Monday, October 12, 2009

EURUSD--Where to from here?

What's next for EURUSD?

The run up that brought lots of profits from March through September is on pause. While this past Friday’s close was 1.4733, the close three weeks ago was 1.4712. A sideways market.

From the point of view of a classical technical analyst, the pair is in an uptrend. No trend line has been violated; no serious level of support breached.

On the weekly chart (see below) the upward trend line is steep, perhaps too steep to easily continue. The last time it was this steep was the run-up from 2007 to 2008. We all know what happened then.

On the monthly chart, the fall from the summer ’08 highs did breach a trend line that began in early 2002 and had nine touches before that violation. The pair is struggling with that old upward trend line now. It poked its head above it briefly in September as well as last week but seems to have the willies about taking up residence there. This is in the 1.47 area, the area I have talked about as resistance for several weeks. Until the Euro closes definitively above 1.4865 (a weekly and ideally monthly close), I can trade it sideways and the range (1.4480 to 1.4845) is respectable, allowing for more than a few pips to be earned by agile traders.
Here’s the hourly chart showing the trade I entered last week. The stop is now a profit stop. Note the pair violating the two trend lines. Note the negative divergence with RSI. Finally, RSI is staying at or below 50%. The pair needs to drop below the lower shadows I pointed out on the prior candles in order to continue its drop. It could bounce from here as well. The thing is, if you’re in a short, lighten up a bit or close, depending on your style. I’ve lightened a bit. If it fails from the uptrend line (this is, it bumps its head on it and starts down again, dipping below the lower shadows), one could look for another short entry. Or if it climbs back towards 1.48 one could short. Remember though, you want to trade where your stops can be tight.
Thinking about the larger picture, even when one is going to trade short-term, is valuable. Is this a simple pause for breath? Or is it the beginning of a reversal? Ah, the age old question and the question that all the hundreds, if not thousands, of trading techniques and approaches seek to answer.

The dynamism that accompanied the push up to 1.60 last year is not present on this rise from March. A look at the weekly RSI shows it isn’t reaching the levels it did last year. Looking at it from an Elliott Wave (EW) perspective, this could be corrective. In some types of corrective waves, as Frost and Prechter write in their book, Elliott Wave Principle, “Momentum indicators reveal an ebbing of the market’s power (i.e. speed of price change, breadth, and in lower degrees, volume).”If this is true it’s a bearish scenario.

As I’ve mentioned before, the weekly chart here looks corrective to me. I’ve traced the corrective zigzag in red. If the pair can’t move definitively above 1.4865 then it’s possible the path forward is down, down, down. Note that since I’m currently trading this as a sideways market, the bounce off the 13-EMA has been a buy point in the past. Here’s the weekly chart:
These are not trade recommendations. My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. You have to decide on your own approach to trading. Trading is risky. But you know that already.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

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