I have posted a number of charts that I have used to come up with my thoughts for next week. First some general observations. There was a timely reminder from Tess (post 64) that fundamentals are important. Sometimes we can get so embroiled in the technicals that we overlook the fact that longer term the fundamentals drive the market. Viewed from this perspective technical set ups are our “call to action”. There seems to be an overwhelming case that the US dollar will remain under pressure and the lowering of the fed rate can be seen to be reflected in the ongoing fall in value of the dollar (therefore rise in the GU pair). The market is consumed by the state of housing and this is not an isolated US phenomena. Reports I have read suggest that the UK and NZ are at least as overpriced with their housing stock and who would bet on Northern Rock being an isolated example of problems in the UK. I am currently negotiating a house swap with a guy in Bristol who lives in a house divided into 3 flats and which he tells me has just been valued at over 500,000 sterling for his flat - I am gobsmacked! As an expat ‘pom’ I was somewhat surprised to learn that bank guarantees in Britain by the BoE are not quite as watertight as I believed them to be. We therefore have to be vigilant at all times with news coming out of Britain as well as the US and there is a growing consensus that the UK will also lower rates. For those, like me, that are strictly amateurs I find Kathy Liens pieces on the FXCM site to be very informative on this big picture fundamental ‘stuff’.
It is also important to realise just how good the professionals are at understanding and trading the market. My own mentor picked the fall off the highs in Gu to within 48 hrs of it happening and told those of us in his trading group to get short (on legitimate technical entries) and leave some of our stake for a longer term run. I think a number of us made a great deal of money from this which represented an adjustment (at least for me) from my normal strategy. He also picked equally well the carry trade issues late last year (another nice little earner as they say back home). The market is not always as chaotic and unpredictable as some would think although each trade certainly does have its unpredictability hence the need for strict money management AT ALL TIMES. Within our own forum I have noted that both Tess and Captain Currency in their different ways have their trade set ups informed by their overall view of the market. They patiently await their favoured triggers within an overall understanding of what the market is doing and is likely to do next. The concept of area of interest have been put forward by both of them and is something that I have certainly taken on board as I seek to get better at this
First to my longer term daily chart. I wanted to highlight the way that the RSI stayed in overbought territory for almost 3 weeks after the break of 2.0000. This is a characteristic of oscillators in strongly trending markets as we have now. I find the RSI and ATR useful on the daily timeframe. ATR gives you a quick look at how likely it is that trend following techniques will work (the higher the better) and when they were down at 60 earlier this year (almost an historical low according to my charts) it was very difficult. Now of course it is much easier although it is also important to remember that it is a lagging indicator
Focussing down my 4H bar chart shows the 3 key levels currently in play (in my opinion). We have got through 2.0365 with that fantastic run on Friday but can now expect that level to be retested. I like the analogy of a floor and the bulls need to know how strong it is before we proceed higher. We closed right at a previous high at 2.0462 (have you noticed how often this happens, price action really does denote the actions of buyers and sellers). Of course the other key level is the 14 year high at 2.0654 which is within striking range
The last 2 charts are 2 of my trading charts. They show that stochastics are overbought (though remember what I said above) and this might suggest (as does commonsense) some pullback and testing before we move higher
So what does all this mean. I usually trade the Asian H/L strategy on a monday because we dont have a direction set for the week. I would trade it in either direction (unless we get strong trending action in the Asian session) but would feel more comfortable if it moved short initially. I know that this is counterintuitive to some extent in a strong uptrend. My target would be in the 2.0365 area. If the break is long I will take half if there is any sign of stalling and certainly at 1R. Sooner or later we are after all going to get consolidation at the very least. We cannot afford to stay out of the market just because we expect a pullback since markets can go on for much longer and to much greater extremes than any of us could guess and had we have done so at the break of 2.0000 we would have failed to take advantage of good trending action for 3 weeks although I do admit that at that time I was relieved when the pullback started. At 2.0204 or 2.0365 I would be looking for signs that the support is strong giving an entry long. If the support fails and is then retested from the downside and this holds as resistance I would then go short. In my mind 2.0462 is not such a strong level and would be unlikely to enter a trade off a test of this. Perhaps later this week or next week we will see the highs tested in which case I would look for a break then a retest from the upside before going long or the formation of a double top with a fall back initially to the 2.0462 level
As always the price action tomorrow morning may render my thoughts redundant. The 600 pip move up in little more than a week certainly shows that this thing is rocket propelled at the moment and of course all trend following techniques should have been doing well. Any unexpected news (tape bombs as JY likes to call them) can, as always, have a profound effect so if you are trading short term it is imperative that you have at least one good, reliable, news service on at all times