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FOREX PRO WEEKLY, January 15 - 19, 2017

Discussion in 'Sive Morten- Currencies and Gold Video Analysis' started by Sive Morten, Jan 13, 2018.

  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Fundamentals

    (Reuters) - The dollar slipped to a more than three-year low against the euro on Friday, as the common currency extended its gains on hopes that European Central Bank policymakers are preparing to reduce their vast monetary stimulus program.

    The euro was up 1.21 percent to $1.2177, on pace for its biggest single-day percentage gain against the greenback in more than six months.

    On Thursday, the euro rose 0.72 percent against the dollar after minutes of the ECB’s December meeting showed that bank policymakers could revisit their communication stance in early 2018.

    Investors took that as a signal that the ECB will wind down its 2.55 trillion euro ($3.10 trillion) bond purchase scheme this year if Europe’s economy continues to hum along.


    “The latest ECB comments were a bit on the hawkish side, so that’s giving more life to the euro,” Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.

    The euro’s rise weighed on the dollar index .DXY, which measures the greenback against six rival currencies. The index was down 0.92 percent at 91.008, after slipping to a four-month low of 90.954.

    A sharp rise in the British pound also dragged the index lower. Sterling rocketed to its highest level against the dollar since the vote to leave the European Union, after a report that the Netherlands and Spain were open to a deal for Britain to remain as close as possible to the trading bloc.

    “Anytime you hear Brexit going well it is going to give the pound a little bit of a boost,” said Trang.

    Sterling was up 1.43 percent to $1.3729.

    Given the strong momentum in the euro and sterling, the dollar failed to capitalize on data which showed underlying U.S. consumer prices recorded their largest increase in 11 months in December, which bolstered expectations that inflation will accelerate this year.


    “It may be a bit premature to jump on the inflation bandwagon. I would want to see at least a quarter or two of some solid numbers,” Trang said.

    Bitcoin was 3.8 percent higher at $13,749.05 on the Luxembourg-based Bitstamp exchange a day after it skidded over 11 percent after the government of South Korea said it was considering a plan to ban cryptocurrency trading.


    Neither UK Investment- Nor Export Orientated Growth Will Save the Day
    by Fathom Consulting

    Our model suggests that the boost to UK net trade from the fall in sterling and the ongoing global upswing will not be sufficient to save the UK economy from a technical recession. It may have weathered the Brexit storm better than most economic forecasters, ourselves included, anticipated, but it is a case of ‘pain deferred’ rather than ‘pain avoided’.
    [​IMG]

    The majority of forecasters agree that the short- to medium-term impact of Brexit will be to harm, rather than help, the UK economy. Consequently, the debate is over the extent of that impact. We are markedly more pessimistic than both the Bank of England and the consensus, which have forecast growth of 1.6% and 1.3%, respectively.

    For reasons covered in a Fathom In Depth sent to our clients last week, we contest the belief that sterling weakness will boost net trade and investment by enough to offset the consumer squeeze and avoid an economic downturn. Instead, we find that what matters more for the UK’s ability to re-balance is global demand, highlighting the importance of maintaining a close relationship with the UK’s major trading partner post-Brexit.

    As our chart highlights, the recent referendum-induced drop in sterling has coincided with only a slight improvement in the UK’s trade balance, with net trade contributing a cumulative 0.4 percentage points to GDP growth since the Brexit vote.
    [​IMG]

    Some have pointed to firms’ pricing behavior as reason for this limited improvement. Indeed, as our chart illustrates, UK exporters have opted to build profit margins, increasing the sterling price of their exports by nearly the same amount as the fall in sterling since the Brexit vote. Recognizing this, policymakers have pointed to the beneficial effect on profitability. It is hoped that rising profitability will encourage businesses to invest in additional export capacity.
    [​IMG]

    But when modelling the impact of movements in the real effective exchange rate on the UK’s real trade balance we find a relatively small effect. And, tempered by Brexit-related uncertainty, that tailwind is likely to fall short of that implied by our model. Indeed, the Bank of England’s Agents’ Summary of Business Conditions Survey continues to point to only modest investment growth, noting in the latest release that there were fewer examples of domestically-focused businesses considering exports for the first time than might have been expected, given the fall in sterling.

