Technical Analysis

Talking Points

• USD/JPY Technical Strategy: Pending Long
• Prices cleared resistance at 103.94 (38.2% Fib exp), exposing 107.08 (50% Fib)
• The rally looks overextended after nine weeks; we await a pullback to get long

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Talking Points:

• USD/CAD shows signs of an ascending triangle
• The pair has found resistance three times by 1.0709
• A rising trend line from October provides support

Over the past month of trading, USD/CAD has found resistance three times by a high initially set at the beginning of December, but the pair still continues to set higher lows. Technically inclined traders will immediately recognize the recent pattern as an ascending triangle.

USD/CAD Daily



An ascending triangle is a pattern with an upper horizontal line that provides resistance and a rising trend line that provides support. An ascending triangle is usually considered a bullish continuation pattern and should follow a significant uptrend.

If we pull out a bit on the daily USD/CAD chart, we also see two other significant lines that should be considered when trying to trade the ascending triangle. The pair has found support by a longer-term rising trend line from October 22; this should confirm the desired longer-term uptrend mentioned in the previous paragraph. Also, an August high at 1.0568 has provided support since it was broken in late November.

USD/CAD Daily



The bullish continuation pattern on an ascending triangle is only confirmed once the pair has closed above the horizontal resistance line, meaning traders should wait for USD/CAD to close a daily candle above 1.0708 before considering buying the pair, or a conservative approach would be to wait for a close above the 3-year high at 1.0737.

Once a confirmed breakout is seen above an ascending triangle, technical traders would look for an extension beyond the horizontal line equal to the height of the triangle. In this case, the height between the start of the triangle and the horizontal resistance line is roughly equal to 180 pips. However, the 2010 high may also provide resistance at 108.54, which is only approximately 150 pips above the horizontal resistance line.



Alternatively, if USD/CAD declines further and closes below the December 23 low at 1.0623, the ascending triangle formation should be disregarded, as the pattern only remains relevant if the pair continues to set higher lows. Also, a close below 1.0623 means the rate has also fallen below both the rising trend line from October as well as the ascending trend line of the triangle. Finally, a close below support by the August high at 1.0568 may even lead some traders to look for a continued move lower.

-- Written by Benjamin Spier, DailyFX Research.
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Talking Points
-Next year may prove more challenging
-Notable rise in volatility
-Greenback strength will be the focus, but look for opportunities against Asian EM currencies

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited." ~ George Soros

This time of year is usually filled with forecasts and predictions for the year ahead. Over my career I have noticed that in order to do this most Wall Street economists and strategists just take the preceding trend of the past year and extrapolate it forward another 365 days. It makes sense as it is the safe thing to do. When they are wrong, it doesn’t seem so bad,since everybody else is as well. When right, they look smart.
This year so far is proving to be no different. After a 25% run up in US equity markets over the past year strategists are tripping over themselves to slap targets some 15% + higher on the S&P 500 and Dow for 2014.
We don’t think next year will be so easy and we expect a bit more two-way action in the indices – at a minimum. There are numerous reasons why the equity markets look a lot more precarious now than this time last year. Margin debt and sentiment, for instance, recently reached higher levels than those seen at the peaks in 2000 and 2007. This reeks of complacency.

These, however, are really just symptoms of the greater problem of policy and its overriding impact on the stock market. What happens when the market begins to seriously question this influence - or worse, sees through it? Similar episodes in the last decade suggest it will not end well.
We think 2014 might just be the year that the investment world begins to question the not so invisible hands of our central banking authorities. In such an environment, volatility should rise markedly with indices undergoing a decline of at least 10% at some point during the year.



From an FX perspective we like the Greenback generally in such an environment, but especially so against Asian EM currencies given their geared link to the current global credit cycle. In the FXCM universe of exchange rates, USD/SGD looks especially attractive even with the involvement of the Singapore Monetary Authority.


