FX: time for some mean reversion? by Mary McNamara

Last week:  Whilst it was an eventful week across the markets it was fairly quiet on the TC 4hr chart trend-trading front. Many trading instruments traded sideways ahead of FOMC to then give sharp moves following the news whilst, thereafter, reversing much of this gain only to turn back again on Friday. There were plenty of pips to be scalped off lower time frame charts though. Global stocks have rallied for the week and some new milestones have been printed.

 This week:

Much still depends on the US$ and the ultimate direction it will take following this latest FOMC update. The US$ is back trading under the key 100 region and this seems to be the ‘line in the sand’ level for this index:

  • A move and hold back above this level would support bullish continuation whereas;
  • a hold below 100 would support the notion of some relief from this lengthy rally and, possibly, a bit of a pullback or even reversal.

FX due a bit of ‘mean reversion’? Many trading instruments pivot off the US$ and have been decimated by the recent but lengthy USD rally. Central Banks have weighed in here too and helped to turn the knife on many FX pairs. The lack of clarity with the US$ struggling at this 100 level may continue to spill over to these markets. However, the renewed weakness on Friday might point to further weakness ahead and, if so, may allow for some long overdue mean-reversion movement on a number of FX pairs. The weekly chart of the USD index illustrates this lengthy rally and how some pullback, even if just part of overall continuation, would not be too surprising. This would enable some technically-based mean reversion here as well as on many FX pairs. A review of the FX indices can be found through this link.

DXYweekly

A bit of ‘Risk On’ heading this way? Any continued US$ weakness could trigger a run of ‘risk on’ trading. I have been suspecting this for some time but, in much the same way that an analogue clock is correct twice a day, maybe I might be on the right track here this time!

Weekly Reversal Candle Patterns: this recent US$ weakness has resulted in many instruments printing reversal-style candle patterns:

  • Kiwi: The Kiwi printed a bullish weekly engulfing candle and has broken above a 9 month bear trend line and back above the daily Cloud. This pair is looking bullish despite the best efforts of the RBNZ to talk this currency pair lower.
  • EUR/USD: has essentially printed a bullish-reversal ‘Railway Track‘ pattern.
  • AUD: has also printed, essentially, bullish engulfing style weekly candles on the A/U and A/J. Watch out for any continuation moves here.
  • CAD: has printed a bearish engulfing candle on the USD/CAD.
  • Gold and Silver: both have bounced off major support with the recent US$ weakness and formed bullish engulfing candles. Continued US$ weakness could help to lift these two much higher.

It is a pretty light week for scheduled news but Europe-related news and Chinese data will be in focus. Any positive European news, especially Greek-debt related, may help to keep pressure on the already struggling US$.

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

Stocks and broader market sentiment:

Global stocks have rallied with the NASDAQ closing above 5,000 again and London’s FTSE closing above 7,000 for the first time ever. I had been looking for the NASDAQ to test its triangle breakout region of 4,800 before any possible continuation, and, whilst price has come within 43 points of this region, that may be it!

NASDAQ monthly:

NASDAQmonthly

FTSE monthly: watch for any March close > 7,000:

FTSEmonthly

I had mentioned last week how the bullish activity with the small-caps, ‘Canary in the Coal mine’, Russell 2000 index carries some psychological weight and this has proven to be true! Watch the S&P500 now in case it prints any new bullish Tenkan/Kijun cross as this will print above the Cloud and thus be a strong signal.

I noted a bullish breakout on the  Aussie market’s ASX-200 back on Jan 27th. This index looks set to continue and any break of the psychological 6,000 mark will then have the 6,800 in focus:

XJOmonthly

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 index is still trading above the psychological 2,000 level and above the daily trend line:

S&Pdaily

Ichimoku S&P500 chart: a clear cross of the blue Tenkan-sen line below the pink Kijun-sen line. There has been a recent bearish Tenkan/Kijun signal here BUT watch for any new bullish cross. Any new bullish Tenkan/Kijun cross will be a ‘strong’ signal:

S&PdailyCloud

S&P500 monthly chart: a break of the monthly support trend line (see monthly chart). The monthly trend line remains intact. A break of this support level would suggest to me of a more severe pull back or correction.