    [​IMG]
    In addition, a Chartered Institute of Procurement & Supply survey, conducted between September and October last year, suggested nearly two-thirds of EU businesses were expecting to move elements of their supply chain out of the UK. Although fewer UK firms reported plans to diversify, the implementation of contingency plans could prove costly, diverting funds away from investment. Meanwhile, it seems that only the manufacturing sector has enjoyed rising profitability, as measured by the net rate of return in the chart below. The service sector, which accounts for the bulk of the UK economy, has struggled to defend profit margins.
    [​IMG]
    With those caveats in mind, and others expressed in a more detailed note sent to clients, we maintain our belief that there is a greater-then-evens chance that the UK will suffer a mild technical recession this year. Although, as we have commented in the past, trying to predict a recession with any certainty is a “mug’s game”. But if we are right, economic slack in the UK economy will be greater than the Bank of England set out in its November 2017 Inflation Report and further rate hikes will be off the cards.

    COT Report

    In general GBP sentiment in last 3-5 months could be described as "indecision". Since October net speculative positions was turning up and down, while open interest mostly was flat. Since the beginning of 2018 we see careful bullish steps that suggests some equilibrium shifting in favor of bulls, but this advantage is still rather small.
    Indeed, we see that net position is growing slowly, but we do not see significant changes in open interest. While on EUR net long position has reached unprecedented highs and Open interest reached new absolute record - here, on GBP upside action mostly was triggered by short covering as open interest has decreased last week.
    That's being said people have positive view on GBP but it is not strong and lets us to focus on near targets only.
    upload_2018-1-13_12-47-46.

    Technicals
    Monthly

    Today, guys, we will take a look at GBP. Despite big difference to EUR in general, GBP has approximately the same pattern and target in particular, when we speak on short-term perspective.
    In daily video I'll show you EUR chart and you'll see that setups are very similar.

    Long term chart barely has changed as last 4-6 weeks. October and November were inside months and only yesterday market was able to reach new top.

    Although long-term view for GBP is not really positive and, as we read above, in Fathom's release, they expect some recession in 2018 and no rate increase from BoE. Temporal relief that has come yesterday in statements from Netherlands and Spain that they will keep tight trading relation with GB hardly will last too long. And bearish sentiment could return fast as soon as first negative Brexit impact will be shown in statistics.

    Still, right now, as market stands in upside action - we're mostly interested with its perspectives.

    Trend is bullish here and there are some moments that we should take care on. First is uncompleted AB-CD target around 1.1650 area. Market has turned up just 350 pips above it, which is small distance for monthly scale. When such turning happens, this creates friable background of upside action. In fact, you never know where precisely market could stepped out and start dropping again, tending to uncompleted target. The same situation we have here. The nature of price action definitely shows that this is not a trend - too many overlapping candles, long shadows and no thrusting action.

    If we will take a look at reasons for this action, from technical point of view we will find nothing but 0.618 target of all time AB-CD pattern. No Fib supports, Pivots, OB/OS levels, nothing more. Taking it all together, it seems that upside action should not be too extended. Usually market shows either small reaction on minor target or sometimes no reaction at all. This leads us to second issue.

    As market is not at OB right now, it seems that nearest upside target stands around 1.3860-1.3975 K-resistance here. Obviously, this is rather strong resistance cluster as we have 2018 YPR1 at 1.4110 as well.

    Also this is previous very important monthly lows of 2007-2009. But they point on rather wide range of 1.36-1.42 area.

    That's being said, combined all tools that we have here right now, we could say that cable could turn down at any point of 1.39-1.42 area. But as we have K-resistance, we suggest that retracement market should not break it and this lets us to narrow range a bit to 1.36-1.41 probably.

    Finally, reaching of yearly Pivot resistance 1 will be a moment of particular interest. Pivots are not just support or resistance. They are sentiment indicators. And if GBP will fail to break it - this could become clear signal of coming downside reversal.

