NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS OF RECOMMENDED TRADES GO TO http://fxmarketanalysis.wordpress.com/ AND SELECT "DAILY OUTLOOK" FOR TODAY
THE BIG PICTURE: S&P 500, Other Major Global Stock Indexes:
The daily chart of the S&P 500 is our preferred best single picture of overall market risk sentiment, from which we set our overall bias to being long or short currencies (or currency ETFs) that do well in risk or fear prevails.
Advice: As noted above in Conclusions, given its tendency over the past 7 months to retreat back to around its 50 day moving average once it pulls back from its upper Bollinger band, and the dour market reaction to earnings thus far, especially those of the banks, bias to the short side. However, we're impressed that buyers stepped in yesterday with only a mild pullback, despite the numerous time bombs ticking under the global credit markets and data that suggests whatever recovery we have coming along very haltingly.
The safer move is to wait for a pullback, like we saw on the 12 preferably to some kind of support level (at least the 50 day EMA), and then jump in when that reverses, as happened yesterday. However, we urge those long on any risk assets to keep tight stop losses in place, given:
· The potential time bombs that continue ticking under the US banking and housing sectors, as well as in
· The Euro-zone sovereign debt default threat area –Update: Portugal received a warning about another downgrade from its current A+ rating following a downgrade January 21 2009.
· The Fed has now warned banks to get ready for rising rates and the certain increase in mortgage defaults. Stocks do not tend to do well in an environment of rising rates. In recent long term treasury bond auctions, the high percentage of awards to direct domestic bidders had many wondering if the Fed is in fact doing a major share of the buying via intermediaries. If so, that suggests flagging foreign demand and eventually falling bond prices and rising rates.
· The very real falling demand for US Treasury bonds, which the US must keep issuing, and thus the very real incentive for Washington to allow stocks to crash a bit and drive up US T-bond demand (hat tip to Graham Summers for that observation).
Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", always take a look at the daily chart (or other relevant timeframe to the style you trade) for a picture of overall risk appetite or aversion. The current picture is bullish/long but the move may be losing momentum and flattening out.
S&P 500 Daily AVA FX Chart (04 Jan 18 )
** GOLD: Unchanged from yesterday: Await clarification of trend. Moving with stocks and risk appetite, opposite the US dollar. It is currently sitting between Fibonacci levels, no clear support/resistance nearby. Given our overall bias for the coming days to the downside, be ready to take short positions as noted below.
Long: Conservative traders should avoid longs for now until it either retests and holds near the 50% Fib level at $1125.41, or breaches price resistance at 1154 for a target exit around the 23.6% Fib level at 1175.75
Short: We do not recommend opening new shorts until gold breaches the 50% Fib support level with a stop just above your entry point (with then a target exit near 1103, the 61.8% Fib level, OR after gold tests and fails to break over the 38.2% level around 1148.
Gold is moving opposite the dollar, so watch the EURUSD and S&P 500 for indications of gold's near term moves. Also watch the S&P 500 and other major stock indexes and news to see if risk appetite gets a lift from improving spending, jobs, or other data that ALSO boosts USD stimulus exit and interest rate expectations, thus supporting the dollar and driving down gold.
Gold Daily AVA FX Chart (05 Jan 18)
Crude Oil: STILL Virtually unchanged since Friday, sitting right at the 38.2% level, a great entry point long or short with stop loss within about 30 pips. Crude is volatile, so best to accept being stopped out and then just jump on the trend in the other direction. Will move with risk appetite and the dollar, which for this week rests mostly with US earnings and other key events noted:
As noted above, our bias for the coming days is to the downside, so traders should be ready to enter short on a breach below 78.03, with a short term target to at least around $76-75. Oil has been in a range of about $82-$69, so the short side has lots of room should risk sentiment make a longer pullback.
Watch the EUR/USD chart for USD movements, and the S&P 500 chart for overall risk sentiment.
WTI Crude Oil Daily AVA FX Chart (06 Jan 18)
EURUSD: Sliding down on "Greeced" Rails: Down hard Tuesday vs. all majors as weak German PPI and ZEW data, PIIGS (Portugal, Italy, Ireland, Greece, Spain) debt concerns and a strong dollar combined to send the euro lower all day long, breaking strong support at 1.4270 after already falling through its 50 and 200 day SMA. With the 50 SMA looking to soon cross below the 200 SMA and form the "death cross" that suggests a longer term downtrend.