S&Pmonthly

Russell 2000 Index: this small caps index is a bit of a US market ‘bellwether’ and continues to move up from the key 1,220 level and Bull Flag breakout.

RUTweekly

VIX Index: The ‘Fear’ index printed a bearish candle and is back trading below 14.

VIXweekly

Bonds:  The bond ETF has printed a bullish weekly candle on the back of the weaker US$.

TLTweekly

Oil: Oil printed a bullish candle for the week and may be putting in a bullish ‘Double Bottom’ just above $40 support. USO looks to be holding above $16 still and forming a bullish ‘Double Bottom’ as well. Watch for any follow through on both, especially if the US$ stays weak:

CLweekly USOweekly

Trading Calendar Items to watch out for: 

  • Mon 23rd: EUR ECB President Draghi speaks.
  • Tue 24th: CNY HSBC Flash Manufacturing PMI. EUR French & German Flash Manufacturing PMI. GBP CPI. USD CPI & New Home Sales.
  • Wed 25th: NZD Trade Balance. EUR German Ifo Business Climate. USD Core Durable Goods.
  • Thurs 26th: GBP Retail Sales. USD Unemployment Claims. CAD BoC Gov Poloz speaks.
  • Fri 27th: USD Final GDP.

FOREX: 

E/U: The E/U chopped sideways in a triangle ahead of last week’s FOMC but this news triggered an upward spike to test the 1.11 region before it fell back down to the lows traded prior to this news. Price recovered again on Friday though as the US$ struggled to reclaim lost ground.

I wrote a separate article about the E/U following FOMC and this can be found through the following link. As discussed in this article, the 1.12 region near the 61.8% fib of the 2000-2008 bull run is still in focus, especially as the month draws to a close.

There are still two bearish patterns in play on the E/U for the time being but any continued US$ weakness could undermine these:

  • a 1,400 pip Bear Flag on the daily chart and
  • a 4,000 pip bearish descending triangle breakdown on the monthly chart. Both of these are outlined below:

Bear Flag on the daily chart: This ‘Bear Flag’ has already given 800 pips of a potential 1,400 pip move and if this US$ weakness continues then that may be all we see. The Flagpole of this Bear Flag is about 1,400 pips. This bearish move is a sub-set within the larger monthly chart descending triangle breakdown.

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 below 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! The monthly chart shows how critical this 1.18 level is for the E/U. The January monthly candle closed below this key level and I will be looking for a test of 1.18 before further possible bearish continuation. I’m beginning to wonder if we will see this ‘test’ though.

Price is trading at the top of the Ichimoku Cloud on the 4hr chart but below the Cloud on the daily, weekly and monthly charts although this is a bit of a bullish shift.

The weekly candle closed as large bullish, almost bullish-reversal style ‘Railway Track’, candle. Fibs on the weekly chart show that the 61.8% retracement level is up near the 1.26 region and this may be a target if US$ weakness continues. The weekly Cloud chart (below) reveals that some mean-reversion may be in order here given that price action has moved well away from the Cloud:

EUweeklyCloud

  • I’m watching for any new TC signal and the 1.11 level. After that, I’m watching the 1.12 level near the 61.8% fib followed by the 1.18 level.

EUmonthly EUweekly EUdaily EU4

E/J: The E/J also chopped sideways in a triangle ahead of last week’s FOMC. The news triggered an upward spike before price fell back down to the lows traded prior to this news. Price also recovered here a bit on Friday though as the US$ struggled.

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

The weekly candle closed as a large bullish candle.

  • I’m watching for any new TC signal on this pair.

EJmonthly EJweekly EJdaily EJ4

A/U: The A/U chopped sideways in a symmetrical triangle ahead of last week’s FOMC but this news triggered an upward spike to test the 0.785 region before price fell back down to the lows traded prior to the release. The AU$ rallied on Friday though with recent US$ weakness and this looks to have triggered a new TC signal on the A/U BUT I need to see how this pair opens next week.

