Forex FOREX PRO WEEKLY #2, December 23 - 27, 2019

Sive Morten

Special Consultant to the FPA
Messages
16,276
Greetings everybody,

Guys, I've taken a look at gold market and it mostly stands the same - nothing to add to our last week analysis. Thus, today, I think, we could take a look at GBP. For a gold is just few words to say.

Spot gold was little changed at $1,477.40 an ounce, but was on track for a modest weekly rise. "There are concerns that the stocks are so hot right now. And there are investors who are buying gold as a backstop if that thing is to turn," Haberkorn added.

World stock markets touched record highs, while the U.S. dollar was set for its best week in six against a basket of currencies. Gains in bullion were limited after data showed U.S. economic growth edged up in the third quarter amid signs the economy more or less maintained the moderate pace of expansion as the year ended.
Recent positive economic data and optimism around the U.S.-China trade war has fuelled expectations that the U.S. Federal Reserve is unlikely to cut interest rates again in the near future. President Donald Trump on Saturday said the United States and China would “very shortly” sign their so-called Phase One trade pact.
“We just achieved a breakthrough on the trade deal and we will be signing it very shortly,” Trump said at a Turning Point USA event in Florida.

The Phase One deal was announced earlier this month as part of a bid to end the months-long tit-for-tat trade war between the world’s two largest economies, which has roiled markets and hit global growth. Under the deal, the United States would agree to reduce some tariffs in exchange for a big jump in Chinese purchases of American farm products. Treasury Secretary Steven Mnuchin said last week the pact would be signed in early January, saying that the deal had already been translated and was just undergoing a technical “scrub.”

Safe-haven gold has so far gained more than 15% in the year on global recessionary fears, owing to the 17-month trade war between the two largest economies. The likelihood that negotiations are proceeding smoothly has drawn some attention away from gold.

"Traders and investors are turning their attention to the upcoming holidays, including squaring their books, so trading interest and volumes are likely to wane the next couple weeks," Kitco Metals senior analyst Jim Wyckoff said in a note.

"There has been a good set of economic data released recently. The equity market is still going strong, and the sentiment is more risk-on," said SP Angel analyst Sergey
Raevskiy. "So, people are just prepared to go for some more risky assets, and reduce their gold positions."


World stocks touched record highs after the United States and China agreed on an interim deal, while the U.S. dollar rose to an over one-week peak. China's finance ministry unveiled a new list of import tariff exemptions for a duration of one year starting Dec. 26 for six chemical and oil products from the United States.

"Any news about the deal is better than no news about it... people are still waiting for more to come. It is being considered as the first step for a bigger agreement and it is a step in the right direction," Raevskiy added.

"Key factors to watch for gold next year will be the second phase of the U.S.-China trade negotiations, the U.S. election, global monetary policy, and the investor response to these developments," Standard Chartered Bank analyst Suki Cooper said in a note.


That's shortly what we have on gold. Now gold stands under pressure because of stable Fed policy, good US statistics and relief in US/China tariffs war. In short-term perspective we see only two driving factors and both should impact in January. First is - details of "phase one" deal, second - Senate voting on D. Trump impeachment. This stuff could shake the gold if there will be some surprises around it.

Meantime, while news agencies try to impress on massive risks relief - it seems that investors see something and keep longs on gold at record highs. Here is recent CFTC report chart.
1577004638644.png

source: cftc.gov
Charting by Investing.com


Although currently it is difficult to suggest what particular factor disturb investors, but I'm tending to trust them more than news agencies. We will see. Maybe they know more on impeachment background, or some other information that is not public yet.

Speaking on GBP - a lot of important information we've discussed yesterday, in our report, dedicated to EUR. The only driving factor that we do not may enough attention is China, its financial situation and US/China relationships. GBP itself now shows that Brexit fears are back. As euphoria around elections and BJ victory calmed down a bit, more rational fears come on surface. As BJ intends to leave EU at 31st of January, the hard Brexit again is on the table. Second, long-term factor is Brexit consequences. Now investors have to think about it as they are becoming a reality, and hardly consequences will be the positive as for EU as for UK economy. The process of building new economic relations is difficult.

Sterling was precariously poised as it headed for its worst week in more than two years on Friday, hobbled by familiar fears of a chaotic British exit from the European Union, while firm data helped the dollar arrest its recent slide.

Overnight the pound slipped below $1.30 for the first time in a fortnight. It was last quoted at $1.3022 as worries grow about whether a deal can be secured before the December 2020 hard deadline.

Cable has given up all the gains won after Prime Minister Boris Johnson was re-elected last week and has slumped 2.3% against the dollar since Monday. It has fared even worse against the euro, headed for its largest weekly loss since July 2017. .

