Week in FX Europe – Bank of Japan and Fed pressure ECB both ways

• ECB Bank Stress Tests results stress EUR


• German Confidence falls again in October


• BOJ and Fed in the driver seat of Global monetary policy

The results of the European Banking Authority (EBA) stress tests were published on Sunday and so began a hard week for the EUR. Twenty four banks failed the stress tests, with Italian banks on the spotlight as nine found themselves on the black list. There is a 25 billion capital hole for the European financial system.

EUR/USD continued to lose ground, as the pair trades in the mid–1.25 range after trading below 1.25 as a reaction to the Bank of Japan stimulus announcement. In the Eurozone, German Retail Sales posted a sharp decline of 3.2%. French Consumer Spending came in at –0.8%.

It’s been a rough week for German releases, as the Eurozone’s largest economy continues to struggle. The Ifo Institute Business Climate survey fell to a six month low. Germany depends on exports to grow and it is now under threat from geopolitical turmoil such as the situation in Ukraine and with monetary policy moves such as the ones announced this week by the Bank of Japan and the U.S. Fed.

On Friday, German Retail Sales were dismal, plunging by 3.5%. This marked the sharpest decline since October 2007. The markets had expected a decline of 0.8%. Consumer Climate and CPI softened in September, although Unemployment Change was better than expected. Meanwhile, Eurozone CPI edged upwards to 0.4%, matching the forecast. Core CPI and the Unemployment Rate remained unchanged, at 0.7% and 11.5% respectively.

The European Central Bank will release its minimum bid rate announcement next week where no change is expected followed by a press conference. ECB President Mario Draghi will continue to struggle as he has no answers for the market questions. He will redirect the attention to the EU governments who need to step up their commitment to growth by allowing sovereign debt to be part of the stimulus menu. Without that, the ECB has its hands tied as there is only so much that can be done. On the other hand it has left the market speculating about other options and even the rumours of corporate bond buying have trigged EUR negative moves.

The Bank of Japan was under pressure as Abenomics was running out of steam and the 2% inflation goal in a two year timeline was getting further away. In a surprise move the BOJ added to its current stimulus and gave the market the signal to take more risk. The flip-side of this action was the U.S. Federal Reserve which announced the end of quantitative easing and although giving no time commitments is on track to raise rates next year. The ECB by comparison stands alone as a Central Bank who needs to act, but it is prevented from doing anything meaningful by the European political quagmire. Both CBs put pressure on the ECB, that hopefully it can help to help unlock the EU’s divisions amongst nations regarding the much needed stimulus.

Next week in Europe

There are two major events during the week. The Bank of England and the European Central Bank will announce their benchmark rate. As with the RBA there are no changes expected as the BOJ seems to once again lead with example on the stimulus front as it did in 2013. The BOE could take a cue from the Fed and begin cutting back on its bond-buying program, but that seems unlikely given the dark clouds that have begun to appear above the UK economy and upcoming elections next year reward prudence over speedy action.

The U.S. Non-farm payrolls will be published on Friday. The biggest economic indicator in the forex market can further validate the Fed’s decision to end its quantitative easing program off the table and build more confidence in the growth of the U.S. economy. This in turn would boost the USD strength versus all pairs. Last month’s figures came in at 248,000 added jobs and while expectations are for a lower number as long as it is above 200,000 it can justify the strong USD position.

For more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* USD ISM Manufacturing

* AUD Reserve Bank of Australia Rate Decision

* NZD Unemployment Rate

* AUD Unemployment Rate

* GBP BOE Asset Purchase Target

* GBP Bank of England Rate Decision

* EUR European Central Bank Rate Decision

* USD Change in Non-farm Payrolls

* CAD Unemployment Rate

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Has the Weakness in the Oil Market Fueled the Decline of UNG?

