Sive Morten
Special Consultant to the FPA
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Fundamentals
This week was relatively quiet as US celebrates Thanksgiving and markets are mostly thin across the board. Still, on Friday we've got solid action on Forex. Since we already have trading plan, we need to check how recent action suits to our expectations.
As Reuters reports - The dollar rose on Friday, posting its biggest weekly percentage increase in a month, as risk appetite declined and investors sought the currency’s safety following a steep drop in oil prices that suggested global growth is slowing.
The drop in oil prices fuelled a risk-off wave across the board. U.S. crude futures were last down nearly 8 percent on the day.
“Risk aversion has been the main driver all week, with oil prices driving market sentiment,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “The dollar is better overall for the week because of the risk-off stance, despite a fairly significant pricing out of 2019 rate hike expectations,” he added.
The dollar’s near-term outlook, however, has dimmed a little bit as some of the recent U.S. economic numbers have come in weaker than expected and several Federal Reserve officials have struck a cautious tone on the economy. All told, investors increasingly believe the Fed may be nearing the end of its tightening cycle.
That said, Jane Foley, senior FX strategist at Rabobank in London, believes the dollar will still find decent support as investors are likely to remain cautious on emerging market assets.
“The huge liquidity associated with the greenback, the fact that there is no real default risk on U.S. Treasuries, and the credibility of the U.S. legal system are enough to endow the U.S. dollar with sufficient safe-haven appeal for many investors,” Foley added.
The euro, on the other, fell to a one-week low on signs economic growth could be slowing across the euro zone, with worries about Brexit and Italy’s budget negotiations also weighing on the single currency.
Business growth in the euro zone slowed much more quickly than expected this month, a Purchasing Managers Index survey showed. After German private-sector growth slowed to its lowest level in nearly four years, the euro dropped into negative territory and was last down 0.7 percent at $1.1329 .
There is no fresh CFTC data for this week, so, it is unclear what short-term sentiment we have and how speculative positions have changed. But Fed watch tool shows that dollar-supportive sentiment has improved this week as probability of rate increase in December moved higher to 72-75% (of 23rd of November), while last week it was ~68%:
As we've talked above on Germany economy contraction, Fathom consulting suggests that changing of the test procedure, which demands adoption of all major car and truck producers:
The German economy contracted by 0.2% in the third quarter of 2018, the first negative print since 2015. The contraction was largely foreseen (the consensus of economists polled by Reuters had expected a 0.1% contraction). The primary cause appears to be bottlenecks in the auto industry following the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). However, this is appears to be a predominantly supply-side problem with the fall in new orders data far less pronounced. Whether the German economy rebounds in Q4 will therefore depend upon how soon firms are able to adapt to the new regulatory standard and how quickly they can increase output.
That's being said, this week doesn't show big shifts in fundamental background, so not drastic reversals should happen, theoretically. This let's us proceed with the trading plan that we have.
Technical analysis
Monthly
As we talked in our previous reports, monthly picture is the one about 1.13 lows. They have very important technical meaning for monthly chart. Now we see that despite recent break of these lows, EUR doesn't move lower but turned up again. Logical question that we have to ask here - could it be W&R. In this case situation could change at 180 degree. Although monthly chart is rather long-term, it needs more time to get confirmation of this idea - EUR needs to move above 1.15 top, but if now we see real upside reversal, it will have extreme importance for long-term perspective.
Because, in general, EUR doesn't look strong in recent months. As we've mentioned, EUR - hangs upon 1.14-1.15 support area. After strong drop and spike down - no meaningful upside action has followed. This is not good sign for bulls. It's already 5 months of laying upon this area. As longer EUR will stand here as greater chances on downside breakout will be.
This is indirect sign of weakness, when market can't jump out from strong support area. It means that strong level could support price from collapse but its effort is not sufficient to start bullish action. Day by day buyers will be washed out around this level and EUR could break it, if nothing will change. So, let's keep this issue in mind. It is not vital by far, but still first warning signs already exist. And now this hypothesis will be checked.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Now - take a look what progress we have around it. 1.14 lows is the first test of rectangle and monthly support. After small bounce price returns back to it. So, this is the crucial border and if it will be broken - free space to YPS1 around 1.08 will be opened. It will mean return back in rectangle. Next our target here will be 1.03 AB-CD COP extension right around major lows, if nothing will change now.
