FOREX TRADING

Dollar Declines On Momentum-less Market

Overall, Monday trade proved to be very slow in the forex market, with most pairs having very weak momentum. As has been the case recently, the strongest two pairs of the day were the aussie and cad, while the pound was the only major currency that did not gained any ground against the dollar. Still, the pound was Monday’s most active pair, and in relative terms no pair made much headway on a day that was ripe for a channel break that just did not come. Ahead, the market is preparing for RBA interest rate decision at 23:30 EDT, which is likely to have an important impact on the forex market.

Dollar Index Technical View:

Daily chart trend: Long possibilities. Main price points: 75.00-76.00. Looking for: Wave V low

Prices on the dollar index chart are currently testing the upper resistance line of a trading channel, where a long break-out will confirm that wave V of a black C is done. If so, then a move higher over the next few weeks should follow, especially if S&P futures stay below their 1075 highs. In this case we will be looking for a move on the dollar index chart, near to the 78 area of the previous wave E), of the fourth wave triangle.

The euro (Eur/Usd 1.4655) is struggling to break above the 20-day moving average at 1.4650, even though it first tested this area during the Sunday session. The gains seen in the equity markets during the U.S. session gave an important boost to the euro, as to the rest of the currency market, helping it gain approximately 70 pips.

Trade Plan of the Day: TheLFB Trade Plan is Eud/Usd, one of the six that are available to members on the major pairs each day, plus four Jpy based cross pairs, plus S&P futures, oil, gold, and the dollar index.

The pound (Gbp/Usd 1.5940) was very active during the overnight session, but in the U.S. session the currency disappointed a little, with the pair moving in a 50-pip range. For now, the pound is trading close to Sunday’s opening price, which means that a third pin-bar formation on the daily chart out of the last four candles is in place. This usually denotes a mixed outlook.

The aussie (Aud/Usd 0.8780) was today’s best performing pair, as the market prepares for the RBA interest rate decision. The market is currently pricing in a hold-decision, but there are some rumors surfacing about a rate hike. If so, the aussie is likely to see a very strong uptrend, which might help it to break above the current high of the year, in the 0.8850 area.

The cad (Usd/Cad 1.0700) broke to the downside, through the resistance area formed by the 20 and the 50-day moving averages at 1.0850 and 1.0750, which lately had been the main swing points for the pair. During the day, the cad declined 100 pips, but the vast majority of pips came during the Sunday open. Right now, the cad is trading slightly above a trend-line that has held tight since Sep 17.

The swissy (Usd/Chf 1.0315) had very weak momentum during the day, moving only 55 pips, but still was able to break below the 20-day moving average at 1.0350. This may provide an important resistance area over the next few days of trade, helping the Swiss franc to gain additional ground against the dollar.

The yen (Usd/Jpy 89.45) failed once again to break above the 89.90 area, which has been an important swing area over the last few days of trading. A break above this level would probably trigger a wave of buy orders into the market, sending the yen much higher. For now, the pair is trading below all the important moving averages.

Basic Materials, Financials Led The Market Higher

Equity Futures: Dow +71.00. S&P +9.80. NASDAQ +9.75. Japan Nikkei +50.00. German Dax +30.00

Despite the positive ISM read, the U.S. markets traded on relatively light volume, advancing approximately 1% on Monday. The commodity market advanced during the U.S. session, while the dollar index extended the declines seen throughout the last half of year, but the market participation across all global markets signaled that today was not a day that too much was likely to go too far.

U.S. Trade: Following the pattern set during the prior week of trade, the U.S. futures market saw a very weak overnight session. The market continued to trade on a weaker momentum even after the opening bell of the cash market, even though the ISM Non-Manufacturing PMI showed that the service side of the U.S. economy expanded for the first time in a year. This gave a strong boost to the financial sector, which up 2% going into the close. The calls for banking weakness were addressed by upgrades from Goldman Sachs on a swath of financial companies.

