FX & Stocks: USD still running this show: Trade Week Analysis by Mary McNamara

Last week:  It was yet another volatile week for trading and this limited the potential for trend signals off the 4hr chart time frame.  Trading off shorter time frame charts during the US session continues to offer higher probability, and lower risk, trading opportunities as I noted again on Friday.

This week:

The USDX continues to hover just below a significant resistance level and the next directional move on the index will define moves for a number of FX pairs. Many FX pairs continue to trade at key support and seem to be waiting to see where the USD will head from here. It is still a bit of a waiting game here but traders will be looking to FOMC in the coming week to hopefully be the catalyst to trigger a USD move. A review of this index can be found through this link.

There is a fair bit of high impact data next week and the first of these is the ECB Bank Stress results released on Sunday. This news could impact risk appetite at market open on Monday. Also, three central banks report on their cash rates: USD, JPY and NZD. There is also key Chinese Manufacturing PMI data released after the markets close next Friday and so traders will need to watch for any impact from this on the following Monday.

Friday is the last day of the trading month. Watch for new monthly pivots on the following Monday.

Events in the Ukraine and the Middle East, as well as with Ebola, continue to have the potential to undermine any developing ‘risk’ appetite and need to be monitored.

Stocks and broader market sentiment:

What a difference a week makes! Stocks made a significant recovery last week with the three indices, S&P500, DJIA and NASDAQ, all printing bullish engulfing candles. The Russell 2000 ‘small caps’ index also printed a bullish weekly candle and now looks like it could be setting up into another weekly chart Bull Flag! And to cap all this off, the VIX is back below 20. 

AAPL has made a bullish Cup ‘n’ Handle breakout and I’m wondering if this is a metaphor for the broader trading universe? See charts and thoughts on this through this link.

Yet despite this latest upbeat sentiment I am still seeing divergence on the monthly S&P500 chart and whilst this might just be warning of a pause, as the index navigates these new highs up at the 2000 region, the chance of a pullback cannot be ruled out either. There has not been any real deep pull back since the break up through the 1,577, 1,600, 1,700 and 1,800 levels and the major break of the 1,577 level was only tested once. 

The S&P500 recently broke below the key 1,900 and if, by some slim chance, the monthly candle closes next week back below this key support then I will be looking for a move lower to test the following two key levels:

  • The 50% fib pull back of the recent bull run (Nov 2012-present), near 1,685, as this also the region of the monthly support trend line.
  • The 61.8% fib pull back of the recent bull run (Nov 2012-present), near 1,577, as this is the breakout level from the previous 2000 and 2007 highs.

Thus, with all of this, I continue to watch out for further clues as to any new momentum move, long or short though! In particular I’m looking out for:

S&P500 daily chart: The daily trend line remains broken here but price is back above the key 1,900 level.

S&Pdaily

Ichimoku S&P500 chart: a clear cross of the blue Tenkan-sen line below the pink Kijun-sen line. A bearish Tenkan/Kijun cross remains open on the index BUT it is back trading up in the Cloud. Any new close and hold above the Clud would be rather bullish.

S&PdailyCloud

S&P500 monthly chart: a break of the monthly support trend line (see monthly chart). The monthly trend line remains intact. 

S&Pmonthly

Russell 2000 Index: this small caps index is a bit of a US market ‘bellwether’ and I see the 1,080 level as key support here. The index closed above this key support and now looks to forming up into a ‘Bull Flag’ pattern:

RUTweekly

VIX Index: this recently broke up and out of a descending triangle pattern and is looking like it might continue with some bullish momentum. However, the index closed back below the 20 level last week.

VIXweekly

Bonds: The bond ETF remains in a bullish breakout above the triangle trend line. I’m also seeing a possible bullish ‘Cup ‘n’ Handle’ pattern here:

TLTweekly

Oil: is still weaker but there is clear and strong support just under current price at the $80 level:

CLweekly

Trading Calendar Items to watch out for:

  • Sun 26th: EUR EBA Bank Stress results.
  • Mon 27th: NZD Bank Holiday. EUR German Ifo Business Climate.
  • Tue 28th: USD Core Durable Goods & CB Consumer Confidence.
  • Wed 29th: NZD ANZ Business Confidence. USD Fed Funds Rate & FOMC.
  • Thurs 30th:  NZD Cash Rate and RBNZ Rate statement. EUR German Prelim CPI. USD Advance GDP & Unemployment claims.
  • Fri 31st: AUD PPI. JPY BoJ Monetary Policy Statement & Conference. EUR CPI Flash Estimates. CAD GDP.
  • Sat 1st: CNY Manufacturing PMI. 