Price is now trading above the Cloud on the 4hr chart but below on the daily, weekly and monthly charts which is a bullish shift here.

The weekly candle closed as a bullish engulfing candle.

  • A new TC signal may have formed on this pair.

AUmonthly AUweekly AUdaily AU4

A/J: The A/J chopped sideways in a symmetrical triangle ahead of last week’s FOMC. The news triggered a small upward spike before price fell back down to the lows traded prior to the news. Like the A/U, this pair rallied on Friday and looks to have triggered a new TC signal.

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

The weekly candle closed as a bullish engulfing candle.

  • A new TC signal may have formed on this pair.

AJmonthly AJweekly AJdaily AJ4

G/U: The Cable chopped sideways in a symmetrical triangle ahead of last week’s FOMC. The news triggered an upward spike to test the 4hr 200 EMA near the 61.8% fib of the recent bear move before it fell back down to the lows traded prior to this news. Price rallied on Friday here too though and the GBP/USD closed the week just below the 1.50 level. This price action is giving the 4hr chart a bit of a bullish-reversal ‘Inverted H&S’ appearance! The pattern is a little wonky but the ‘neck line’ would be best viewed as being the key 1.50 level.

I wrote a separate article about the GBP/USD following FOMC and this can be found through the following link. The chart below shows how there hasn’t been a monthly close below 1.50 since mid-2010 and any hold above this level for March could evolve into a rather bullish signal:

GUmonthlyCloud

Bear Flag: This break and hold below 1.50 on the weekly chart has brought the ‘Bear Flag’ into focus. The Flag Pole is worth around 2,000 pips and this would suggest a move down to the lows seen back in early 2009 near 1.35. This latest weekly candle may just have been testing the broken 1.50 level before further bearish follow through BUT the recent US$ weakness makes me more cautious here. Continued US$ weakness may undermine this move.

Price is now trading in the Cloud on the 4hr chart but below the Cloud on the daily, weekly and monthly charts which represents a small bullish shift.

The weekly candle closed as a large bullish candle.

  • I’m watching for any new TC signal on this pair and the 1.50 level.

GUmonthly GUweekly GUdaily GU4

GBP/JPY: The GBP/JPY chopped sideways in a 4hr chart triangle ahead of last week’s FOMC. The news triggered a bit of an upward spike before price fell back down to the lows traded prior to this news. The 179 remains a strong magnet for price action 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 continuation include the 61.8% fib near 200 and the 78.6% fib near 222.

Price is still trading below the Ichimoku Cloud on the 4hr and daily chart but above the Cloud on the weekly and monthly charts.

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

  • I’m watching for any new TC signal on this pair and the weekly chart’s triangle trend lines.

GJmonthly GJweekly GJdaily GJ4hr

Kiwi: NZD/USD:  The Kiwi chopped sideways in a triangle ahead of last week’s FOMC. The news triggered an upward spike to test a daily chart bear trend line before price fell back down to the lows traded prior to this news. Friday was a very bullish day for this pair through as price rallied back above the daily Cloud, triggered a new TC signal and broke above a bear trend line that had been in play since last July, a period of almost 9 months.

I had written a separate article about the Kiwi following FOMC and this can be found through the following link. In this update I noted how any close above the daily bear trend line would also result in a close above the daily Cloud. This is what has been achieved following Friday’s bullish activity:

kiwidailycloud

‘Double Top’ breakdown on Monthly chart? The monthly chart reveals a possible ‘Double Top’ pattern with a neck line at 0.735. The monthly candle close below this level for January suggested a possible 2,000 pip bearish follow through move as this is the height of the ‘Double Top’ BUT there does not seem to be a hold below this key level JUST YET. This may still well evolve, especially if the USD index regains its bullish mojo but any reversal on the USD index could see Kiwi continue to bounce up off this major support. It seems we are getting the ‘Kiwi bounce’ option at the moment!

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

The weekly candle closed as a bullish engulfing candle.

  • There is a new TC signal on this pair.

