USD and FX Majors: Red or Blue Pill?

Market participants continue their lively debate: what next in this confusing ‘brave new world’?  Has the Trump trade – long USD and US stocks (e.g. Russell 2000); short Gold and bonds – run its course?  What next for the U.S. Dollar?  Should I take the red pill or the blue pill?

In this update I will briefly review some major themes within the FX and commodities space.  To summarise:  the USD and DXY are still uncertain of direction having narrowly avoided a capitulation recently; the AUD is showing continued upside momentum; select emerging market currencies BRL, RUB and especially ZAR showing continued strength. And we have buoyant commodities markets, notably precious and industrial metals where I particularly like two ETFs, $SIL and $XME, as a way of playing this strength. 

FX:

Inspection of DXY weekly chart indicates an arrest of the 6-week decline in USD with a bullish engulfing candle and reclamaition of the technically significant 100.50 level, having re-tested a major two year consolidation pattern’s boundary line.  The market is still undecided as to which way it will take the buck medium term, however, in my opinion we may see some near term modest strength, depending on the flavour of the multitude of Fed-speak we have next week, including Ms. Yellen’s testimonies. 

Similarly, EURUSD prints a clear bearish engulfing candle on the weekly, neatly rejecting the boundary line of a 2-year consolidation pattern following a retest last week.  The near-term prognosis is bearish.  Of note is the increased congestion that a long-term downward trend line confluence with 1.04-1.06 area provides.  This will need resolution over the coming weeks and we may see a significant breakout move, one way or the other.

USDJPY loved Trump’s comments regarding a forthcoming announcement on tax policies which saw an impulsive move up on Thursday although this move is capped just below 114 for now.  USDJPY appears to be charting a 2-month falling wedge, usually a bullish pattern.  A breakout to the upside would see us target 118 area.  And to the downside: 107.50. 

AUDUSD continues its impressive and spritely rally.  Further confirmation is required, however, the predominant pattern appears to be the completion of a major 2-year head & shoulders bottom.  I would like to see the 0.7750-0.78 resistance area taken out convincingly before we target 0.87 on the upside. 

My pick of the minors is EURAUD where we appear to be commencing a sustained move down.  All that remains in terms of resistance is the 1.38 level ahead of targeting 1.25.

In emerging markets the Brazilian Real and Russian Ruble continue to perform.  However, it is the South African Rand that catches my attention the most at this point.  USDZAR has been consolidating for several months following its steep decline from a high of c. 18 a year ago. Further, we have confluence of several long term trend lines that will require resolution.  USDZAR, currently trading at 13.35, may be readying itself for an assault on the 10 level.  

Commodities

My pick of the commodities space are precious metals and industrial / base metals sub-sectors.  Silver is my favoured pick which I continue to be bullish on.  I highlighted the $SIL (Global Silver Miners ETF) at the start of January as a long following a convincing break out of a major falling wedge pattern and I continue to like this asset.  $XME (Metals & Mining ETF) is another ETF that I am bullish on.  I like this sector in the near/medium/long term.

And finally, in case any doubt still lingers: always - I repeat, ALWAYS - take the RED pill.  

USD Inflexion Point: weekly trading outlook

Approaching the eve of February a number of markets appear to be poised at key levels of decision, possibly major inflexion points.  With markets assessing the impact that our new POTUS will have – and still collectively scratching their heads – perhaps the more fundamental and immediate matter of interest rate differentials will dominate thinking this week with BoJ, FOMC and BoE all up?  We will briefly examine the weekly charts for upcoming possibilities.  To summarise: it is all about the USD.

FX:

DXY, following its ripsnorter rally after the US election, lost momentum and is currently sat on a key level of support at 100.50.   This level, that stretches back to March 2015, is ostensibly the inflexion point for a possible renewed leg up (reflation, closing of US output gap, increasingly hawkish Fed etc., higher UST yields..etc.).  Or has the USD rally run out of steam with the top in place?  With the weekly candle indicating a “doji” precisely on the 100.50 level the USD bulls and bears are poised to reveal their cards imminently.  It cannot be understated how relevant the strength and direction of the USD is with respect to global markets at present.  A grand  inflexion point?

EURUSD tells a similar story with a neat weekly doji posted right on trend line support dating back to March 2015, with a post election break out currently being retested.  Failure here sees will see us head back to the 1.0350-1.0450 area. 

Across most JPY pairs the Yen displays renewed weakness, particularly AUDJPY, NZDJPY, CADJPY, GBPJPY, with USDJPY also possibly poised for another leg up.  All eyes wil be on BoJ / FOMC for monetary policy clues.

GBP is showing renewed positive momentum.  The cable has enjoyed a decent recovery since PM May’s speech shook many shorts out of the market.  Bears will be eyeing 1.2740-1.2800 as their next possible level of interest.