Forex:

E/U: The monthly 200 EMA proved to be a barrier once again to the E/U. Price retreated from this level early in the week, continued lower, and eventually broke down from the developing ‘Bear Flag’ pattern. I wrote a separate article about this move during the week and this can be found through the following link. The 1.25 level remains the ‘line in the sand’ level for me with the E/U as explained below.

Bear Flag:  The daily chart shows the developing ‘Bear Flag’ on the E/U. The ‘Flag Pole’ of this pattern is about 1,000 pips. This is minimum target as I have only measured the daily chart’s trading channel. Thus, technical theory would suggest a continuation move of at least about 1,000 pips. The whole number 1.26 remains as decent support here for now and I’ll continue watching to see if this level can hold. A break of this 1.26 level gives a 100 pip trip down to previous lows near 1.25 and a break of both levels would suggest that a move to 1.18 support, and possibly beyond, might be underway. Personally, I will be waiting for any close and hold below 1.25 to confirm a ‘Bear Flag’ break and then looking for a possible target down near 1.18 and then 1.15. 

Traders need to remember that this pair is also trading within a bearish descending triangle pattern on the larger scale monthly chart. 

Descending triangle on the monthly chart: the descending triangle pattern is a bearish continuation pattern and has a base at around the 1.18 level. The height of this triangle is about 4,000 pips. Technical theory would suggest that any bearish breakdown of this triangle at 1.18 might see a similar move. It is worth noting that this would bring the E/U down near 0.80 and to levels not seen since 2000/2001! 

Price is now trading below the Ichimoku Cloud on the 4hr, daily, weekly and monthly charts which is bearish.

The weekly candle closed as a bearish coloured ‘inside’ candle.

Traders need to monitor Sunday’s ECB Bank Stress result as this might impact sentiment on this pair at market open. Also, Wednesday’s FOMC will impact here too.

  • I’m watching for a new TC signal on this pair, the ‘Flag’ trend lines and the 1.26/1.25 levels.    

EUmonthly EUweekly EUdaily EU4

E/J: Not much has changed here since last week. The pair spent another week chopping up and down either side of the key 136 level but managed to close the week above this support. It also seems to have made another breakout from the revised descending wedge pattern. This bullish wedge pattern has been forming up within a larger-scale weekly chart triangle pattern with the key 136 level forming the triangle base.

The weekly chart triangle is a descending triangle and these are often bearish patterns, however, this is still giving the weekly and monthly charts a bit of a ‘Bull Flag’ appearance and so I’m keeping an open mind here. Any continued recovery with stocks and developing USD weakness would help to lift this pair.

Price is still trading above the Cloud on the 4hr and monthly chart, below on the daily chart and in the bottom edge of the Cloud on the weekly chart.  The November and December candles were the first to close above the resistance of the monthly Ichimoku Cloud since 2008. Check out the monthly Cloud chart below. The E/J made its last break back above the Cloud in 2003 and the consolidation pattern following that breakout is very similar to the consolidation we’re seeing now. Note how, back then, price eventually rallied and I wonder if history will repeat itself here (click on the chart to enlarge):

EJmonthlyCloud

The weekly candle closed as a small bullish candle with a long lower shadow. This follows on from last week’s bullish-reversal ‘Hammer’ candle that formed up off the support of the bottom of the weekly Ichimoku Cloud.

  • I’m watching for any new TC signal on this pair and the 136 level.

EJmonthly EJweekly EJdaily EJ4

A/U: Little has changed here since last week as well although some USD weakness crept in late on Friday. I’ll be watching to see if this develops as this would support the A/U. The USD weakness resulted in the A/U moving a bit higher on Friday and it is butting up against a short-term bear trend line. 

The 0.865 level continues to be key support for the A/U and price bobbed along again just above this key support for the whole of last week. The 0.865 level underpins the previous swing low printed back in June 2014 and, apart from that time, the A/U hasn’t printed this low since July 2010. 

Bear Flag? The Bear Flag continues to build BUT I will wait to confirm a breakdown following any new close and hold below the 0.865 support level. The ‘Flag Pole’ for the A/U Bear Flag has a height of about 630 pips. Thus, the expected move for any bearish breakdown is expected to be of about 630 pips as well. This projects a bearish target down near the 0.80 level. This is significant as this is also the 61.8% pull back for the 2008-2011 bull run. I would expect that any break and close below the 0.865 might target this 0.80 level. There are the 50% fib and monthly 200 EMA levels above this 0.80 target that may offer some interim support.

Price is trading above the Cloud on the 4hr chart, below the Cloud on the daily and weekly charts and near the bottom of the Cloud on the monthly chart.

The weekly candle closed as a small bullish candle. This is the second bullish candle to follow on from the earlier bullish-reversal ‘Inverted Hammer’ candle.

