s absolutely necessary.

The first “necessary” occasion is when I appear on CNBC. The financial media is very fundamental and news-driven, and in order to participate in a debate, I need to lean on fundamentals to support my chart view.

When it comes to trading my own capital, however, it’s always the technicals that come first. Only when fundamentals have something meaningful to add to a trade will I pay attention.

Now, when I say “fundamentals,” I’m not referring to GDP growth, CPI data, or even relative levels of interest rates. I’m talking about the price behavior of two or more fundamentally related asset classes demonstrating to us that they are, in fact, respecting their textbook fundamental relationship.

When related trading markets are showing strong fundamental correlation, it can be quite helpful for the technician’s trade plan. If, on the other hand, fundamentally related markets are not respecting each other and are “wandering,” then factoring their supposed correlation into your trade could be quite costly.

Right now, USDJPY is a great example of a market that is respecting textbook fundamental relationships.

The main fundamental headline driving markets is whether or not the Federal Reserve will reduce the $85 billion in monthly asset purchases widely known as quantitative easing (QE).

The chart below is showing what I believe to be the three most important macro factors tied to the great QE tapering debate. All three are highly QE-sensitive markets and are traders’ preferred voting ballots. Those are: 1) Three-hour chart of US ten-year bond yields; 2) USDJPY; and 3) gold futures (with the price scale inverted).

Guest Commentary: 3 Fundamental Factors That Support USD/JPY

Fundamentals_A_Technicians_Best_Friend_body_GuestCommentary_TGordon_November26A_1.png, Fundamentals: A Technician's Best Friend

Trading USD/JPY Using Cross-Market Correlation

This is actually an occasion when the typically murky fundamentals that usually don’t matter do, in fact, come into play. As the markets are expecting the Fed to announce in December that it intends to buy fewer bonds, bond prices will fall, which would push bond yields higher.

Such a scenario would help the US dollar (USD) for two reasons:

  1. Higher US bond yields (especially on ten-year bonds) filters through to broader levels of interest rates in the US, which means overseas investors can earn higher returns on US investments. This draws foreign capital into the US, thereby strengthening the dollar.
  2. The Fed will stop printing money to fund the ongoing bond-buying spree that may or may not be paid back.

Back to the chart above, we can see that increasing US bond yields (or falling bond prices) have helped track USDJPY higher throughout November.

Another market that is fundamentally related to the great QE debate is gold, which is a great indicator of Fed policy and tracks these two markets exceptionally well. Notice I have placed an inverted gold chart on this overlay.

Rising bond yields, falling bond prices, and a rising USDJPY are the market’s way of betting that the Fed is leaning towards tapering. As I said earlier, tapering would be bullish for USD, which infers that it’s also bearish for gold considering the inverse USD/gold relationship.

Bottom line is this: I’m going to present a long USDJPY trade idea, and as I tell my research clients, if this trade is going to work, a rally in those yellow and blue lines would really help its cause.

Elliott Wave and Fibonacci Supports USD/JPY Longs

Now, you can’t make a trade based solely on that fundamental analysis! This simply helps identify the themes and trends driving price change. The necessary second step in the process is to apply disciplined pattern recognition in order to formulate a game plan.

Guest Commentary: Applying Technical Methods to Take the Trade

Fundamentals_A_Technicians_Best_Friend_body_GuestCommentary_TGordon_November26A_2.png, Fundamentals: A Technician's Best Friend

USDJPY is pulling back in orange wave (C) of higher-degree green circle 4. I have highlighted the ideal pullback zone in this ongoing correction using Fibonacci analysis of the prior green second and third waves compared to the ongoing fourth wave.

The combination of Elliott Wave and Fibonacci pinpoints an ideal reversal zone of 101.40 to 101.05 for a long trade. According to the Elliott Wave principle, wave four can’t enter wave-two territory or else the count is invalid and we should no longer be in the trade. That level comes in at 101.43, which will act as a stop level.

On the top side, there is a cluster of Fibonacci levels standing guard to capture the end of green wave five at around 102.50.

The Trade

We are scanning the 101.40-101.05 zone using the WaveTrader system for long trades and will initiate a trade if we receive the signal. Stops could be below 100.43 and profits taken starting at 102.50.

Remember, though, we would like to see confirmation from falling gold prices, falling US bond prices, and rallying US bond yields to give us an extra fundamental push towards profitability in this trade.

By Todd Gordon, founder,

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Disclaimer: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.