The Musings of Faith

So the EUR/GBP played me this week, as GBP strength did surprise me and I underestimated it. Thanks to increased risk appetite (for some RIdiculous reason in light of more debt defaults), GBP rallied even past 0.9054 to a low of 0.9024 - a completion of the quarter to 0.9000. And again, the pair still finds support on another attempt towards the 0.9000 level. That is a bullish development.

Secondly, price still respects the Fibonacci retracement levels on the daily charts. This makes the current levels a nice buying opportunity. Yesterday’s session, my bullishness was waning but rightfully so as intraday, the pair dropped 80 pips. I had too much risk on the table to hold my longs during that anticipated drop. Another lesson in trade management, timing, and psychology for me this trading week. I’m a better trader for it.

Lastly, I was discussing with Paul Pinfield on Twitter that the GBP can’t defy fundamentals forever. Perhaps, forever has arrived: 1) The Financial Times confirms that UK banks (5 in total) bear the biggest brunt of Dubai World’s debt, to the reported tune of $2 billion. If this plays out as true, UK equities will undoubtedly suffer and drive the GBP lower with a double whammy of increased risk aversion. 2) The ECB is up in a few hours with ECB President Trichet speaking later in the morning. They are expected to be quite hawkish and this contrast in policies with the BoE will keep this pair supported still.

So my start of the week analysis still holds with an additional target at 0.9150 - targeting ST resistance at that level. This is a good first target to unload and book pips. As I always say: Trade what you see, not what I think.

0.8950 is SERIOUS resistance. Look how many attempts were made at on the way down as it served as the upper boundary of an area of support then.

Now yesterday’s rally failed to break the 0.8950 price level and exhausted at a high of 0.8947. Technically, no real cause for concern as the pair is still consolidating. Fundamentally, if, in fact, the risk trade is causing the EUR to surge then this rally could continue. This time though, the risk trade is a little different. Rather than being driven by poor economic data, risk is being fuled by the rally in gold, oil, and other commodities that is giving traders the appetite to buy riskier assets. In fact, the USD continues to weaken despite poor US economic news that would have usually driven investors to safe-haven assets. On the other hand, the BoE just keeps getting more and more dovish. The minutes revealed a discussion on cutting interest rates. WTF?! I don’t see how the GPB can rally even in the long term until the BoE takes steps towards tightening monetary policy. I’m actually targeting 0.9000 for this currency pair. Price action at this major whole number and psychological level will be very telling.

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

Yesterday’s fall in price breached the 50% Fibo of the larger move from 1.6260 to 1.6843. Technically, this up trend is over. I am expecting more downside with price moving to 1.65 and possibly even reverse completely to 1.6250. Fundamentally, BoE Governor King pretty much sealed the deal telling markets that a weak GBP is good for exports and that quantitative easing is good for the economy. Sterling dropped like a stone from those comments. A market environment with technicals and fundamentals lined up gives the short pound trade lots of confidence. I’m short GBP.

But as usual, trade what you see not what I think.

Watch 1.6700. It sits just beyond the 50% Fibonacci retracement level of today’s slide down to 1.6600. After the tremendous drop in prices when Fitch’s threatened to downgrade the UK’s AAA rating, prices look to have found support at the 1.6600 whole number and bounced to a high of 1.6696. Price has already breached the 50% Fibo level.

If prices hold above 1.6700, the rally has resumed.

I rode this entire move today. NICE. Good entries and good exits left me profitable and able to hold for more.

The EUR/GBP is just sitting there! This is a 10 minute chart looking like a 1 hour chart. Ha! This market is seriously just waiting on US 3Q GDP release tomorrow morning. The market actually expects +3.2% with economists hoping for a much stronger reading. WOW! Talk about over optimistic. I actually expect a small decline. If there is growth, it will be small and, therefore, a disappointment to the markets. In this risk-dominated market environment, this will lead to a tumble is riskier assets and the EUR will weaken further against the GBP.

What Goldman Sachs and BNP Parnibas know.

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.

This is a progression of the daily chart during the day’s session at 9:50AM PST and I am sparked with deja vu. We have been here before (shown in the rectangle).  We see what happened before (in the circle). 1.6250 will be very telling. I’m a GBP bear. Today’s reports proved disappointing bearish US numbers which may spark safe haven flows again. The stronger-than-expected numbers out of the UK just proves that the British economy is the world laggard. And the BoE knows it which is why it is more dovish now than when the market thought back in July.

All very interesting to see how it unfolds. As always, trade what you see, not what I think.