Weekly
Weekly chart brings bad surprise, guys and it doesn't match to our trading plan. This is bearish grabber. Two weeks ago we already had one either. As soon as minimal upside harmonic retracement was done - we have another one and it suggests drop below recent lows. This time it will be right to 1.1185 Fib support and MPS1. Of course, any pattern could fail, situation could change etc. But now it makes risky any attempt to go long on daily chart. Other words, it puts under question the reverse H&S pattern that we have on daily chart and significantly increase chances on its failure.
Daily
So, here is the pattern that we're watching now, guys - reverse H&S. Downside reversal from K-resistance was pretty nice, with Reversal (R) session on board. But we're mostly interested in upside reversal around 1.13 area. As you understand, appearing of bearish grabber works opposite to this scenario and diminishes chances on success. Market is not at oversold till the 1.12 area, so failure indeed could happen.
Still, as usual - on first touch of 1.13 support minor intraday technical bounce has good chances to happen. We will try to use and move stop to breakeven.
Here we make following adjustment to trading plan. We could try to take look position as we've talked initially, but use technical upside bounce for stop moving to breakeven. Later, if our trade will close and market drop below 1.13, we could try to go short with weekly grabber, since it will be clear sign of H&S failure.
Intraday
Our suggestion on 2-leg downside action due daily Reversal session was correct. Indeed, on Friday we've got second leg down. "222" Sell pattern also has been formed, or better to say we've got two of them of different time scale.
Thus we have perfect bullish setup - "222" Buy shape as a part of reverse H&S pattern. Bottom of right shoulder will be Agreement support. The one flaw that we could find here, guys - fast downside action. The nature of reverse H&S suggests that this part of pattern should be under control of bulls. It means that upside action should be stronger than downside. But we see the opposite picture. Whether it will lead to H&S failure - we will see. But all other things stand rather good. As we said, if even H&S will fail later - first touch of 1.13-1.1320 area should lead to upside bounce and we intend to use it.
For purity sake, we also could watch for bullish reversal patterns on15-30m charts. For example, it could be reverse H&S as well, or, say 3-Drive "Buy" because market has not hit OP yet on 4H chart and should drop a bit more.
Conclusion:
We do not have any changes in market sentiment this week. It means EUR progress will be driven by technical factors. As we've got weekly grabber - it put the shadow on bullish scenario and we should be careful enough with any long position that we take.
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.
This week was relatively quiet as US celebrates Thanksgiving and markets are mostly thin across the board. Still, on Friday we've got solid action on Forex. Since we already have trading plan, we need to check how recent action suits to our expectations.
As Reuters reports - The dollar rose on Friday, posting its biggest weekly percentage increase in a month, as risk appetite declined and investors sought the currency’s safety following a steep drop in oil prices that suggested global growth is slowing.
The drop in oil prices fuelled a risk-off wave across the board. U.S. crude futures were last down nearly 8 percent on the day.
“Risk aversion has been the main driver all week, with oil prices driving market sentiment,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “The dollar is better overall for the week because of the risk-off stance, despite a fairly significant pricing out of 2019 rate hike expectations,” he added.
The dollar’s near-term outlook, however, has dimmed a little bit as some of the recent U.S. economic numbers have come in weaker than expected and several Federal Reserve officials have struck a cautious tone on the economy. All told, investors increasingly believe the Fed may be nearing the end of its tightening cycle.
That said, Jane Foley, senior FX strategist at Rabobank in London, believes the dollar will still find decent support as investors are likely to remain cautious on emerging market assets.
“The huge liquidity associated with the greenback, the fact that there is no real default risk on U.S. Treasuries, and the credibility of the U.S. legal system are enough to endow the U.S. dollar with sufficient safe-haven appeal for many investors,” Foley added.
The euro, on the other, fell to a one-week low on signs economic growth could be slowing across the euro zone, with worries about Brexit and Italy’s budget negotiations also weighing on the single currency.
Business growth in the euro zone slowed much more quickly than expected this month, a Purchasing Managers Index survey showed. After German private-sector growth slowed to its lowest level in nearly four years, the euro dropped into negative territory and was last down 0.7 percent at $1.1329 .