The natural gas market cooled down as the natural gas ETF United States Natural Gas (UNG) plunged by 12.5% since the beginning of the month. The oil market also loosened up as crude oil prices tumbled down by 11% during…

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Predictions on the Major Currency Pairs for November

Only a couple of trading days are remaining in the month of October. Whereas the month of September was strongly bearish for the EURUSD, GBPUSD, AUDUSD and NZDUSD, the October month is not showing any resemblance to the previous month. The USD strength, so far, was not able to push further. For a review of the EURUSD and USDCAD click here and for the AUDUSD here.

NZDUSD CONTEST: BEARS WIN

Nathan talked about the Kiwi in his article more than a month ago: the NZDUSD Decision Point (Comment Contest). Those Forex traders that chose the bearish side won the contest – congrats to the bears! And for the bulls: better luck next time– it was only a contest anyhow.

Back to the Kiwi: this pair was an excellent example of the USD strength. The currency pair posted 3 bearish candles in a row but had the largest one in September. The October trading month, however, has so far been incapable of breaking the September low and the odds of that changing are slim.

NZDUSD BEAR-BULL LINES

An impressive 1,100 pip fall stopped at a heartbeat when it reached the weekly bottom (green circle). Price then bounced up 300+ pips but was unable to break above the broken support trend lines because it turned into resistance.

The most eye catching question at the moment is:

1. Will the NZDUSD use the resistance as a bouncing spot for a continuation of the down trend;


2. OR will the NZDUSD bearish break turn out to be ‘false’ and can price fight itself back above the support trend lines?

Personally I am expecting a bigger bullish retracement in November to occur before bearish momentum continues. However, to remove bias from trading, I will use the resistance spots (trend lines and top) and the support level as the decision spots or the ‘lines in the sand’.

1. As long as price stays in between the S&R, it could easily continue with a drawn out consolidation but the playing field changes when a break occurs;


2. The NZDUSD is bullish upon an upside break and bearish upon a downside break;


3. Upon a breakout Forex traders are always vulnerable to pullbacks and false breakouts so it could best to have patience before trading the break. But price certainly has entered a bearish or bullish zone.

Personally I would not be surprised to see price action unfold as mentioned in the screenshot below but I am using confirmation levels and events before any actual trading is implemented.

YOUR DECISION TIME

How do you see the month of November? Will the November candle close bullish or bearish or as a doji? (A candle will be counted as a Doji if the candle close is within 10% of the candle open in comparison to the entire candle measured from high to low.) I personally will choose the Doji for November and a bearish candle for December.

Those that lost the previous contest have a chance to take ‘revenge’; whereas the winners of the contest have an opportunity to confirm their winning streak. Join us and write in the comments whether you expect a bearish, bullish or Doji month of November!

Thank you for sharing this article on the web and wish you Happy Hunting!

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Many Factors Behind Oil’s Decline

The reasons oil prices started sliding in June were hiding in plain sight: growth in U.S. production, sputtering demand from Europe and China, Mideast violence that threatened to disrupt supplies and never did.

After three-and-a-half months of slow decline, the tipping point for a steeper drop came on Oct. 1, said Ray Carbone, president of broker Paramount Options Inc. That’s when Saudi Arabia cut prices for its biggest customers. The move signaled that the world’s largest exporter would rather defend its market share than prop up prices.

“That, for me, was the giveaway,” Carbone said in an Oct. 28 phone interview from his New York office. “Once it started going, it was relentless.”

Bloomberg

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The Number One Handbook on Trend Lines in Forex Part 5

Our series on TREND LINES (TL) in the Forex market continues with part 5! Today we focus on solving potential problems that could occur when using trend lines (TL) in real live Forex trading. There is a difference between the “perfect theory” and “actual implementation” and this part tries to bridge the gap.

If you would like review the previous parts of the series on trend lines, please click on these links:

• Part 1


• Part 2


• Part 3


• Part 4

In this post problems and answers will be compiled to help traders with solving practical issues.