CLASSIC Fibonacci retracement occurring in GBP/USD here on the daily chart after last week’s MAJOR move that saw cable drop 700 pips. The pair is even defying fundamentals such as a dovish BoE v. a more hawkish Fed,  in this hike right back to 1.6000 where price is edging even higher towards the 38.2% Fibo level.

So will the trend continue down after this bounce or a reversal in the making? IF 50% Fibo is achieved, and that’s a big IF, any breach may be first clue that the trend is reversing to the upside. However, looking at fundamentals, I am very bearish GBP and see the GBP/USD continuing to the downside.

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.

The Schizo Level

Markets like certain levels. And for the GBP/USD, the 1.6500 level has had a particularly interesting effect on price action. Many call this level a psychological level. I’m call it the schizoprenic level where cable has no idea where to go when it reaches this level.

The chart illustrates the sideways chop that we have been forced to trade with and within for the past FOUR months! And it has been at this 1.6500 level that cable has been unable to pick a clear trend. Look at this chart! It’s HORRIBLE! Traders don’t want to see charts like this! There is literally no trend in this daily chart for months and months and months. Not only that, there is no clear direction where price is headed once we get to 1.65. Price has broken to the upside just to completely reverse. Price has broken to the downside just to completely reverse.

Today, we finally got a move to the downside completing the quarter to 1.6250. Fundamentally, we should continue moving to the downside. As long as we stay away from 1.65, we will have clear direction. We end up back there, that means 1) the market is confused and 2) GBP/USD is sure to act psycho again.

The double bottom played out exactly as expected, taking the GBP/USD to 1.6742 — completing 3 large quarters (1.6111 to 1.6250, 1.6250 to 1.6500, 1.6500 to 1.6750) in 2 bullish waves.

After the second bullish wave, price consolidated and found support just below 50% Fibo level as illustrated in the chart above. After this consolidation, I expect a 3rd bullish wave as fundamentals have shifted. The USD is weakening across the board as different countries continue to show signs of a global recovery and central banks are starting to make hints that interest rate hikes could become a possibility earlier than expected. Though we don’t expect an interest rate hike from any central bank this year, 2010 could see an interest rate hike from the likes of China, Australia, or the US.

Now, that price has consolidated back to 1.6500 large quarter point last session with a low of 1.6519, news this week will determine if the uptrend continues or reverses.

I am studying the daily chart of the GBP/USD (finally! I have finally finished packing up my old home and I can get some quality time in front of the markets) and I find that in the last 2 sessions (while I was packing boxes), cable has set a textbook-perfect double bottom at 1.6111 (circled above). What is currently playing out, is a mini-breakout after that double bottom. But I’m starting to think that this may be the beginnings of a reversal of the current downtrend.

1. The technical double bottom on the ST chart after breaking major support at 1.6250. A break of this level should have seen prices completing the quarter to 1.6000. Instead, the trend exhausted and retreated back to 1.6250. Twice.
2. Counting the waves (not Elliott style but Yoltov style), the downtrend was actually FOUR waves. That is an overextended trend that, while it did break major MT support at 1.6250 level, didn’t make it to 1.6000 as expected after the break.
3. Due to the double bottom, the wave counter (if you count waves) has been zeroed out. This could very well be a first bullish wave developing on the charts right now. A break of 1.6372/80 confirms it.
4. Non-farm payrolls (NFP) will not come in better than last month, as it is expected to do by economists. If the released number disappoints with higher layoffs then the USD could see a serious correction. If severe enough, we could see a reversal of the current downtrend in the GBP/USD.

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

I was asked on Twitter about my short positions and if I see a general sell-off in the market. I have been bearish on the GBP/USD for some time now — really since the BoE revealed it was more dovish than the Federal Reserve earlier this month. And since, then there have been some interesting technical developments that further support my bearish stance.

1. @tweetertrades pointed out a head & shoulders on the daily chart. I agree with him. If that plays out, we could target MT support at 1.5981.
2. Also, on the daily chart, the Fibonacci retracement levels played perfectly. You know what I think about Fibo levels and the GBP/USD.
3. Fundamental landscape is ripe for further GBP weakness. FOMC minutes this week should reveal a cautiously bullish Fed while economic data should continue to show a recovery in manufacturing while the consumer remains weakened by unemployment and wage stagflation. The USD is poised to gain in this environment.

So do I see a sell-off in the market this week? Depends on which vehicle you trade but be ready for USD strength this week headed into NFP. Employment number will be big on Friday as it will either confirm or rebuke the notion that the US economy is seriously on the mend and that the rest of the world economy is not too far behind.