  • I’m watching for any new TC signal on this pair, the flag trend lines and the 0.865 level. 

AUmonthly AUweekly AUdaily AU4

A/J: The A/J chopped higher last week within the 4hr chart’s descending trading channel but made a bullish breakout from this on Thursday. The daily 200 EMA has been a reasonably strong S/R level for the pair but the A/J managed to close back above this resistance on Friday which was a small but fairly bullish move. It is still trading below the key 96 S/R level but any new close and hold above 96 would have to be seen as bullish.

Price is trading below the Cloud on the daily chart but above the Cloud on the 4hr, weekly (just) and monthly charts.

The weekly candle closed as a large bullish candle.

  • I’m watching for any new TC signal on this pair and keeping an eye on the 96 level.

AJmonthly AJweekly AJ4

AJ4

G/U: The Cable drifted higher last week and tested the key trend line intersection area that I had discussed in last week’s analysis. The two trend lines were the monthly chart’s triangle trend line and the daily charts wedge trend line and the bounce down from this resistance level gave 150 pips.  Despite some weaker than expected GBP data this pair continues to trade within a bullish descending wedge and, importantly, continues to hold above the 1.60 level. Some USD weakness on Friday resulted in the Cable drifting higher and back up towards the upper wedge trend line. This will be a key trend line to monitor for next week as this resistance has been in effect since July and, thus, any bullish breakout would be significant.

Price is trading above the Cloud on the 4hr chart, below the Cloud on the daily chart but in the bottom of the Cloud on the weekly and monthly charts. 

The weekly candle closed as a bearish coloured ‘Spinning Top’ candle.

  • I’m watching for any new TC signal on this pair, the wedge trend lines and the 1.60 level.

GUmonthly GUweekly GUdaily GU4

GBP/JPY: The GBP/JPY chopped along below a 5 week bear trend line until Thursday. It subsequently made a bullish breakout above this resistance and also above the key 173 level. Friday’s price action was rather slow but the pair managed to close the week above 4hr 200 EMA which was another bullish achievement. I do suspect now that the 179 level will be the next major target here.

Two key S/R levels on the G/J chart: The monthly chart shows a band of choppy congested activity across the chart. This band is defined by rather strong S/R levels at 179 and 167. The 179 level seems to be a key demarcation level and a close and hold above this would suggest bullish continuation. The key 173 level lies midway between these two S/R levels. Targets for any bullish break and hold above the 179 level, apart from obvious whole number levels, include the 50% fib near 184, the 61.8% fib near 200 and the 78.6% fib near 222.

Price is trading above the Ichimoku Cloud on the 4hr, weekly and monthly charts and in thin Cloud on the daily chart.

The weekly candle closed as a small bullish candle.

  • I’m watching for any new TC signal on this pair and the 179 level.

GJmonthly GJweekly GJdaily GJ4hr

Kiwi: NZD/USD:  The Kiwi chopped higher to start the week and, once again, tested the 0.80 level. It couldn’t manage to break and hold above this resistance though and subsequently drifted back down from there whilst still conforming to a possible ‘Bear Flag’. Some weak CPI data mid-week however resulted in the Kiwi breaking down through the bottom trend line of the Bear Flag pattern. To the surprise of many though, weak Trade Balance data on Friday didn’t trigger any more of a sell off here.  A bit of USD weakness crept in late on Friday and, if this develops, it will help to support the Kiwi.

Bear Flag for Kiwi: The ‘Flag Pole’ for the Kiwi’s ‘Bear Flag’ is about 1,100 pips. Thus, any bearish breakdown and continuation below the ‘Flag’ trend line may be expected to extend by 1,100 pips as well. This would bring the Kiwi down to near 0.67 cents. This level is between the 61.8 and 78.6% fibs of the 2009-2014 bull run. Given that the 0.77 is strong support I would still prefer to wait to confirm any possible ‘Bear Flag’ move until there is a close and hold below this 0.77 level. The 0.77 remains a significant S/R level for the Kiwi. This level represents the previous swing low for the period during mid-2013 and, prior to then, from mid-2012.

Fib levels shows other possible targets for any bearish continuation below 0.77 as being the:

  • 38.2% fib near 73.5.
  • 50% fib near 70 and the weekly 200 EMA.
  • 61.8% fib near 0.65.

Price is trading below the Ichimoku Cloud on the 4hr, daily and weekly charts but in the top edge of the Cloud on the monthly chart.

The weekly candle closed as a bearish candle with long upper and lower shadows reflecting the uncertainty with this pair.

  • I’m watching for any new TC signal on this pair, the ‘Flag’ trend lines and the 0.77 level.

