The Musings of Faith

Pigs Get Slaughtered

OK, I admit it, this EUR/GBP bull became a pig on Friday and my great position is now sitting slightly negative. It’s always important to analyze your own trading psychology and this is what I’ll attempt to do in this article.

What caused me to become a pig?

RECAP

1. I did not honor the EUR/GBP’s characteristic to move from whole number to whole number. As EUR/GBP approached 0.9200, the pair ran into resistance and retraced. The best thing to do to maximize pips was to get out at the highs and re-enter long on the correction. Or even better, get out at the highs and ride the correction down for a quick scalp.
2. Upon further scrutiny of the daily chart, we can see that on Tuesday, not only was 50% Fibo broken, the 61.8% Fibo was breached. On Wednesday, this move followed through with a low of 0.9074. This is a clear sign of a possible reversal of the 2nd bullish wave on the daily chart (0.8981-0.9298). After a breach occurs, I look for price to bounce then return in the direction of the correction. If price is serious about a reversal, the pair would have printed a low lower than 0.9074. It did not. That was the signal that the longs were still in play and we got confirmation when price continued in the direction of the uptrend and printed a high at 0.9196 in Friday’s session.
3. After this high, I would expect a correction that, first, found support at the 80s level and, second, did not exceed 50% Fibo level of the day’s move. The correction breached both levels and closed very weakly at 0.9154. Look at the hourly chart (not pictured here).

RED FLAGS

There are several red flags in this recap that EUR/GBP bulls, like myself, need to pay attention to.

1. The high on Friday at 0.9196 is a lower high than the high on Tuesday at 0.9208. We may get a spike in Asia when markets open for the new trading week on Sunday. If we don’t see 0.9208 and hold at those levels, expect price to go lower.
2. The retracement on Friday did not find support at the 9180s level nor did price close at this level. This level is an important level for the EUR/GBP. If the pair was truly bullish, we would have seen price supported by this level and a close at or above this level. The fact that price did neither is a bearish development.
3. The retracement exceeded 50% Fibo level. You know what I think about this. Another bearish development.
4. Several ECB officials have started unofficial verbal intervention of the euro’s appreciation and it has had a real effect on the euro as the currency failed to rally significantly against the GBP and USD last week.

GAME PLAN

I will exit my longs on the spike that I expect we will get in Asia as it gets a chance to react to the lower-than-expected NFP numbers released in the US on Friday. If price action remains below 0.9208, I will initiate shorts and to build a short position that will first target the 0.9074 low and then the 0.9000 large quarter point and whole number.

It looks like Goldman Sachs obviously knew something when they called EUR/GBP to fall to 0.8400. Due to an increasingly nervous ECB with a strong euro, this call may have some validity. Nevertheless, the fundamentals still look bearish for the GPB. The BoE would prefer a weak pound and is taking a stance to support the economy. Though the housing market still show signs of stabilizing, it is a function of supply rather than demand. Uemployment is still high in the UK and manufacturing lags behind other countries in showing strength. On the other hand, the EZ economy is relatively robust with good numbers in both its manufacturing and services sectors. The consumer continues to be drag on the economy but that is a global phenomenon in this recession so has little impact on market direction at this time. EZ is very much suffering from deflation which will halt an interest rate hike ambitions coming out of the ECB.

The upcoming week sees interest rate decisions from both the Bank of England and the European Central Bank as the main spotlight events for this currency pair. The contrast in the statements coming from these central banks will determine the ST direction for the EUR/GBP. I think there is a real possibility that the ECB turns dovish while the BoE maintains its same rhetoric. If this is the case, the GBP will strengthen mightily against the EUR and we could see price return to 0.9000. A break and hold below this level will confirm a beginning of a reversal of the daily chart trend.

As always, trade what you see, not what I think. And don’t become a pig.