The pair appears to have stabilized around the 1.4200 level for the time being, but sentiment against the euro remains negative and if data does not offer support for the euro soon, sellers may aim for the psychologically important 1.4000 level in the near future. As we’ve noted earlier, tomorrow’s EZ PMI data becomes even more important within the context of the current price action. Should the PMI report miss expectations it could trigger further selling as market concludes that the EZ economic recovery has stalled. Recent comments by Germany's economics minister, that even the German economy was not yet in self sustaining recovery (i.e. still needs stimulus), add to the dour mood surrounding the euro.
Long: Wait until it breaks the 1.4600 resistance level or retests the 1.4428 (50%) Fibonacci retracement level, with stop loss just below the recently broken resistance turned support.
Short: At or near a break below the 76.4%% Fib level around 1.4165. Those willing to take a little more risk can try entering on a break below the psychologically important 1.4200 level, since the above Fib levels has not been significant support, and we don't see the factors weighing on the euro (noted in the above Forex section) going away.
Watch the S&P for overall risk appetite, and the EURUSD for a quick gauge of the USD to judge if oil is ready to stabilize.
EURUSD DAILY CHART (01 Jan 20) AVAFX CHART
NZDUSD: Down hard yesterday and thus far today in morning trade (GMT time). Testing the 0.7258 level, which is very significant support, because here converges: 23.6% Fib level, a history of price level support/resistance over the past 3 months, and a 50 day SMA. Markets should at least pause here.
SHORT: If it doesn't hold, then this level is a great entry point to go short, feel free to enter as long as the distance to just above the 38.2% Fib level at 0.7062 is better than 2:1.
LONG: If support does hold, wait for the uptrend to resume and get then enter near this level as long as it allows at least a bit better than 2:1 gain if price reached the recent highs around 0.7400.
Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Much will depend on further news on US economic fundamentals and Euro zone sovereign debt issues.
NZDUSD Daily Chart (03 Jan 20) AVAFX CHART
USD/CAD: Up hard on dollar strength and no countervailing CAD news, and oil is unchanged, thus providing no help for the Canadian dollar. Note that the recent move up broke the near term strong downtrend. As noted above, euro weakness appears to have caught a lot of US dollar shorts hitting stops in a "short squeeze."
LONG: IF the pair can breach the current price shown below at the 76.4% Fib level, with target exit just before the 61.8% level around 1.0448, feel free to enter higher up as long as you have a bit better than 2:1 the distance to that level, which should provide some resistance.
SHORT: IF the current price resistance shown below in pink holds, wait for the downtrend to resume.
USDCAD DAILY AVA FX CHART (image: 04 Jan 20)
USD/CHF: Moving with US dollar strength as the euro sells off, and possible concerns about SNB intervention to keep the Swiss Franc from rising too much against the EZ currency, the main Swiss export market.
Long: At current level in pink or slightly higher as long as the distance to the 1.0494 level is more than twice that to your stop loss, which should be just below the 23.6% Fib level.
Short: Wait for a breach of the 23.6% Fib level and enter at any point at which the distance to the 61.8% level around 1.0225 is still better than twice the distance to your stop loss, which should be just above the 23.6 level.
USD/CHF DAILY AVA FX CHART (05 Jan 20)
Long: wait until the 50% Fib level holds and the uptrend resumes, target just before the 38.2% level with stop loss just below the 50% Fib level, around 1.6290. BEWARE THE DEATH CROSS- the 50 day SMA (red line) has crossed below the 200 day SMA, suggesting a longer term downtrend is in the making. This suggests bias to the short side.
Short: We now have the reversal at the 38.% level that we were waiting for. If you caught the move early, consider taking some profits or at least wait to see if the 50% Fib level at which it's currently sitting holds or is breached. If breached, can enter new short positions. No real support until about the 1.5950 level, so enter at any point just below the 50% level as long as the distance to this point is about 3:1 compared to the distance to your stop loss, which should ideally be just above the 50% Fib level or as close to that as possible to still allow the 3:1 reward/risk ratio
GBP/USD Daily AVAFX CHART (07 Jan 20)
DISCLOSURE: NO POSITIONS