Near-term eur/$ outlook:
In the May 13th email, affirmed the view of temporary gains above the Mar 14th high at 1.3965 as part of an important topping within the large rising wedge pattern since Oct. Reached a high at 1.3990 on May 8th before quickly turning lower, and currently nearing that key base/bullish trendline from Nov (currently at 1.3665/80). As been discussing, wedges are reversal patterns that resolve lower, and suggests an eventual downside resolution (potentially sharp) of that base. A number of other negatives support this view and include an overbought market, poor upside momentum over the last few months, deteriorating technicals (see bear divergence, sell mode on the daily macd), and a number of longer term bearish signs (see longer term below). Also added in the May 6th email, that such a downside resolution of the large wedge since Oct may finally be near as the market had entered the ideal early May timeframe for such a top (a number of time cycles have peaked including the seasonal chart, see 3rd chart below). On a very short term basis, the bottom of this wedge pattern (currently at 1.3665/80) may hold for a few days, but any near term bounce would likely be short-lived before resuming the bigger picture decline and downside resolution of the base of the wedge (would confirm an important top, see in red on daily chart below). Nearby resistance is seen at the recently broken bearish trendline from last July (currently at 1.3800/15).
Strategy/position:
In the May 6th email said looking to short given the view of an important topping, but did not have the chance to sell given the rapidity of the reversal lower. Still looking to trade from the short side but with the market approaching that key base of the wedge (and potential for a near term bounce), its not seen as the time to just hit bids. So for now, would wait for a near term bounce toward 1.3830 to sell and then using a very wide stop on a close above 1.4030 to allow for more topping/volatility. Would also sell on a close 15 ticks below the base wedge (if that occurs first) and in that case, stopping on a close 25 ticks back above.
Longer-term outlook:
As discussed above, a top is finally seen likely in place (still need downside of wedge since Oct to confirm) and lots of longer term negatives suggest that an even more major top may also be in place. Note that the market remains within the huge triangle-type consolidation since July 2008, and in turn suggests eventual declines all the way back to the base/bullish trendline from Jun 2010 (currently at 1.2150/75, see in red on weekly chart/2nd chart below). Long term technicals continue to fail/not confirm the last few months of gains (see bearish divergence/sell mode on the weekly macd at bottom of 2nd chart below), the longer term 47 week cycle tops has peaked and the market remains limited by the longer term 1.4000 resistance area (ECB also clearly uncomfortable with the euro at those levels). Longer term support before the base of the large triangle is seen at the bullish trendline from July 2012 (currently at 1.3400/25) and may provide support for at least a month within the larger decline (see in red on weekly chart/2nd chart below).
Strategy/position:
With the confidence in a top (and potentially more important top) rising, would stay with the bearish bias that was put in place on Jan 17th at 1.3540 (got a bit caught). A final note, with the vols quite low after the last few months of little action and potential for a sharp move nearing (on downside resolution of the wedge since Oct and potential increase in vols), it may worthwhile to take a look at expressing this bearish view of an important topping via options.
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Current: Nearer term : see strategy for entering short side above. Last : short Apr 8 at 1.3825, stopped May 5 above t-line from Mar (1.3855, closed 1.3875). Longer term : bearish Jan 17th at 1.3540, important top likely in place. Last : bull bias Nov 26th at 1.3455, to neutral Nov 7th at 1.3635. |
EUR/USD
