An investigation into monthly candlestick patterns, specifically those of the EURUSD, USDCHF, and EURCHF, reveals what may be the best trade in May.
Euro / US Dollar
A bullish engulfing candle formed in the EURUSD in March, signaling the potential for additional gains. In April, the pair traded in a tight 700 pip range, closed just 17 pips beneath its open, and formed an inside month in the process. Following a bullish engulfing pattern, an inside month signals consolidation and is a continuation pattern. EURUSD monthly candlestick patterns are bullish.
British Pound / US Dollar
In April, the GBPUSD traded above its prior month’s high for the first time since July 2008. This is more of an observation than a pattern but I view the evidence as bullish nonetheless. Not making a new low is evidence that a downtrend is pausing. Making a new high following a pause in the downtrend signals upside potential, even if just for a month or two.
US Dollar / Swiss Franc
Not surprisingly, the USDCHF monthly candle pattern is similar to that of the EURUSD monthly candle pattern. A bearish engulfing candle formed in the USDCHF in March, signaling the potential for additional losses (some may disagree with me here, claiming that a bearish engulfing pattern did not form because March’s close was not beneath that of February’s low. However, the close was 1 pip above the February low and other data providers may actually have a lower close). In April, the pair traded in a tight 506 pip range, closed just 15 pips above its open, and formed an inside month in the process. Following a bearish engulfing pattern, an inside month signals consolidation and is a continuation pattern. USDCHF monthly candlestick patterns are bearish.
Euro / Swiss Franc
EURUSD and USDCHF monthly candlestick patterns both suggest that USD weakness is probable this month, which makes the EURCHF pattern that much more interesting and insightful. A bullish engulfing candle formed in the EURCHF in March (the month engulfs the January and February), signaling the potential for additional gains (again, some may disagree with me here since March’s close was not above that of February’s high. However, the close was less than 50 pips below the February high which I do not find significant). In April, the pair traded in a tight 289 pip range, closed just 6 pips below its open, and formed an inside month in the process. Following a bullish engulfing pattern, an inside month signals consolidation and is a continuation pattern. EURCHF monthly candlestick patterns are bullish.
Conclusion
Monthly candlestick patterns, notably in the EURUSD and USDCHF, signal USD weakness as probable in May. Additionally, the EURCHF candlestick pattern signals that the Euro will likely outperform the Swiss Franc. Based on monthly candlestick analysis, one can make an argument that the Euro will be the strongest, the US Dollar the weakest, and the Swiss Franc somewhere between the two in terms of strength. The evidence makes a case for buying the EURUSD this month.
Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday, GBP on Thursday, AUD on Friday), and the DFX Trend Index every day after the NY close. He is also the author of Sentiment in the Forex Market.
Please send comments about this report to [email protected]
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