Traders will be closely examining price action on the commodity complex currencies too following their recent rallies.  AUDUSD, USDCAD and NZDUSD are all at key technical levels.  I favour a short on AUDUSD should we fail to break through 0.7600 which appears to be a key level from several aspects, including a possible neckline on a 2 year head & shoulders bottom.  The Aussie has already shown signs of momentum loss and so failure to break through this level could see some decent selling.

Similarly, NZDUSD is retesting a 15 month rising wedge pattern from which it broke out down from in November 2016.  Following its spritely 5 week rally we should be scrutinising price action around the 0.7300 level for signs of weakness and the possible opportunity of a short.

The minor FX pair’s weekly charts continue to confirm Yen weakness with all pairs showing continuation patterns.  GBPJPY impressive recovery continues, I expect further strength to the upside here.  EURAUD and EURNZD deserve close monitoring for possible breakouts to the down side.

Equities:

All 4 major US indices currently look very bullish with further gains most likely.  This, for me, adds to the balance of probabilities to the ‘near term stronger USD’ thesis.  However, the ‘risk on’ sentiment could evaporate in a flash in this market, with any number of possible surprises, grey swans or white rabbits appearing suddenly and dramatically.  Expect the unexpected in this age of absurdity!  

My preferred chart morphology on the S&Ps, taking the birds eye vista, is for a breakout down from a massive 10 year rising wedge pattern.  Should this indeed pan out, this classical chart pattern would project a target of 1,200.  Food for thought...However, in the near term, there is nothing but bullish prognosis to speak of, irrespective of how dizzying these heights may seem to some.

Commodities:

Two interesting charts in commodities space right now – particularly when taken in the context of the USD’s current inflexion point – are Silver and WTI.  It is no coincidence that both of these markets are also at key levels and are poised for a breakout move in either direction.

Silver has been in a down channel since printing its 2016 high in July.  However, recent strength is illustrated by a possible major 3-month head & shoulders bottom.  The neckline coincides perfectly with the boundary line to the aforementioned down channel, at a key horizontal resistance level too.  17.20 is silver’s inflexion point, illustrated quite beautifully by its chart. I anticipate a decent move from here, with the lead taken from the USD.

And finally, inspection of the weekly WTI chart shows 7 weeks of indecision with doji’s and spinning tops decorating the neckline of possible head and shoulders bottom stretching back to October 2015 around the 52 – 54 price range.  WTI futures, with Commitment of Traders reports showing near record net speculative longs, are in desperate need of some positive fundamental news to prevent a failure here.  I would not be surpised to see prices drop sharply back down into the 40s.  Of course, a stirring USD will not help WTI longs’ cause.

One last word:  February brings with it two eclipses.  What is the relevance of that, I hear you cry!  Perhaps nothing.  Have a look at my previous blog if your interested is piqued…

(http://fundtech707.blogspot.co.uk/2017/01/ecliptic-inflexions.html)

Good wishes & good luck.

Ecliptic Inflexions

I have always been fascinated by astronomy and archetypal cosmology.  What might be the external and universal influences upon the universe within?  How does the timeless universe above affect the universe below?  Is the Jungian Collective Unconsciousness expressed in the financial markets?  And is it written in the stars, already neatly filed away in the Akashic Records?

You may be wondering what place such idle ruminations have in an apparently otherwise serious blog on financial markets and technical analysis.  In case you are, I dare you to read on…

Let us look at the celestial phenomenon of eclipses.  Most are familiar with the astronomical concepts of lunar and solar eclipses.  And perhaps some are also familiar with the great meaning that folk placed upon them in times yonder.  They often signal times of great change, omens, and warnings.  Take heed! 

Using Germany’s DAX 30 Index as a proxy for ‘risk’ I have highlighted timely occurrences of both lunar (total, partial & penumbral) eclipses and solar (total & annular) eclipses, 2007 – 2017.  You can refer to NASA’s website for all historical dates (https://eclipse.gsfc.nasa.gov/eclipse.html).

My observations:

1.             Eclipses tend to come in pairs, sometimes in threes;

2.             Eclipses often appear to coincide with major market inflexions;

3.             Eclipses often highlight arrears of minor swing low/highs;

4.             Eclipses highlight significant price levels, if not on a timely basis;

5.             Eclipses can coincide with periods of consolidation.

At times these celestial reflections are so uncannily accurate.  At other times, perhaps less so.  In case you are wondering, I wouldn’t take a trade solely on the basis of a forthcoming eclipse.  Remember, celestial influences are just that: influences.  However, when taken together with other factors perhaps they are another indicator of what may be to come?  Nature’s very own Doji: take heed!

February kicks off 2017's eclipse season with a lunar penumbral eclipse on February 10th and a solar annular eclipse on February 26th.  We have a partial lunar eclipse on August 7th and August 21st brings us a total solar eclipse that will ominously streak through the centre of U.S.A.  I will leave it to you as to what meaning you may attach to these grand celestial events...