The EUR/GBP - Pound from A Different Perspective

After the breakout in the EUR/GBP this week and its completion of the large quarter from 0.8750 to the all-important 0.9000 level, my interest has returned to this pair. The fundamentals are in line and the technical price action is moving accordingly. So now that the market has returned to the 0.9000 price level, is it too late to jump on the bull train?

THE FACTS

1. Technically, price is very bullish with the markets closing the trading week on Friday well above 0.9000 at 0.9044.
2. Calculating the Fibo retracement levels of Friday’s move on the 10 minute chart, a drop back towards the 0.09020 level would be normal and healthy development of such a large move. However, studying the daily chart, one can see that that deep of a pullback has never happened when the rally is strong and still continuing.
3. On Friday, price did not make it beyond the 75 pip hesitation zone that I like to watch with a high of only 0.9044 on Friday. But that price exhaustion is completely expected for an end-of-the-week move like that. If this rally is for real, expect price to break and hold above 0.9075.
4. The fundamentals are the real buttresses of this rally. The markets have received positive UK data with a rising GBP. Manufacturing is showing some pick up while even the delicate housing sector in Great Britain seems to be stabilizing with rising house prices. But the forex markets take its lead from the central banks and Bank of England governor Mervyn King made it quite clear that he remains bearish on the British economy and monetary policy shall reflect that bearish perspective. The GBP remained weak on the news but it was the news of Lloyds Banking Group failing financial stress tests, thereby loosing participation in the government’s stimulus program that really shook the markets and sent GBP reeling on Friday. A bearish BoE really weakens the GBP for the short to medium term.
5. The Eurozone, on the other hand, has been a surprisingly resilient during this economic crisis. Politically, compared with the UK and the US, European stimulus packages have been rather small. Merck and Sarkosy have taken strong stances against expanding current stimulus beyond already seemingly paltry levels. Monetarily, the ECB has also been staunch in using very small incremental rate cuts and now the interest rate stands highest in the West at 3.00%. The interest rate is the strongest peg the euro is standing on and it has appreciated accordingly. If you zoom out the daily chart, the euro appreciation has been crazy in such a short time.
6. The economic data out of the EZ has also seen surprises with rising GDP and a pick up in manufacturing and inventories much in line with global economic story.
7. Watch the calendar. UK house prices will help set the tone for the trading week before the highly anticipated release of the BoE meeting minutes. These minutes should reveal just how dovish the BoE is; so seeing how markets react will be interesting. FOMC on Wednesday will influence the dollar counterparts. Between the EUR/USD and GBP/USD, whichever pair is reacting excessively in terms of price action will be the currency that has the edge in the EUR/GBP. It will be an interesting week with US home sales, German IFO, French GDP, and Italian retail sales rounding out the calendar.

THE COMMENTARY

Again, INTERESTING WEEK! The EUR/GBP is in brand new territory as this pair is at all-time highs. We could keep going or we could retrace a little. To be honest, I wouldn’t mind a little retracement. The trend is your friend only when you can get out in front of it. I count waves a little differently than most traders so I don’t like to put in facts but I count a first bullish wave on the daily chart. That is increases likelihood to me of a trend that is strong enough to at least attempt to continue on towards 0.9250. If GBP/USD confirms with a move below 1.6250 towards 1.6111 support, even at these levels I’m bullish EUR/GBP. I think the BoE gave the markets just the reason to grant the euro parity with sterling. And it is possible that economic data out of the UK begins to show the very thing the BoE has been worrying about. Having had a premium over most (dare I say all?) currencies for decades now, GBP has a long way to fall down before stabilizing. Very interesting feat WHEN that happens.

Then’s there the case for the shorts. We ARE at the top of a 4-day old rally. How much more can this slow mover move after already making a brand new all-time high. A strong case is made for a move lower before any continuation of the up trend. So this train of thought begs the question: Can the GBP rally? We’ll find out on Wednesday.

As always, trade what you see, not what I think.

Check out the daily chart of the EUR/GBP. Do you see a chart formation? Certainly a clear downward channel. What do YOU see!