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Talking Points

• GBP/USD fails just under key Gann resistance
• EUR/USD reverses from key cycle turn window
• NZD/USD closing in on important support level

Foreign Exchange Price & Time at a Glance:
Price & Time Analysis: EUR/USD

• EUR/USD failed near the 1.3895 61.8% retracement of the 2009/2010 decline heading into the important cycle turn window this week
• A move under the 2nd square root relationship of last year’s high at 1.3655 will turn us negative on the Euro
• The 1st square root relationship of the 2012 high at 1.3775 is now important resistance with a move above needed to relieve immediate downside pressure
• An important long-term cycle is in effect over the next few days
• A daily close under the 2nd square root relationship of the year’s high at 1.3655 will turn us negative on the Euro

EUR/USD Strategy: Will favor the short side on a close under 1.3655.

Instrument	Support 2	Support 1	Spot	Resistance 1	Resistance 2
EUR/USD	1.3580	1.3655	1.3660	1.3720	1.3775

Price & Time Analysis: NZD/USD

• NZD/USD has been under steady pressure since failing early last month at the 4th square root relationship of the 2012 high
• Our near-term trend bias remains lower in the Kiwi while below .8260
• The 5th square root relationship of the October high near .8100 is key support with weakness below needed trigger the enxt important decline
• A minor cycle turn window is seen early next week
• A daily close over the 38.2% retracement of the October/November decline at .8260 would turn us positive on the Kiwi

NZD/USD Strategy: Like the short side while under .8620.

Instrument	Support 2	Support 1	Spot	Resistance 1	Resistance 2
NZD/USD	.8100	.8140	.8150	.8215	*.8260

Focus Chart of the Day: GBP/USD



The month of January has a seasonal tendency to be one of the worst performing months for European currencies. A few key cycle turn windows this week in the Euro and the Pound suggest this January could see more of the same especially when taking into account the recent jump in positive sentiment vis-a-vis the Daily Sentiment Index . In the case of Cable we have been looking for a top this week based on certain medium-term Fibonacci time relationships that seem to be playing out. Our idealized point of failure for this peak is the 15th square root relationship of the 2012 low at 1.6610 which is very close to today’s high. An initial downside pivot is seen at 1.6495, but a move under 1.6410 is really required to confirm that a more important peak is already in place in the Pound. Any strength through 1.6610 over the next couple of days would severely undermine the potential for a cyclical top.

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Talking Points

• Prices are testing support at 142.26 (23.6% Fibonacci expansion)
• Breaking lower initially exposes 140.15 (38.2% Fib exp.)
• Reversing above 144.10 (trend line) targets 145.68 (December 27 high)

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com


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Talking Points

• USD/JPY nearing key support zone
• GBP/USD reversal gaining momentum
• EUR/USD flirting with important downside pivot

Foreign Exchange Price & Time at a Glance:

Price & Time Analysis: USD/JPY

• USD/JPY failed on Thursday just below the 61.8% retracement of the 2007/2011 decline at 105.55
• While over a key Gann angle line 104.00 our near-term trend bias will remain higher in the exchange rate
• The 105.55 level remains important resistance and needs to be overcome soon if the rate is to embark on another important leg higher
• A minor cycle turn window is seen early next week
• A move under 104.00 would shift our near-term trend bias to negative in USD/JPY

USD/JPY Strategy: Favor the long side while over 104.00

Instrument	Support 2	Support 1	Spot	Resistance 1	Resistance 2
USD/JPY	103.40	*104.00	104.45	104.70	*105.55

Price & Time Analysis: GBP/USD

• GBP/USD reversed sharply on Thursday from just below the 15th square root relationship of the 2012 low at 1.6610
• A move under 1.6410 will shift our near-term trend bias to negative in Cable
• Immediate resistance is seen at 1.6495, but traction over 1.6610 is really needed to signal a resumption of the broader uptrend
• A minor cycle turn window is seen early next week
• A daily close below 1.6410 will confirm the importance of yesterday’s reversal and turn us negative on the Pound

GBP/USD Strategy: Like the short side on a move under 1.6410.