“The market was always a little bit naive in a way to think that a Tory election win was going to remove the fog of Brexit,” said Ray Attrill, head of FX strategy at National Australia Bank. “There were obviously some longs in weak hands that got forced out.”

More than three years since Britain voted to exit the European Union in a 2016 referendum, Johnson’s government will leave the political bloc at the end of January and has set Dec. 2020 as a hard deadline to reach a trade agreement.

Uncertainty over that prospect helped the safe-haven Swiss franc to its highest in a month against the euro at 1.0881 francs and its strongest against the dollar since August.

There are not expectations on changing of Bank of England policy. As in Fed case, investors do not expect any moves through 2020. Now, probabilities hint lightly on possible change of the rate in Nov 2020 only:

1577005343091.png


Speaking on China situation - it becomes a hostage of US import. We talk about it every time, since tariffs war is started. Tariffs is a tool in the hands of US. They will use it to make pressure on "trade partners" across the world. China is the first, as it is simpler to force them work on improving of US trade balance. After "phase one", next phase should follow where US Trading balance will improve more. Speaking by easy language - D. Trump twists China's arms to force them to pay out huge Trading deficit and reduce domestic debt burden. We expect that as EU, as may be Japan will become other "partners" who will meet tariffs in nearest future, as soon as China will be totally squeezed.

The Chinese yuan held just on the strong side of the symbolic 7-per-dollar as China’s unveiling of new tariff exemptions on U.S. chemical and oil product imports supported optimism about the Sino-U.S. trade detente. China kept its lending benchmark rate unchanged on Friday, but markets widely expect further monetary easing in 2020 to arrest an economic slowdown. The one-year loan prime rate (LPR) was unchanged at 4.15% from the previous monthly fixing. The five-year LPR also remained the same at 4.80%. On Wednesday the People’s Bank of China lowered rates on 14-day reverse repurchase agreements to ease monetary conditions.

Fathom consulting also tries to foresee possible changes in Chinese economy. Previously we already talked about deteriorating situation in Chinese economy and that it should worse more. Now, Fathom takes a look at China cash flows and come to conclusion that they have dropped significantly:

Over the past few years, Fathom Consulting has developed a range of bespoke tools to assess China’s economic performance, specifically its efforts to upgrade its enormous manufacturing base, its growth strategy, and its cross-border capital flows. The latter, which has resulted in a custom-built Capital Flows Database, is part of a major ongoing consultancy project. It tracks foreign direct investment from China to the rest of the world, at deal level, by country and by sector.

The data currently holds over 27,000 deals from 2005 to July 2019, and acts as a more reliable and timely source than alternative providers of capital flows data.

Unlike other sources, our database removes measurement issues such as round-tripping (non-cross-border flows), while properly accounting for pass-through investment (deals conducted via foreign acquirors). M&A deals with no openly published value are also estimated, and data on greenfield and expansion of capital are included. Reassuringly, the trend in our measure of China’s cross-border capital flows is not dissimilar from that reported by the IMF or MOFCOM (China’s Ministry of Commerce), although our methodology means that we successfully capture more than double the value reported by these alternative sources in some years.

Notably, both the total value (as shown in the chart) and total number of deals has fallen sharply from a peak in 2016. Since that time scrutiny of China’s efforts to grab know-how through the acquisition of strategic assets has put its activity in the spotlight.


1577005836835.png



Now in our two reports of this weekend we have full information on existing driving factors. As today we agree to talk on GBP - I would suggest that we should not gamble about UK economy right now, because nobody knows at what degree Brexit will impact on it. It would be better now to follow exiting tendency that will last through January on a fears of hard Brexit and deteriorating effect of UK divorce with EU. These investors' fears clearly could be seen in current GBP price action.

Technicals
Monthly


The core of our trading plan stands on monthly chart. Now have huge "shooting star" pattern, out from monthly K-resistance and overbought area. Second - on recent drop price returns back under Yearly Pivot. This is important sign, shows that long-term sentiment still was not able to turn bullish and still stands bearish, at least by Pivot point analysis.

Finally, the third issue here is bullish reversal swing. Take a look that recent upside action is greater than previous swing down. Usually, after reversal swing market shows deep retracement. That is, particularly this retracement we intend to trade at "phase one" of our trading plan ;)

gbp_m_23_12_19.png


Weekly

After the inputs that we've specified above, on monthly chart, I suggest there should be no problems to you to identify our major pattern on weekly chart. Indeed, this is reverse H&S pattern. And the pressure of this pattern is twofold. It is equally useful as in case of direct action as in case of failure. Besides, as it has really great scale it potentially generates multiple trading setups.

