The Brexit result triggered the anticipated ‘Flight to Safety’ move into the US$ but the rally faded a bit into Friday’s close. This shift has triggered the FX indices into ‘risk-off‘ alignment but there are some technical signals urging caution with this move.
Monthly: The June candle is now printing a bearish coloured Doji candle that is also an indecision-style ‘Inside’ candle. The monthly chart still shows a Bull Flag forming and, if it evolves, it might target the 120 region. This has been calculated as follows: the height of the Flag pole of the Bull Flag is about 20 units (100 – 80 = 20). Extrapolating up 20 from the top of the Bull Flag, as per Bull Flag breakout technical theory, puts price up in the vicinity of the 120 area. This happens to be a key region for two reasons: Firstly, this is the 50% fib of the 1985-2008 major swing low move and, secondly, this is a previous S/R region with price action reacting here for over a two year period from mid-2000 to mid-2002. Thus, any break and hold back above 100 might be expected to target this region.
Monthly Ichimoku: The June candle is trading well above the Cloud.
Weekly: The weekly candle closed as a bullish, essentially ‘engulfing’ candle with most of this gain coming from Friday’s Brexit-inspired rally. Price action remains range-bound between 100 and 92.50 though and has been stuck within this channel for over 18 months. Any break and hold below 92.50 would have me looking for a potential move down to test the congested area containing the monthly 200 EMA, weekly 61.8% fib and previously broken trend line region (highlighted on the chart below). Note how any move down to this broken trend line region would be a move of similar order magnitude to the height of the current trading channel.
Weekly Ichimoku: The weekly candle closed back up in the bottom of the weekly Cloud.
Daily: price action looks to have made a breakout attempt from the descending trading channel BUT this isn’t very convincing just yet. The index could not manage to hold the week above the 95.50 threshold despite rallying well above this during Friday’s session. The 95.50 level is the one to watch for clues about this US$ rally.
Daily Ichimoku Cloud chart: Price rallied up through the daily Cloud on FRiday with Brexit-inspired ‘Flight to Safety’.
4hr: Price chopped lower last week until Friday’s Brexit-inspired rally.
4hr Ichimoku Cloud chart: Price rallied up through the 4hr Cloud on Friday and this chart is now aligned with the daily chart and suggests LONG US$.
Monthly: The June candle is still printing a bearish coloured ‘Spinning Top’ candle but is holding well above the 94 level still giving the chart a ‘Double Bottom’ appearance.
Monthly Ichimoku: The June candle is trading below the Cloud.
Weekly: The weekly candle closed as a bearish coloured candle with a long lower shadow but is still within the weekly trading channel. There have been two conflicting weekly-based technical patterns competing over many months; a basing-style bullish ‘Double Bottom’ and a trading channel with a ‘Bear Flag’ look to it but there still isn’t a clear winner just yet. Any bullish continuation might eventually target the 50% and 61.8% fib levels of this two-year swing low move.
Weekly Ichimoku: Price is still trading in the mid region of the weekly Cloud.
Daily: Price chopped lower on Monday and Tuesday but rallied Wednesday and Thursday before tumbling on Friday.
Daily Ichimoku Cloud chart: Price traded below the Cloud all of last week.
4 hr: Price chopped up and down for much of last week but the 4hr chart is showing a bit of a bullish-reversal ‘Descending wedge’.
4 hr Ichimoku Cloud chart: Price chopped around below the Cloud last week. This chart is still aligned with the daily chart for SHORT EUR$.
USDX: The US$ closed higher last week with most of the gain coming from the expected flow with Friday’s Brexit-inspired ‘Flight to Safety’ rally. The index failed to close above the psychological 95.50 threshold though and, given the Brexit situation, one would have to expect that a US rate hike won’t be high on the agenda which begs the question about how sustainable this US$ rally might be. Continued fear from the Brexit fallout would surely sustain the rally but the weekly candle close below 95.50 isn’t positing a strong argument for that at the moment and so I’ll be watching this 95.50 level into next week.
The US$ index continues to hold above major 92.50 support but I still consider it to be in no-man’s land whilst it trades above 92.50 and below 100. I am waiting for a decisive breakout from this region to signal the next major directional move on the index as this choppy and range-bound price action has gone on for 18 months. The levels to keep watching on the USDX are:
- The daily chart’s descending channel trend lines: there has been a less than convincing break of the upper trend line here but watch for any bullish follow-through.
- The 95.50 level: the index failed to close above this level last week.
- The psychological 100 level above current price. This is the top of the trading range.
- The 92.50 level below current price. This is the bottom of the trading range.
EURX: The EURX closed lower for the week, as expected following the Brexit result but, given the fear displayed across stock markets, I’m surprised the index didn’t close with a larger bearish candle! Between the US$ index failing to close above 95.50 and this EURX candle closing with a relatively small bearish weekly candle I’m a little cautious as I see this as a bit of divergence. I am aware that the indices are aligned for ‘risk-off’ but I’ll be careful with any new TC signals.
Traders need to remember however that there is policy divergence between Europe and the US with the Eurozone trading within a monetary easing cycle and the US trying to emerge from one. Both Indices remain trading within defined channels and within their weekly Ichimoku Cloud so I continue to wait for any decisive breakout from these resistance zones.
The levels to watch on the EURX continue to be:
- The weekly chart trading channel trend lines.
- The 103.5 level: The weekly chart reveals that a 50% fib retracement of the recent lengthy bear move is back up near the 103.50 level. Any bullish channel breakout might see the index target this region and the weekly 200 EMA is near this fib for added confluence.
- The 105.5 level: this is near the 61.8% fib.
- The 96 level:This is a major support level for the EURX and has been a previous monthly chart ‘Double Bottom’ region.
- The 94 level: This is the more recent ‘Double Bottom’ level as seen on the weekly chart.
- Both indices continue to hold within long-term Flag patterns that have persisted for 18 months.
- Both indices remain trapped in their weekly Ichimoku Cloud.
- Both indices are now aligned for LONG US$ and SHORT EUR$ following the Brexit result.
I’m reading some reports suggesting this risk-off bias will be short lived and other suggesting this is just the start of a major bear-market event. I am not an Economist but a mere technical analyst looking for technical clues about market moves. I do note a new shift to ‘risk-off’ but I am surprised, under the circumstances, that there hasn’t been a larger shift. This may well develop from here though and to help me gauge any such outcome I will be watching for:
- the US$ index to make a decisive break and hold back above 95.50 and to move back up to 100.
- the EURX to break and hold back below the weekly Cloud and trading channel.
- The US$ index to break and hold back above the weekly Cloud.
Note: The analysis provided above is based purely on technical analysis of the current chart set ups. As always, Fundamental-style events, by way of any terrorism-related, Eurozone or Middle East events and/or news announcements, continue to be unpredictable triggers for price movement on the indices. These events always have the potential to undermine any technical analysis.
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