Instrument	Support 2	Support 1	Spot	Resistance 1	Resistance 2
GBP/USD	1.6375	*1.6410	1.6430	1.6495	*1.6610

Focus Chart of the Day: EUR/USD


The EUR/USD selloff we have been looking for to start the year occurred pretty much right on schedule following Monday’s high close for 2012 at 1.3801. A key downside pivot for the exchange rate is the 1.3655 2nd square root relationship of last year’s absolute high. On Thursday this level was broken intraday, but by the end of the day the rate managed to finish well above it. A daily close below 1.3655 over the next few days will be further evidence that an important top is in place and should pave the way for further weakness over the next few weeks. Last year’s closing high of 1.3801 is now important resistance and only a move back through this level would undermine the burgeoning negative cyclicality in the Euro.

--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com

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Talking Points:

• A “Bounce-or-Break” Scenario for EUR/AUD
• Conflicting Elliott Wave Counts on Daily Chart
• The Ideal Time Frame for Taking This Trade

EURAUD is now challenging a rising trend line on the daily chart (see below). Whether it will it bounce or break remains to be seen, but it is always better to trade in the direction of the trend, in spite of the apparent pullback momentum. Thus, by default, trading a potential bounce off of the rising trend line is a better bet.

Guest Commentary: “Bounce-or-Break” Scenario for EUR/AUD



Astute Elliott Wave practitioners will note, however, that this is likely to be only a fourth-wave pullback, and technically, there is one more high to be made on the daily chart. Nonetheless, because the initial pullback in wave 2 was shallow, the wave 4 pullback may well be deep and complex, as per the (not unbreakable) "rule of alternation."

Thus, the situation the trader faces is that although price is likely to bounce from the trend line, it may later retrace further before going on to make new highs. Nonetheless, no one has a crystal ball with respect to the markets, and thus, the wisest thing to do is just keep taking defensive trades in order to enter in the direction of the trend.

The four-hour chart below will present an interesting picture for die-hard Elliott Wave counters, as it is showing a rather clear five-wave count. Wave 3, as marked, is longer than wave 1, albeit only slightly. Nonetheless, that is sufficient to justify a five-wave count.

Guest Commentary: 2 Conflicting Elliott Wave Counts to Consider



Personally, I prefer this wave count, although I’m aware that some may choose to calculate an a-b-c wave instead. In line with more advanced theory, however, the five-wave version is preferable as the potential beginning of a zig-zag retracement.

For those interested primarily in the bottom line, what this means is that the desired move marked on the chart may well happen, but it may not move up to test the high of the trend.

What is more likely is a bounce up followed by a push further down. Now, that could be tradable as well, depending on how it develops. For now, though, previous support and resistance offer a ready-made support zone at 1.5019-1.5158.

This trade should be taken on the hourly chart (see below), which is also offering a wedge pattern. What is notable about this wedge is that price is currently creeping on the underside of resistance, suggesting that downside momentum is slowing. Thus, on a bullish reversal divergence, bullish engulfing pattern, or pin bar, there will be a favorable entry opportunity.

Guest Commentary: Wedge Pattern on EUR/AUD Hourly Chart



Markets have been overshooting zones as of late, and it may take two or three tries to get in on this trend, but it’s important to still continue taking trades systematically. The good news is that with many FX crosses beginning to develop pullbacks, the "winter of low probability" part of the trading cycle may now be drawing to a close, which will usher in some better trade set-ups.

Just as inexperienced traders cause problems for themselves by taking greater risk during the height of smooth trading, like we had in October and November, they also tend to give up during these difficult periods, choosing instead to leave the markets just as the depths of the cycle are being worked out.
In order to profit consistently in the markets, one has to sit through the highs and lows and continue to work with what’s being presented, knowing that over the long term, an effective, proven strategy will prevail.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com


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Talking Points:

• The Value of Benchmarks and Validation
• Real Proof About Computers' Limitations
• 2 Classic Trade Set-ups Computers May Not See

Most intuitively understand that following a sensible, proven life regimen is the way to balance the conflict that sometimes arises between our logical side and our very human, emotional side. In trading, it is actually better to check emotions at the door, instead relying on the analytic, logical self.
And while logic coupled with automation will help temper our emotions, too much automation isn’t good, either. Recognizing our own strengths and the limitations of computer automation will help strike that balance and make for positive strides in trading.

