Trading EUR/USD – A multi year technical analysis topped with some fundamentals.

In this review on the EUR/USD pair we will be looking to understand from a technical point of view where this pair might be going. The methodology is to look into past performance and find leading indicators that can provide us with clues for the future. For that we will be using a set of overlays and indicators.
I divide the different tools in my into two types. The first are primary tools, the signals they provide are used to take a view on the market. The second type are confirmation tools. Before opening a position most of my indicators should tell the same story. In this analysis I will be using the following
Primary:

• EMA (120) and EMA (60) [Exponential moving average on price]
• MACD (24,52,18) [Moving Average Convergence Divergence)

Confirmation

• RSI (28) [Relative strength index]
• Fibonacci retracements

I recommend for you to either open in a different window or print the Chart below before we continue (Dotted line is EMA(120) and solid line is EMA(60)

Past performance :
In August of 2008 we can see observe the following phenomenon. Price is making a new high where:

• The EMA(60) exhibits a bearish engulfing over the EMA(120)
• MACD plummets from 272 to around 68 
• RSI declines from 73 to 54

Not far after we can see the EUR crashing in a classic 5 wave pattern.


In late October 2009 and at the beginning of November of the same year after the EUR depreciated by 23%, we can observe the following

• MACD is in positive divergence from it’s signal line
• RSI is going up
• EMA (60) is well below EMA(120)

Since only one of the main indicators suggests a reversal I would have stayed on the side lines this time around. In reality price recovers by 16% in less then two months. The reversal is not sustained and a classic head and shoulders formation with a double bottom is formed between October 2008 and March 2009.
Only in May of 2009 we can again see a clear combination of signals suggesting a sustainable trend reversal.

• EMA(60) is cross over EMA(120)
• MACD is in positive divergence against it’s signal line and in an overall bullish trend.
• RSI climbs from to 47 
• Price crosses the 61.80% Fibonacci retracement mark.

All these signals combined and pointing in the same direction suggest to me there is high probability long trade here. When trading, one should always have a stop loss and a target. I tend to use a concrete price for stop loss and indicators for my take profit. The stop loss should be placed at the bottom of the movement dated April 19th price 1.2980 .The take profit target should be when EMA(60) crosses under EMA(120). This method would have produced profit of 850 pips over an 8 months period.

Beginning of January we can see the exact mirror pattern of the May 2009 one suggesting it’s time to short the EUR.

Now that concluded the analysis, it’s time to evaluate where we now:

• EMA(60) is in a 397 pips (2.37%) negative divergence from the EMA (120)
• MACD is climbing steadily and is in positive divergence from it’s signal line
• RSI is in an upwards channel
• Price touched the 61.8% Fibonacci retracement line.

So… It’s a mixed bag. One of our main indicators suggests a high probability for reversal where the other is still far away from indicating a positive reversal. Our confirmation indicators are both bullish.


Action: I am currently short this pair and therefore I would hold for now. If I was neutral I would wait for the pair to test 1.3400 support, If support hold and there are signs of a bullish engulfing from the EMA (60), I would take a cautious long position.

From a fundamental perspective my view on the EUR remains bearish. The latest crisis had a dividing affect on the Euro zone. We have strong economies (Germany, France) that are on the road to recovery where inflation lurks around the corner. On the other side with the PIGS(Portugal, Ireland, Spain and Greece) are in significant debt and I can’t see any light at the end of this tunnel. The divergence may have devastating affects on the EURO as different fiscal policies with a deadlocked monetary policy ,the ECB cannot increase interest rates as it will push the PIGS into defaulting on their debts. Mr George Soros wrote an article published in the FT two months ago about the same, take a few moments to read the article.


Happy Trading ,

Shai Heffetz
Head of InterTrader.com

Disclaimer
The comment in this blog is the personal opinion of the contributors and not InterTrader.com. The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. InterTrader.com is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.

Multi time frame trading

Like many others I always try to increase the probability of each and every trade becoming profitable. One such way is to use multiple time frames when you are considering entering into a position. Next I will share with you they way I use this method for intraday trading, although I will usually stay in the market for no more then 6-12 hours I am still using charts from a completely different scale to support my decision.

For my trading I am using 3 different time frame before making any decision.
1.Daily chart over 24 months
2.Hourly chart over 3 months
3.15 minutes chart over 7 days

The daily chart will be used in order to understand the underline trend of the market overall. I will use the USD/CHF pair as an example. According to my analysis we are currently in a downturn towards the lower boundary in a bullish run. This implies two potential and opposite trades.
1. Long - assuming that I am correct about the trend there is a high probability that price will rebound once it touches the lower bound of the trading channel.
2.Short - The argument is the same but, why wait ? We can go short now and exit when the price hits the lower bound.





The hourly chart tells a different story. From the beginning of January 2010 to the 19th of February the market was in a bullish trend , a 45 degree positive incline. From February you can see the trend has run out of steam. The rising bottoms are gone replaced by falling tops are everywhere, this suggest that the bullish run is over and we are now in the midst of a bear move. See the chart below:



This is enough information for me to make a decision which way 2 go. I will take the downside, short on the US Dollar, My target would be the bottom of the channel on the daily trend and my stop loss will be placed around what I see as the closest resistance point (1.0737).

In order to fully optimize the potential of the trade I will drill down to the 15 minutes chart. This chart will not affect in anyway the decision if to go long or short, it will only determine where the optimal entry point is.

For this I will be referring to the Elliot wave principle. Assuming the main movement is down one can assume we are now in wave 4 of the movement; all we need now is a beginning of a downturn indicating for wave #5 to commence in order to get into the position. See chart below.





To summarize, we use the daily chart to understand overall market direction and the type of the trend (direction, uniformity, stage). The hourly chart will be used to determine the direction of the trade and the 15 min chart to locate the optimal entry point.

I will be reviewing this trading idea in 5-10 days and see if the market behaviour was similar in anyway to my expectations.

Good luck and happy trading.

Shai Heffetz

Disclaimer
The comment in this blog is the personal opinion of the contributors and not InterTrader.com. The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. InterTrader.com is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.