There is no fresh CFTC data for this week, so, it is unclear what short-term sentiment we have and how speculative positions have changed. But Fed watch tool shows that dollar-supportive sentiment has improved this week as probability of rate increase in December moved higher to 72-75% (of 23rd of November), while last week it was ~68%:
As we've talked above on Germany economy contraction, Fathom consulting suggests that changing of the test procedure, which demands adoption of all major car and truck producers:
The German economy contracted by 0.2% in the third quarter of 2018, the first negative print since 2015. The contraction was largely foreseen (the consensus of economists polled by Reuters had expected a 0.1% contraction). The primary cause appears to be bottlenecks in the auto industry following the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). However, this is appears to be a predominantly supply-side problem with the fall in new orders data far less pronounced. Whether the German economy rebounds in Q4 will therefore depend upon how soon firms are able to adapt to the new regulatory standard and how quickly they can increase output.
That's being said, this week doesn't show big shifts in fundamental background, so not drastic reversals should happen, theoretically. This let's us proceed with the trading plan that we have.
Technical analysis
Monthly
As we talked in our previous reports, monthly picture is the one about 1.13 lows. They have very important technical meaning for monthly chart. Now we see that despite recent break of these lows, EUR doesn't move lower but turned up again. Logical question that we have to ask here - could it be W&R. In this case situation could change at 180 degree. Although monthly chart is rather long-term, it needs more time to get confirmation of this idea - EUR needs to move above 1.15 top, but if now we see real upside reversal, it will have extreme importance for long-term perspective.
Because, in general, EUR doesn't look strong in recent months. As we've mentioned, EUR - hangs upon 1.14-1.15 support area. After strong drop and spike down - no meaningful upside action has followed. This is not good sign for bulls. It's already 5 months of laying upon this area. As longer EUR will stand here as greater chances on downside breakout will be.
This is indirect sign of weakness, when market can't jump out from strong support area. It means that strong level could support price from collapse but its effort is not sufficient to start bullish action. Day by day buyers will be washed out around this level and EUR could break it, if nothing will change. So, let's keep this issue in mind. It is not vital by far, but still first warning signs already exist. And now this hypothesis will be checked.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Now - take a look what progress we have around it. 1.14 lows is the first test of rectangle and monthly support. After small bounce price returns back to it. So, this is the crucial border and if it will be broken - free space to YPS1 around 1.08 will be opened. It will mean return back in rectangle. Next our target here will be 1.03 AB-CD COP extension right around major lows, if nothing will change now.
Weekly
Weekly chart brings bad surprise, guys and it doesn't match to our trading plan. This is bearish grabber. Two weeks ago we already had one either. As soon as minimal upside harmonic retracement was done - we have another one and it suggests drop below recent lows. This time it will be right to 1.1185 Fib support and MPS1. Of course, any pattern could fail, situation could change etc. But now it makes risky any attempt to go long on daily chart. Other words, it puts under question the reverse H&S pattern that we have on daily chart and significantly increase chances on its failure.
Daily
So, here is the pattern that we're watching now, guys - reverse H&S. Downside reversal from K-resistance was pretty nice, with Reversal (R) session on board. But we're mostly interested in upside reversal around 1.13 area. As you understand, appearing of bearish grabber works opposite to this scenario and diminishes chances on success. Market is not at oversold till the 1.12 area, so failure indeed could happen.
Still, as usual - on first touch of 1.13 support minor intraday technical bounce has good chances to happen. We will try to use and move stop to breakeven.
Here we make following adjustment to trading plan. We could try to take look position as we've talked initially, but use technical upside bounce for stop moving to breakeven. Later, if our trade will close and market drop below 1.13, we could try to go short with weekly grabber, since it will be clear sign of H&S failure.
Intraday
Our suggestion on 2-leg downside action due daily Reversal session was correct. Indeed, on Friday we've got second leg down. "222" Sell pattern also has been formed, or better to say we've got two of them of different time scale.
Thus we have perfect bullish setup - "222" Buy shape as a part of reverse H&S pattern. Bottom of right shoulder will be Agreement support. The one flaw that we could find here, guys - fast downside action. The nature of reverse H&S suggests that this part of pattern should be under control of bulls. It means that upside action should be stronger than downside. But we see the opposite picture. Whether it will lead to H&S failure - we will see. But all other things stand rather good. As we said, if even H&S will fail later - first touch of 1.13-1.1320 area should lead to upside bounce and we intend to use it.
For purity sake, we also could watch for bullish reversal patterns on15-30m charts. For example, it could be reverse H&S as well, or, say 3-Drive "Buy" because market has not hit OP yet on 4H chart and should drop a bit more.
Conclusion:
We do not have any changes in market sentiment this week. It means EUR progress will be driven by technical factors. As we've got weekly grabber - it put the shadow on bullish scenario and we should be careful enough with any long position that we take.
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.