    Situation on monthly chart obliges us to be careful for any signs of bearish reversal on lower time frames. We do not have reasons to worry right now, but week by week market will be closer to turbulence of resistance area.
    gbp_m_15_01_18.

    Weekly

    This time frame is a cornerstone of our short-term expectations. Last report that we've done, in November 2017, correctly suggested that we should get some Gartley pattern. But, as bullish stop grabber also was formed - chances on butterfly appearing were better than on "222" Sell. In fact, you've seen our "222" Sell, as we also have traded it two weeks ago.

    Now, as GBP has jumped above previous top - grabber has been completed. Here we have two targets, based on this pattern. First one stands at 1.3825. It mostly coincides with lower border of monthly K-area.

    We also have AB-CD inside the butterfly and its OP stands in the same level.

    Next target stands at 1.4040, closer to upper border of monthly resistance and YPR1. But now it is not as interesting for us, since it stands beyond weekly OB level.

    We have some other upside Fib extensions, but they mostly stand in the same area. Picture that we have on weekly chart right now mostly suggests that cable should continue upward action on coming week with most probable target area of 1.3825-1.39:

    gbp_w_15_01_18.

    Daily

    So, those of you guys, who follows our regular analysis, should familiar with this chart. In fact "BC" leg is reaction on our "222" Sell pattern, which we've traded month ago. This pattern was among others as it could turn GBP down.

    Now our "222" has turned to butterfly as previous top was taken out. Here on daily, we have AB-CD pattern, that is a part of larger weekly setup. We see clear reaction at COP target and minor retracement. Now market is coming to OP at 1.3820 area.

    In general, as you can see, 1.3820-1.3835 should be rather solid resistance as it includes daily OP, Overbought, WPR1 and major weekly butterfly target.

    This will be major destination point for coming week.
    gbp_d_15_01_18.

    Intraday

    Here the major detail is thrust up. In fact, we have two thrusts, but both of them are suitable for DiNapoli patterns. As we have major target that has not been reached yet, it is logical to search some bullish continuation patterns here.

    Most welcome scenario for us is B&B "Buy". Although I'm not an expert of EW method, but this upside action shows very clear EW pattern. Now we stand at the top of most powerful #3 wave. Next step should be retracement of 4th wave. Final wave up is 5th and this idea corresponds to our suggestion and targets of daily and higher time frames, right?

    Hence, 4th wave retracement could give us desirable pattern - B&B "Buy". Now we have just one question - from which level it could start. We have two options - 1.3664, nearest 3/8 Fib support, or K-support around 1.3615-1.3634. Second level looks more attractive, as it is stronger, also is based on previous top and includes WPP.

    But, whatever level will be hit either first one or second - just watch for bullish patterns. May be it will be not B&B, but "222" Buy. Anyway this should be opportunity to go long as cable should tend to major daily target.
    gbp_4h_15_01_18.

    Conclusion:
    Recent Fathom insight on UK economy stands mostly supportive to our suggestion that GBP could turn down again on long-term charts.

    Still, in coming week cable should proceed to major daily and weekly targets that have not been hit yet. It means that retracements and bullish continuation patterns on intraday charts could become a chance for taking long position.


    The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
     
  2. shahsavari

    shahsavari Private, 1st Class

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    A perfec analysis.
    thanks.
     
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  3. ward133

    ward133 Private, 1st Class

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    Great job Thx
     
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  4. Joh

    Joh Sergeant Major

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    Thank you Sive most appreciated :)
     
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  5. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Morning, guys,

    So, let's continue our discussion of GBP. Yesterday on daily chart our major target has been hit - GBP has reached as 1.27 butterfly target as completed AB=CD pattern. Also, cable right now stands at Overbought as well. What conclusions we could make here?
    First - it is definitely not the point where we should take long position. Daily traders should wait for retracement while intraday ones could think about trading this retracement short
    Second - upward action right to the target was rather fast, with acceleration and tail closes. It means that as retracement will be completed, there are not bad chances on upward continuation, say, to next 1.618 butterfly target around 1.40 area. Besides, this action magically agrees with YPR1 around 1.4190 and upper border of monthly K-resistance area. Finally, appearing of butterfly here, which is bearish reversal pattern corresponds to fundamental outlook on UK economy. So, it really could happen that this butterfly will lead to fargoing consequences:
    gbp_d_16_01_18.