A Plan

For traders, that “proven regimen” is called a benchmarked trading plan, and it will make the road ahead much easier. Without that black and white proof in hand, a trader likely won’t have the confidence needed to risk valuable capital on a daily basis.

A benchmark is a spreadsheet that shows the complete history of a method's trades in up, down, and sideways markets. It provides an abundance of useful information including that all-important win/loss percentage and risk/reward ratio.
This is the ultimate end game when it comes to market analysis, and it tells when a method is reliable enough to risk real money trading.

Statistical Validation

Once there is statistical proof that a particular trading method is working successfully (by way of the benchmark spreadsheet), it’s then possible to start demo or live trading that method with the goal of matching personal performance to that of the benchmark for the chosen time period.
Keep in mind it will be virtually impossible to match the benchmark because it is unlikely to be able to stay awake for days straight and manage every trade to the letter of the plan. For this reason, the benchmark is technically hypothetical (see Figure 1 below). It is a record of how to ideally initiate and manage trades, which is often different from the real outcome.

Guest Commentary: Benchmark Spreadsheet for Daytrading Method



Fractals Limit Computers

If finding a viable trading method that provides desirable results in all environments were easy, everyone would have one. One of the largest drawbacks for aspiring traders is that they are relying on the computer for indicators. The fractal, or asymmetrical nature, of markets does not lend itself to being measured with technical indicators, which are, at best, secondary, or lagging indicators, of price itself.

The beauty of fractal design is that each new iteration, or pattern, is slightly different than the previous one. While the human eye is good at recognizing this pattern, a computer is not. The computer calculates symmetry, or exactness, in a world that is far from exact.

In a fractal world, each new pattern is a slight variation of the previous pattern—like branches of a tree, or waves hitting a beach—where after just a handful of samples, that difference will have increased enough to be unrecognizable to the original or programed pattern.
On the other hand, however, our eyes can easily follow the string of slight changes to a pattern over time.

Guest Commentary: “Picture-Perfect” Trades a Computer Might Miss



Man vs. The Machine

One example of a pattern that’s easy for the naked eye to see, but that a program likely would not, is seen in Figure 2 above. The two retracement levels, which are identical in terms of percentage, are drawn from the low of the last correction to the high of the ensuing rally, and provide high-probability long-entry levels following price dips. The standard deviation line of the Bollinger Bands also provides a nice visual and lends further confidence. By the way, "nice visual" is not in a computer programmer's lexicon!

To an experienced trader, these two dips in the overall uptrend are picture-perfect trading opportunities that stand out nicely. To the computer, however, they are widely different in both length and timing. In terms of ease and understanding, it is far simpler to draw those retracement levels by hand than try to get a program to draw them instead.
While the computer is a great tool, you have to know its limitations, and a big one is pattern recognition. Figure 3 is the same chart, except we have highlighted the two patterns by outlining them.

Guest Commentary: Fractal Patterns in USD/JPY (Dec. 20)



Fractal in Nature

In Figure 3 above, we get a more intuitive view of the market. First, we see the larger pattern on the left with an upside climax, followed by a characteristic dip (retracement) to support (green line). There is a smaller pattern on the right within that larger pattern, again with a retracement to the green line that is nearly identical in percentage terms to the retracement in the first box.

Once you have an experienced eye for pattern recognition, you will notice right away the similar behavior that markets exhibit on all time frames. For example, notice the small box created by the overlap of the two larger boxes.
Notice we have a price "retracement" following a sharp rally, which is again identical in scale to the other two retracement levels we've already highlighted with those short green horizontal lines. It is this similar behavior we are referring to when we say markets are fractal in nature. The sum of the parts equals the whole, and the parts themselves are similar, albeit asymmetrical, miniatures of the whole.

