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Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

2012-07-13 19:51:00
Jamie Saettele, CMT, Sr. Technical Strategist
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***

On balance, markets that I follow the closest were unchanged this week. For the week, the S&P 500 is unchanged, the EURUSD is down .4% and the AUDUSD is up .1%. Of course, it doesn’t feel that way if you are sitting in front of a screen every day. A sideways market, full of false breaks and traps, serves an economic purpose. That purpose is to eliminate weak positions that inhibit the market in question from moving to where it ultimately needs to go. For example, a market will have a much more difficult time breaking support if that market is saturated with scared shorts; the reason being that those shorts are more likely to cover (buy) on any adverse price movement. Once the market is ‘cleaned up’, it is free to move more freely towards its destination. These are the real ‘technicals’ of the market. The indicators and methods (patterns for example) aid in describing the environment.

I’m a bigger picture USD bull but recognize the potential for another bout of USD weakness before the acceleration phase of the advance. Based on early July trading (opening range for the month), I’m bullish the USD now against the July USD lows (10330 AUDUSD and 12677 EURUSD). If those USD lows are broken, it doesn’t make sense to fight USD weakness as per the 1995/96 USD model.

As for positions, I am short the AUDUSD (10240 entry earlier this week) with a stop above 10280 (originally was above 10330). There may be opportunities to play both sides of the EURUSD next week. Today’s action, high volume at the low and 240 minute key reversal, suggests additional strength towards 12360-12400 before weakness resumes. After expressing these thoughts on Twitter today, I received many questions from confused followers asking how I could be bullish (at least in the short term) EURUSD and still be short the AUDUSD. The AUD and EUR have diverged significantly since early July, which can be observed in the acceleration lower in EURAUD. A bullish key reversal unfolded Thursday in the EURAUD, thus it is not inconceivable that the EURUSD advances into the mid-12300s-12400 while the AUDUSD trades sideways below 10280 (the result is a higher EURAUD). Moreover, these are separate trades. When confronted with evidence that warrants a short term stance in one market, it doesn’t make sense to abandon a previous trade in a different market that is still in progress. - Jamie

***

“THE MARKET(S)” a.k.a. “RISK” – Weekly Bars

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_all.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

I’ve shown this chart for 4 weeks now (and similar charts since March) but it’s worth a look each week if for no other reason than to remind ourselves that decoupling is a myth; that capital markets remain USD centric and fluctuate with the expansion and contraction of USD denominated credit.

“The story being told by markets remains one of slowing global economic growth. Interest in the story is on the rise as key markets such as crude oil and copper approach multiyear support lines (head and shoulders necklines). The downward sloping neckline on crude portends an especially weak market (Some may take issue with this because these charts are of continuous futures, rather than spot. The crude spot market shows a much higher right shoulder and upward sloping trendline but does indeed show a multiyear topping pattern). Breaks of these long term supports will probably trigger the panic portion of the story in the coming weeks and months.

Of particular interest to FX traders is the emergence of topping patterns in both the Euro and Japanese Yen (Yen futures shown to correlate with EURUSD). Both currencies have been carving out topping patterns since late 2010. Viewed through this lens, it’s not out of the question that we’ll soon see a much stronger USD against both the Euro and Yen (and a more or less sideways EURJPY). Specific to the Yen, the divergence between the Yen (not a new record high) and 10 year Treasury note (new record high) remains in place and is characteristic of long term reversals.”

S&P 500 Index ETF (SPY)

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_SPY.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

Equities traded lower intraweek but ended the week relatively unchanged. As such, last week’s thoughts remain valid. “Early in June, I suggested 2 topping dates based on common time relationships seen at previous tops. The dates were 6/21 and 7/3-7/4. I was confident that the top was in on 6/19 after the 6/21 drop but Ms. Market, always with a trick up her sleeve, had other plans. Once again, the information that I rely on (pattern, sentiment, momentum) suggests that a top is in place. I am more confident this time as the rally from June is 1 day removed from a 50% relationship in time with the decline from April, July’s opening range has been resolved to the downside (which was not the case in June), and daily RSI has rolled over after poking above 60. The only thing that worries me as a bear is sentiment. The mainstream media acts as if the world is ending each time the S&P falls 10 handles. Words like ‘crumble’ and ‘plunge’, usually in capital letters, populate the Twittersphere. This psychology is more consistent with bottoms than tops. By the same token, each 10 handle rally in the S&P brings out bullish prognosticators in droves. Maybe the extreme changes in sentiment over short periods of time presage drastic market moves. The thought fits the Elliott wave model in which the majority sells out at the wave 1 low (after 1-2-3-4-5 down) and gets caught turning bullish at the wave 2 high (after A-B-C up).”