PROBLEM 1 SHALLOW TREND LINES (TL)

Is it possible to trade very shallow trend lines? Yes but with caution. The danger of very shallow trend lines is the fact that a horizontal support and resistance (S&R) is close by. When price breaks through one layer of S&R, the horizontal level could stop price from continuing. There are a few ways to handle it:

1. Take the TL break and ignore the horizontal level;
   
   
   
   1. Good for small pauses in overall big trend;
   
   
   2. In strong trends price keeps pushing and previous S&R was only a short stopping point for further trend continuation;
   
   
   
   

• Wait for a strong candle close (near high or low) to break TL and/or horizontal level;

1. Good if there is doubt about S&R strength;


2. Most useful if trend line correction is relatively big compared to trend;

• Wait for the horizontal level to break;

1. With strong S&R levels it could be better to wait for an actual break of that level;


2. A risk of a false break out is always present, which can be partially countered by waiting for candle stick confirmations (see B);

• Skip the setup and move on to new currency pairs.

Method A is the most “aggressive” and D the best “conservative.”

PROBLEM 2 STEEP TREND LINES (TL)

Steep trend lines are often viewed as more difficult to trade. It is true that steep trend lines tend to break quickly but without necessarily moving much to the opposite direction. Steep trend lines are most useful to trade when price is going against the bigger trend. In these cases, a break of steep trend line could equal to a completed retracement and a bigger trend continuation. Trading breaks of steeper trend lines against the trend is extremely dangerous and only very seasoned traders might attempt it. Steep trend lines however could be a good method to trail stop a trade (locking more profit along the way).

PROBLEM 3 HORIZONTAL TREND LINES (TL)

Trading the break of a horizontal support or resistance line can especially be troubling because price often encounters volatility upon the break. Price breaks a bottom or top but then quickly reverts to the opposite direction, which can be a very frustrating and painful experience. I see this particular pattern occur often on the GBPUSD.

Any breakout is vulnerable to a pullback – immediately (dark green example) or later on (light green example). Only in some cases does price continue flawlessly (blue). As a Forex trader our options are limited but we can use:

• Candle closes and wicks to measure strength of break;


• Divergence to determine if there is any weakness;


• Multiple time frame analysis to zoom in and out and see the break from various angles.

EXERCISE: practice the above by finding a trend and drawing shallow and steep trend lines on it. Post the chart down below.

PROBLEM 4 HOW TO MEASURE DEGREES

In various parts of this series on trend lines I mentioned that trend lines have various angles. It is important to emphasize that the measurements are rough approximations and certainly not a precise figure. When I write that shallow trend lines have 0-10 degree angle, this is just used as a rough indication. The most important is to realize that there are shallow (outer), normal (trend), and steep (inner) lines.

PROBLEM 5 HOW MANY TREND LINES TO DRAW

I like to draw many trend lines in all directions: the more the better because extra information is available. It really does not matter if the trend line is angled up or down and whether there is a range or up/down trend. BUT… Forex traders must keep a balance and ensure that the chart does not become overcrowded; otherwise this could lead to paralysis of analysis during trading.

Basically, I am happy to keep as many trend lines on the chart as long as the trend line is relevant and I can keep a clear vision of the charts with each trend line. Here are some extra pointers:

• Drawing multiple trend lines is a great benefit because the lines provide a zone of support and resistance rather than just a single point of reference (like a fan).


• Using the same top or bottom twice or three times for different trend lines is perfectly fine.


• The trend line does not have to start at a top or bottom but could be from the middle of a swing as well, as long as it adds values, has sufficient hits and is near price.

Ultimately if I do need to remove trend lines to make the charts more readable, I make decisions based on how many price hits the trend line has, how close it is till price, and how neat (wicks/candle outside) the trend line is. In the screenshot below I drew a ton of trend lines but not all of them need to be on the chart. The orange ones can be easily removed either because current price is far from the trend line or the information is too duplicated. The purple trend lines could be the ones that are left on the chart after the orange ones are gone. This is just an example; some traders might add or remove more trend lines depending on their personal preference.