The understanding of this behavior is what we have used to construct the trading method that formed the basis for the benchmark spreadsheet in Figure 1.

Seeing markets from a fractal perspective is definitely an eye-opener, but it also takes a different way of thinking, as does relying on a pre-scripted trading plan instead of your own thoughts. If, however, you are not seeing desirable results in your trading approach right now, you may want to get out from behind the computer and follow intuition instead.
By Jay Norris, author, The Secret to Trading: Risk Tolerance Threshold Theory

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Talking Points:

• Broad Trading Range That Has Yet to Be Broken
• Notable Divergence from MACD Indicator
• Fundamentals That Support NOK Strength

Since peaking above 6.22 in November, USDNOK has since established a broader trading range between 6.05 and 6.22, which has not been broken, even with significant policy news coming from the most recent Federal Open Market Committee (FOMC) meeting, where the central bank formally announced tapering of asset purchases.

Judging by the inability of the US dollar (USD) to take out the November highs against the Norwegian krone (NOK), it appears that tapering expectations were already priced in.

Now, with the ‘’big’’ tapering news behind us, we still do have higher lows since the USDNOK bottom in September, although the pair has failed to make a higher high. In my humble opinion, we should ride out the ongoing fight between 6.05 and 6.22 in order to determine the prevailing direction for early 2014.

Guest Commentary: Range Trading Prevails in USD/NOK


Support: 6.05, 5.97-5.95, 5.90-5.87
Resistance: 6.22-6.25, 6.30, 6.50

After pricing in expectations for tapering by the Federal Reserve, the dollar posted strong gains against the krone in November, and USDNOK peaked right around the 6.22 level. Since then, the price action has been confined between 6.05 and 6.22.

It bears noting, however, that we see a negative divergence between price and the Moving Average Convergence/Divergence (MACD) indicator, which favors more consolidation or even a deeper pullback in USDNOK in upcoming weeks.

Even with higher lows, USDNOK failed to make a higher high since the bottom in September. The current landscape looks a bit unclear as well, which means that initiating positions in either direction involves higher-than-normal risk.

Furthermore, we do not have any clear short-term technical patterns that support a turning point for either bulls or bears. For that reason especially, I find it best to ride out the current trading range or wait for a better technical set-up before initiating any new positions in USDNOK.

Fundamental Factors in Play for USD/NOK

The Norwegian krone (NOK) has been weak throughout the fourth quarter of 2013, and this could boost Norway’s export industry in the year ahead. This NOK weakness is being caused by slow Norwegian economic growth, which is being driven by weaker growth in the oil industry, as well as in general construction and consumer spending.
Given the slowdown in oil investment, stronger export growth and more breathing room for the Norges Bank should keep the nation’s economy going and maybe even surprise to the upside. The new government, lead by Prime Minister Erna Solberg, supports the easing of bank credit policies in the year ahead, which should support a stronger housing market and general investments.

Furthermore, a stronger NOK may prevail in early 2014 because the currency is now weaker than the fundamentals in the Norwegian economy. It’s very possible that these oversold conditions have simply been caused by low liquidity in the market, and particularly in USDNOK, around the holidays.

Trade Idea for USD/NOK

Sometimes the best trade is no trade at all, and in the current conditions, it is best to be outside the market and simply observe USDNOK. Enter only when a favorable set-up emerges that provides the desired risk/reward profile.

I am currently looking for a reversal pattern in either direction in order to resolve the broad trading range that’s been established between 6.05 and 6.22. A ‘’perfect’’ set-up could be a washout of either longs or shorts in USDNOK, but for now, it is too difficult to see what the next tradable move will be for this pair.

In the meantime, while we wait it out, I wish all the readers at DailyFX.com a Happy New Year!
By Rafiul Hossain, Guest Analyst, DailyFX.com

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Talking Points

• Prices are starting to rise as expected after showing a Morning Star candle pattern
• Resistance is at 0.9041 (23.6% Fib); above that targets 0.9178 (38.2% Fib)
• Near-term support is at 0.8920, marked by trend line resistance-turned-support

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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