With today’s gain, the market advanced for the first time in four days, reversing one of the longest losing streaks of the last few months of trading. The prior week’s sell-off came as markets priced in a weaker global recovery pace, and as some economic reports missed analysts’ estimations. These releases included data from the U.S. labor market, which most analysts agree will act as a drag on the economic recovery, even when taken as a lagging indicator.

S&P Technical View:

Daily chart trend: Short possibilities. Main price points: 1075. Looking for: Wave 5 or C top

The wave count on the weekly chart, above, offers a question; is it wave 4 or not? The price structure on a daily chart is also showing two valid scenarios. On the left side of the chart below, it shows an impulse structure with five waves up from the 665 lows to the current highs. If this is the case, the wave 4 discussed on the weekly chart, above, will be rejected, since the fourth wave is a corrective wave, which means it cannot be sub-divided by a five wave move. However, in this scenario, a three wave push lower into a corrective blue wave 2, with a targets somewhere around 38.2%-50% Fibonacci support levels, is expected.

On the right side of the chart, we have a different picture, with a wave count that has a clear zig-zag correction, which is valid for a wave 4 scenario. In this case lower blue wave 5 will follow.

Overall, the current price structure signals for a turning point, since the market is trading on the top of wave 5 or wave C leg, around the Fibonacci resistance levels with the current top at 1075. As such, we will be looking for at least three wave push lower over the coming days and weeks.

Sector Moves: The raw material and the financial sectors were the best performers in Monday trade, both advancing more than 2%. On the other hand, the healthcare and the consumer goods posted the smallest returns, of only 0.50%. Interestingly, the same pattern could have been observed during the European session. Among the three major U.S. indexes, the broader S&P 500 index led the declines initially, something not seen lately. The top gainers from the index were the call-center operator Convergys and Nordstrom, both up around 9%, after the two companies were upgraded to “buy” by analysts.

The NYSE tick was positive even from the opening bell, with 2500 companies advancing and only 500 declining. Moreover, even though the trading volume was light, most of it was built on advancing shares, something that might provide a strong boost to the market this week if participation levels draw in speculative interest. Citigroup remained the most active stock in the NYSE.

Economic Moves: The only red-flag report from the U.S. session was the ISM Non-Manufacturing PMI, which beat analyst. Ahead, investors prepare for a relatively busy economic Tuesday, with seven top-tier reports starting in the Asian session, starting with the interest rate decision coming from Australia. However, this will have a stronger effect in the currency market rather than in equities.

Crude oil for November delivery was recently trading at $70.50 per barrel, higher by $0.50. Crude oil headed only lower throughout the European session, but the U.S. open helped it reverse every point lost earlier and even gain a few more. Right now, crude oil is trading near the resistance area of the last five days of trading.

Crude Oil Technical View:

4 Hour chart trend: Mixed. Main price points: 73. Looking for: Wave II)

On the four hour wave count we are still looking for a possible flat pattern in a red corrective wave II), with wave c in process. We can count three waves up in wave a, three waves down in b and now the market is currently trading in higher leg c. Leg c of a flat pattern is the only wave that is sub-divided by a five wave move. As such, another push higher into wave v) of a black c is expected over the coming session.

If the wave count is correct then a flat pattern of wave II) should be completed around 73 dollars per barrel. Any near-term break of the 67.03 wave I area will suggest that the flat pattern is already done.

Gold for November delivery was recently trading up by $13.40 to $1017.70. Gold saw a flat overnight session, but then surged in the minutes following the better than expected ISM read. In just short period, gold gained approximately $15, to reach the highest value since Sep 24 09. For gold, the next resistance area is in the $1020 swing point high.

Treasuries notes traded mixed, regardless of the gains seen in the equity markets. Despite the long-term relationship between the two, the last three months of trading saw the debt and the equity markets moving uncorrelated, something that does not happen that often.

Written by TheLFB Trade Team.