EXERCISE: practice the above by drawing multiple trend lines and show which charts are ok (purple) and which ones are irrelevant (orange). Post the chart down below.

NEXT WEEK’S GOAL

Next week’s article (part 6) will continue with more problem solving of trend lines and also dive into the real practical side of trend lines. What are the best ways of using trend lines? What trade setups are possible with trend lines? That and more can be found in part 6.

Don’t forget to post the exercises down below. Thanks for sharing this article and wish you Happy Trading and a nice weekend.

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Is SLV A Better Buying Opportunity Over GLD?

Shares Silver Trust (SLV) resumed its downward trend and shed 0.5% off its value. Considering the ratio between SPDR Gold (GLD) and SLV picked up in the past few weeks, does this make SLV a better buying opportunity over GLD?…

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Why Forex Traders must Embrace the Road Map

Occasionally you will see a post referring to my prediction of potential big price movements. I did this with the USD strength (here), the Gold weakness (here), the Aussie weakness (here) and the Yen weakness (here). As an analyst and writer it makes sense to provide our readers with a heads-up of potential major trends in the future. But the information itself does not generate profits – only trading can.

REACT; DON’T PREDICT

Forex traders want to let the market move wherever it wants to, then they should base their reaction (plan) on that price action. Never do we want to solely trade a prediction and ‘hope’ that the market confirms our analysis. This sets up Forex traders with tons of emotions and quickly imbalances their execution of a(ny) plan. We have to accept the fact that we, as traders, cannot ‘control’ the market, which means that we are always unsure about our trade developing (but we don’t have to be unsure about our trade!).

The best way to generate consistent Forex profits is by setting up a trading plan and following that plan. End of story -regardless of whether your entry and exit plan is built on a discretionary or non-discretionary method.

ROAD MAP READERS

Forex traders are more like road map readers: they are trying to find the quickest and safest way on the map from point A to point B. The graph is a trader’s compass and candles, patterns, trends, support and resistance are clues that traders find along the way. The way we use those clues depends on our plan. There is no need and time for second guessing and second doubting.

Of course, all of our readers do not share a common trading plan, but let us take an example of the AUDUSD. As a discretionary trader, I have biased for shorts because of the strong downtrend and bearish momentum prior to the diamond chart pattern consolidation.

AUDUSD CHARTS

The trend itself is not sufficient to justify a short – especially if price itself is reacting bullishly. I might want price to go down or think it ‘certainly’ will, but this does not justify taking a trade and hoping for the best. As a road map reader (discretionary one in this article), I am waiting for confirmation clues that price is indeed turning back into a bearish mode or already in it. And until those confirmations are seen on the chart, I need to stay disciplined and patient so I can avoid unneeded pain or losses by jumping in the market too early.

There are many different types of confirmation clues such as break or bounce of trend lines, extremes in oscillators, divergence, price action, chart patterns, candle sticks and just plain candles. In this case I will be waiting for false bullish break out and wait for a 4-hour or daily rejection candle stick or candlestick pattern as price moves up. The other signal could be the bearish break of the consolidation.

Do you agree with the map reader philosophy? If yes, why? If not, why not? Share your views with the WET community! What tools and indicators do you use to keep your focus on map reading?

Thanks for sharing and Happy Hunting!

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The End Is Nigh for American Quantitative Easing

The U.S. Federal Reserve will end its US$ 3-trillion quantitative easing (QE) program at its October Federal Open Market Committee (FOMC) meeting on October 29.

It’s a momentous occasion that truly marks the end of the Ben Bernanke era at the Fed; the former chair introduced QE in a bid to save the American economy from ruin in November 2008. It also indicates the Fed’s confidence in the state of the strengthening U.S. economy, but who’s to say the central bank won’t whip out this policy tool again should necessity demand it?