KiwiMonthly KiwiWeekly KiwiDaily Kiwi4

The Yen: U/J: The U/J chopped sideways in a triangle ahead of last week’s FOMC. The news triggered a downward spike to test the 4hr 200 EMA before price climbed back up to near the highs traded prior to this news. Weakness returned on Friday though and price fell to the 120 level.

Price is now trading below the Cloud on the 4hr chart but above the Cloud on the daily, weekly and monthly charts. November 2013 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 bearish, almost ‘engulfing’ candle.  The weekly chart also has a possible ‘Double Top’ look to it.

Weekly Chart Bullish Cup’ n’ Handle pattern: This pattern seems to have completed now just 200 pips short of the 2,400 pip target. 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. This pattern has given up to 2,200 pips of the 2,400 pip target! Watch for another, larger Cup ‘n Handle forming up on the monthly chart worth a possible 4,800 pips though!

  • I’m watching for any new TC signal on this pair.

UJmonthly UJweekly UJdaily UJ4

USD/CAD: The USD/CAD had been trading near the upper limit of a horizontal trading channel prior to FOMC but this news triggered a quick dip down towards the bottom trend line of this channel. Price recovered most of this loss though but the end result is that this pair continues to range-trade within this trading channel. This price action is helping to form up the possible ‘Handle’ of my monthly chart Cup ‘n’ Handle.

Price continues holding above the monthly 200 EMA however and it is worth remembering that the last bullish monthly candle close above this level was back in February 2009, almost 6 years ago. This period also marks the longest bullish hold by the Loonie above the monthly Cloud since 2002! Note the possible bullish Cup ‘n’ Handle forming up on the monthly chart that is in addition to the bullish triangle breakout already in play:

LoonieCloudMonthly

Triangle breakout target:  The Loonie has already broken up and out from a major monthly chart triangle pattern that could deliver up to 2,500 pips. 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. The bullish move has given up to 1,600 pips so far.

Monthly Chart Cup ‘n’ Handle? The monthly chart now also shows a possible bullish Cup ‘n’ Handle pattern forming up. Price may yet rally up to the 1.30 level before any ‘Handle’ formation but recent choppy action might be helping form a ‘Handle’. This is worth keeping an eye on as the pattern would be worth about 3,000 pips if it was to evolve as this is the height of the ‘Cup’. The interesting point is that the target for this pattern would put price up at the highs reached back in 2002 and this is equal to a 100% Fib retracement of the 2002-2007 bear move. Confluence!

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

The weekly candle closed as a bearish engulfing candle.

  • I’m watching for any new TC signal on this pair and the trading channel trend lines.

LoonieMonthly LoonieWeekly LoonieDaily Loonie4hr

Silver: Silver hovered above $15 support ahead of FOMC. Price action has rallied since this news given that the US$ has struggled. There now looks to have been a bullish descending wedge breakout!

The 30 min chart below shows how most of Silver’s weekly gain came from the Friday session. This would have been a great trend trade during the US session:

Silver30min

Silver is now trading above the Ichimoku Cloud on the 4hr chart, in the Cloud on the daily chart but below the Cloud on the weekly and monthly charts.

The weekly candle closed as a bullish engulfing candle.

  • I’m watching for any new TC signal and the $15 level.

SilverMonthly SilverWeekly SilverDaily Silver4hr

Gold: Gold hovered above $1,145 & 61.8% Fib support ahead of FOMC and, like Silver, has moved higher following this news. It closed the week above $1,180 support.

The 30 min chart below shows how the gains for Gold came immediately after FOMC and, then, on Friday with renewed US$ weakness:

Gold30min

The $1,145 region continues to be a major S/R level as it near the 61.8% Fib retracement of the 2008-2011 bull run. Any new break and hold below $1,145 would suggest a deeper pull back. Bearish targets below $1,145 include the $1,000 psychological level and, then, the 78.6% fib near $950.

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

The weekly candle closed as a bullish engulfing candle as well.

  • I’m watching for any new TC signal and the $1,145 level.

GoldMonthly GoldWeekly GoldDaily Gold4hr

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