S&P 500 Index ETF (SPY)

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_SPY_1.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

The red dots indicate days when the market opens UP at least 1.8% and closes the day UP at least 2.5%. The conditions were met on 6/29 for the first time since December. In general, such conditions are more likely to be met in bear markets (as the chart indicates).

US Dollar Index (ICE) Continuous Contract Weekly

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_usd.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

I’m still following the 1995/96 USD model. IF the current market follows the 1995/96 model then expect weakness from current levels throughout July and into mid-August. If the USD breaks higher while remaining above recent lows, then the implications from the 1995/96 model will no longer apply.

US Dollar Index (ICE) Continuous Contract Daily

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_usd_1.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

“The relationship between the US Dollar Index in 1995-1996 and now was pointed out to me by ElliottWave-Forecast. The charts tell the story and it’s uncanny. Not only do the patterns show remarkable similarity in form, but also in time and amplitude. The first number denotes the number of days that the specific leg consumed. The second number in parentheses denotes the number of days since the start of the pattern. The numbers with decimal points are percentage and measure the change from low to high of each leg in the pattern with the number after the slash measuring the net change from the start of the pattern. If the pattern continues (and there is no guarantee that it will of course), then the USD would trade sideways to down throughout July and August before bottoming just above the May low. This should be interesting to follow.”

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_usd_2.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR)

Weekly

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_usdollar.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

Jamie – I wrote last week that “I’d not be surprised to see a strong USD in early July followed by weakening thereafter. Early week focus is still higher towards 10220/40, which is a zone likely to produce a reaction (at least a pullback lower).” The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) reached 10223 yesterday before retracing nearly the entire week’s advance today (Friday). The pertinent question is whether or not today’s decline is a pullback or the beginning of a decline that ends near 9950. The July low is key and 10115 is support.

Euro / US Dollar

Weekly

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_eurusd.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

JamieThe high volume (CME) seen near today’s EURUSD low is consistent with a pivot that lasts for at least several days. My early week focus will be to align with the bull side for a run at 12360-12400. 12200/10 is early week support. 12360 is the 7/5 low and 38.2% retracement of the decline from 12692. 12400 is the 7/6 high and 6/28 low. For now, focus on 12360-12400 and we’ll reassess as appropriate.

British Pound / US Dollar

Weekly

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_gbpusd.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

JamieThe GBPUSD retraced its entire weekly decline today. Even so, the advance brings price back into the 20 day average (15590) and 50% retracement of the decline from 15777. The high for July was registered on the first trading day of the month, which is significant. Bigger picture, one must consider the potential for a resolution to the 3+ year bearish (previous trend was down) triangle. A drop below 15232 would shift focus to the 100% extension of 16301-15277 / 15777 at 14743.

Australian Dollar / US Dollar

Weekly

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_audusd.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

Jamie The AUDUSD is up .1% for the week as I type. I acknowledge that the AUDUSD has held its short term corrective channel and 100% extension of the decline from 10330 but I remain bearish below 10280. Bigger picture information, such as RSI failing before 70 on the daily and near 50 on the weekly, makes turning bullish a risky proposition in my opinion. Exceeding 10280 would bring into play several patterns from the 7/5 high, including an already completed correction, ongoing triangle, or larger complex correction. 10280 is all that really matters near term.

US Dollar / Japanese Yen

Weekly Bars

Euro_Unchanged_Following_Friday_Reversal-12400_is_Near_Term_Focus_body_usdjpy.png, Euro Unchanged Following Friday Reversal-12400 is Near Term Focus

Prepared by Jamie Saettele, CMT

Jamie“Bigger picture, the USDJPY is trying to put in a low above the February low. The RSI turn at 40 on the weekly is promising in that regard.” The market has done nothing but consolidate since the 6/25 reversal. Consolidation after a bearish reversal isn’t bullish. A stronger near term tape is needed in order to act on the long term bullish potential. Stay tuned.

--- Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com

To contact Jamie e-mail jsaettele@dailyfx.com. Follow him on Twitter @JamieSaettele

To be added to Jamie’s e-mail distribution list, send an e-mail with subject line "Distribution List" to jsaettele@dailyfx.com

Jamie is the author of Sentiment in the Forex Market.

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

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

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