On first stage we could trade GBP down, based on weekly/monthly huge bearish candlestick pattern. Here the same "shooting star" takes the shape of bearish engulfing. Next stage suggests our long entry around 1.2550 area, if H&S will start to work. Or, conversely we intend to go short if this level will be broken. As you can see this is big and interesting journey for weeks and weeks ahead.

gbp_w_23_12_19.png


Daily

Here market is entering our K-support area, accompanied by daily oversold level. On Friday we've warned our readers to avoid blind long entry just because of K-support area and wait for clear bullish reversal patterns on intraday chart. Indeed, as you can see, GBP spends time in this area for 2nd day already, trying to break it down.

For daily traders task is relatively simple. They do not care about upside reversal. The only thing that is important for them is where this reversal will be over. In fact, we wait for upside bounce to take short position and trade GBP to 1.2550 area.

But, for intraday traders, the upside reversal has special meaning as it is background for their trade.

gbp_d_23_12_19.png


Intraday

Our hypothesis on possible reverse H&S pattern on hourly chart was not realized by the market as price has dropped a bit more. Now we have no choice but to wait for clear pattern.

Since we do not have any AB-CD's extensions any more - our XOP already is overcome to the downside, we could use extensions of recent upside action. It points that theoretically, market could start forming some bullish signs around 1.2930 area. This is, by the way, major 3/8 Fib support on daily chart as well.

gbp_4h_23_12_19.png


Conclusion:

We are not smart enough to make forecasts on how Brexit will impact on UK economy statistics, Bank of England policy and EU relations. We just could suggest that situation probably should become worse, before it will start to improve. Because such events like Brexit never could pass quiet and unsigned. That's why we prefer to follow the market behavior, that, in turn, is driven by those who could predict, or at least forecast future changes in UK.

Right now market behavior provides a lot of trading setups, which are relatively clear and should last for a few weeks. And this situation is totally satisfied us, as we get what we need.
 

Sive Morten

Special Consultant to the FPA
Messages
16,276
Dear Sive
I would like wish you Mary Christmas and all the best to you and yours.
My dear Friend, it was so long time since our last talk ;)
Great to see you again here. Thanks for wishes - wish same to you - happy and prosperous year. Visit us oftener ;)
 

Sive Morten

Special Consultant to the FPA
Messages
16,276
Greetings everybody guys,

Despite that everybody is relaxed already, expecting Christmas time - gold market provides surprises. Gold right now is challenging daily K-resistance, strongly shifts overall sentiment to bullish. Besides, in last few days - gold is rising in a row with US stock market, which is not typical behavior. German DAX and Nikkei stagnate and shows downside action in recent 1-2 days. I have some gut feeling that it is not simple thing and something is really going on...
gold_d_24_12_19.png


While market stands at daily K-area, definitely it is not the moment for taking long position, and better to wait either breakout of moderate pullback. Next target right now is XOP at 1500. At the same time, 4H chart shows interesting combination of trend lines:
gold_4h_24_12_19.png


Gold breaks them all and returns back in 1480-1550 trading range. Finally I want to show you XAU/EUR chart. The AB-CD pattern that has not been completed here, on USD - was completed in EUR. And it shows bullish scenario of W&R and sharp upside reversal. Thus, those of you who trade gold long-term, may be it makes sense to buy the fraction of your total position:
XAU/EUR Chart
 

Sive Morten

Special Consultant to the FPA
Messages
16,276
Greetings everybody,

It seems that our suggestions are correct and something really outstanding should happen on gold market. It seems that our long-term setup starts to work and our next target is around 1580 area. At the same time, stock market stands in hazard as gold rallies on a background of stock market. If you trade stocks - be careful.

Technical picture shows that we are at strong resistance area and Agreement, as gold has hit XOP target. Picture looks attractive as we definitely have thrust here. Candlestick analysis shows that we've got relatively rare pattern - "Three white soldiers". It usually forms in the beginning of long-term upward action. It means that now we have to decide where to take long position:
gold_d_27_12_19.png


Personally guys, I like idea of reverse H&S pattern here. Gold could form right bottom, to keep harmony with the lows of October in an area of 1490-1500 level, which is left bottom is. This is setup for the bulls. Maybe be we will get "222" Buy as well. This would be nice.
By-product is setup for the bears. We have perfect thrust though. As we expect retracement - we could consider DiNapoli either DRPO "Sell" (which seems more probable in current situation) or B&B "Buy" from the same 1500 area:

gold_4h_27_12_19.png


To take short position you could act differently. For exapmle on 1H chart we have butterfly "Sell" and small H&S pattern could be formed. So, if you feel more comfortable with classic pattern - you could use them. Or, as we said - keep watching for DiNapoli DRPO "Sell"...
gold_1h_27_12_19.png
 
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