    On intraday chart we have perfect thrust, which is suitable for DiNapoli patterns. As daily resistance is strong and market is OB - appearing of DRPO "Sell" looks more logical in current circumstances and it will have not bad chances to work properly due the same resistance and OB area. In recent times we mostly meet DRPO "Failure" rather than good examples of direct DRPO, especially on intraday charts.
    gbp_4h_16_01_18.
     
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  6. Lolly Tripathy

    Lolly Tripathy Master Sergeant

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    Hi sive sir
    can you please share some info about usdcad
    Thank you so much
     
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  7. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Good morning,

    Let's continue our discussion of GBP. Although we have similar setups as on EUR as on DXY, I prefer Cable by some reasons. First - GBP stands at stronger resistance, because AB-CD target coincides with butterfly one. As EUR as DXY doesn't have this combination. GBP is more volatile, hence potential result should be better. Finally thrust on GBP looks better than on EUR.

    Besides, I have some longer-term hopes with GBP. It seems that any downside reaction should be just retracement by far and as soon as it will be completed, cable has good chances to proceed higher to next 1.40 target. Taking in consideration difficult situation in UK economy and strong technical resistance around 1.41-1.42 - this could be important reversal point on cable.

    Meantime, let's focus on possible retracement. It seems that most probable target will be around 1.3620-1.3640 area. This is K-support, WPP and previous top:
    gbp_d_17_01_18.

    On 4-hour chart perfect DRPO "Sell" is forming. To get confirmation of this pattern, according to DiNapoli rules, we need to way second close below 3x3 DMA. Target of DRPO stands here around 1.3646 - 50% support of thrust and mostly it coincides with daily 1.3620-1.3640 range
    gbp_4h_17_01_18.
     
  8. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Hi Lolly,
    my opinion that dealing with CAD now is not very safe... There are two risks. Today is BoC rate decision. Second - NAFTA agreement with US. Trump every time talks about it's cancelling... This fact presses on CAD.

    Still, I expect Crude Oil @77$. This should support CAD. May be we will get something of this kind:
    cad_d_17_01_18.
     
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  9. gwynfor

    gwynfor Private

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    Hi Sive,

    Thank you again for your analysis.

    DiNapoli on page 72 shows a DRPO where the second top is lower than the first. He says the invalidation (stop?) is then at 62% retrace "from the furthermost extreme of the consolidation area (after the second penetration)". I assume in terms of his diagram that this means 62% of the move down from the first top to the bottom formed following the first "close below".

    But reading your recent comments I come to see that a DRPO can occurr where the second peak ( i.e after the first close below and the close above) is higher than the first. If so where is the stop / invalidation level. I can only assume it must be just beyond the second peak. Is that correct.

    Also at what stage would you say the two tops cease to be "reasonably close to one another" in terms of Di Napoli's third criteria?

    Unfortunately I tried GBP USD in anticipation of a close below (well I did have a thrust down and a 38% retrace) but find I have a fresh new high and still await (23:00 London Time) a close below.
     
  10. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Hi, yes they are most common questions that appear, when you're dealing with DRPO.

    1. To simplify choosing of 5/8 retracement - use most extended level - either between first top (if it is higher) to the low of consolidation, or from second top (if it is higher) to the low of consolidaiton. Also it will depend on whether confirmation bar is lower than bottom between tops or not. If it is - then you could use first top, but if not - you have no choice but to use only second top for Fib levels building.
    On intraday charts, especially on FX market now it is difficult to get DRPO as it was described in the book. Usually I look on tops as invalidation of DRPO. 5/8 level now hits too often, but DRPO could be still valid.

    2. Since consolidation of DRPO very often takes the shape of butterfly. I think that second top while it is ~1.27 extension of first top (or smaller) is acceptable.

    Yes, on GBP we do not have DRPO as no second close below 3x3 DMA has followed. So, if market will go down - it will be by some other reason, not DRPO...
     

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