KiwiMonthly KiwiWeekly KiwiDaily

Kiwi4

The Yen: U/J: The U/J had a bullish week and continued its bounce up from the 105.5 level. This is a key level as it is the 61.8% fib level of the 2007-2012 bear move and the 61.8% fib of any move is a major technical level.

I noted during the week how the U/J seemed to be forming up into a bullish ‘inverse H&S’ pattern. The U/J made a bullish breakout from this on Thursday and delivered 100 pips of a possible 200 pip move in one session. Price spent much of Friday consolidating after that breakout as, although stocks rallied higher, there was some USD weakness that tempered this pair.

Price is back to trading above the Cloud on the 4hr, daily, weekly and monthly charts which is a bullish development. November was the first monthly candle close above the Ichimoku Cloud since mid-2007 and the bullish hold above the monthly Cloud continues to be noteworthy.

The weekly candle closed as a medium sized bullish candle.

Weekly Chart Bullish Cup’ n’ Handle pattern: This pattern is still taking shape but has stalled under the 110 level. The theory behind these patterns is that the height of the ‘Cup’ pattern is equivalent to the expected bullish move from the ‘handle’ breakout. The height of the Cup for the U/J weekly chart is around 2,400 pips. The interesting point here is that a 2,400 pip bullish move up from the ‘Handle’ would put price up near the 124 level. This level is the last major swing high for the U/J from back in 2007 and represents the 100% fib pullback for the move down in 2007 to the lows of 2012. Possible targets along the way include the psychological whole number levels and the 78.6% fib that is up near the 114 region.

  • I’m watching for any new valid TC signal and the 105.5 level.

UJmonthly UJweekly UJdaily UJ4

USD/CAD: The USD/CAD essentially chopped sideways last week but still managed to hold above the monthly chart’s triangle trend line and also the 1.10 level. The 4hr chart reveals price action developing into a bit of a wedge so watch these trend lines.

The Loonie continues to hold up and out from a major monthly chart triangle pattern that could deliver up to 2,500 pips. The weekly candle was bearish though so there may still be a bit of pull back potential here. Also, any reversal with the USD index may see this pair pull back somewhat.

Triangle breakout target:  There is a 2,500 pip triangle breakout move evolving on the monthly chart. This 2,500 pip figure is evaluated from the height of the triangle. I have used the triangle height from the beginning of the bull trend line, as shown in the monthly chart below. The height of the triangle is around 2,500 pips and, thus, this would be the expected move from any breakout action. Extrapolating a bullish move from this triangle places price up at the 61.8% fib level. These fibs levels are popular targets in retracement moves and so this adds some confluence to this as a possible target.

Price is now trading below the Cloud on the 4hr chart, above the Cloud on the daily and weekly charts and is still trying to emerge from the Cloud on the monthly chart.

There is important CAD GDP next week to watch out for.

The weekly candle closed as a bearish candle.

  • I’m watching for any new TC signal on this pair and the 1.10 level.

LoonieMonthly LoonieWeekly LoonieDaily Loonie4hr

Silver: Silver chopped sideways again last week along the $17 level. It is still trading within a monthly chart triangle pattern but has taken on a bit of a ‘Bear Flag’ look on the daily chart. Any close below the monthly chart’s triangle trend line would be quite bearish and possibly signal the start of the ‘Bear Flag’ as well. The ‘Flag Pole’ for this bear Flag is worth about $4.50 and so this would be the suggested bearish move here.

Silver is now trading below the Ichimoku Cloud on the 4hr, daily, weekly and monthly charts which is bearish.

The weekly candle closed as another bearish coloured ‘Spinning Top’ candle.

  • I’m watching for any new TC signal, the USDX and the daily ‘Bear Flag’ and monthly triangle pattern trend lines.

SilverMonthly SilverWeekly SilverDaily Silver4hr

Gold: Gold chopped higher to start the week but ran into strong resistance from the $1,250 level which triggered a pull back for the metal.

There have been patterns within patterns on the Gold charts though! The metal has been trading within two separate 4hr chart channels and, all the time, ranging within a descending trading channel on the daily chart which is set within a larger horizontal channel on the weekly chart. Gold gets marks for geometry if nothing else!

Gold is now trading below the Ichimoku Cloud on the daily, weekly and monthly charts but within the Cloud on the 4hr chart.

The weekly candle closed as a bearish-reversal ‘Shooting Star’ style candle.

The next directional move on the USD index will most likely seal the fate for both Gold and Silver. USD strength would no doubt see them weaken but any reversal for the USD would support the two.

  • I’m watching for any new TC signal on this pair, the USDX and the $1,180 level.

GoldMonthly GoldWeekly GoldDaily Gold4hr

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