Last year, a mere statement from Bernanke about the Fed’s plans to reduce the amount of bond-buying drove markets into a tailspin. Emerging markets in particular absorbed huge losses after benefitting from global investors’ search for yield in a prolonged low-rate environment.

The actual start of tapering last December was not as influential, however, as it marked the beginning of a process that in the eyes of the market ends not with the end of QE, but an interest rate increase. During her first press conference following her first FOMC meeting, then newly elected Chair Janet Yellen made the rookie error of mentioning that rate hikes would begin six months after the end of tapering. Financial journalists in attendance at that event did quick math to figure out that QE would end this fall (and it is), which would take the Fed until spring 2015 before initiating a rate hike. Since then, the Fed has tried to distance itself from those comments by encouraging the market not to focus on the schedule, but rather on economic fundamentals, as they will dictate the schedule and not the other way around.

How Soon Is Now?

Overall, the Fed has done a poor job of communicating its intentions to the market these last few months. It further complicated its messaging via a series of conflicting Fed member statements. In its own official forecast, the Fed does not plan on a rate hike in the first half of 2015, yet its end-of-the-year forecast calls for an increase over the near-zero interest rates we have today.

This means the Fed has pushed back the start of the rate-hike cycle, potentially resulting in an accelerated rate of hikes. It is uncertain at this point which one will be more disruptive to the markets. The Fed wants to keep things calm but by its own actions it’s creating uncertainty and volatility, only to repeatedly dismiss committee members’ comments to curtail market panic.

This cycle of sustained low rates and stimulus has spurred global market indexes to break records while siphoning liquidity from other markets as investors pour into speculative investments with an attractive return. The Fed has strongly hinted that this era will end soon. How soon is now? The Fed can’t say because it all depends on the U.S. economy and how it will react to what the Fed does.

Global Inflation Worries Abound

Inflation stateside is weak and it remains a worrisome matter for the Fed but the U.S. in a much better place on that score than Europe and Japan. Europe is facing a very real threat of deflation similar to the one experienced in Japan in the now two “lost” decades.

Japanese Prime Minister Shinzo Abe pledged to end his country’s chronic low inflation which discourages consumers and subsequently gross domestic product growth by launching a three-pronged strategy dubbed ‘Abenomics.’ His three arrows were launched in early 2013 but only the first one — monetary stimulus by the Bank of Japan — has been truly effective. Europe faces a political quagmire in order to be able to launch similar stimulus.

The European Central Bank (ECB), meanwhile, has its hands tied as it’s looking for alternative ways to stimulate the ailing eurozone economy. Germany stands as the biggest roadblock to eurozone stimulus, as domestically it is not seen as the right solution, and it could result in political backlash if German funds are used to bail out other nations viewed as irresponsible.

An Uncertain Road Ahead

The Fed remains in the lead as the major central bank most likely to raise rates first. Previously, it was the Bank of England (BoE) the market largely expected to spike rates as the U.K.’s economic recovery outperformed earlier this year, hoodwinking the Old Lady’s own economists. That left the market wondering if the BoE was out of touch with its own economy. Governor Mark Carney changed his dovish tone to accommodate the improved economic weather only to watch it turn on him again as new warning signs threatened the trajectory of U.K. economic growth. The end result pushed expectations of a BoE rate hike well into 2015.

Analysts expect the Fed will stick to its script and announce an end to QE. The language from the statement will be the closely scrutinized as there will be no press conference from Yellen to give further insights. Though the U.S. economy has suffered minor setbacks like downbeat retail sales figures that shrank-0.3% in September, the market overreacted to the data with one of the worst selloffs in history. The global economy remains highly dependent on U.S. economic growth and any indicators that point to weakness will be more heavily penalized by markets as investors won’t hesitate to flock to safety.

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Actively Applying Trend Lines to 4 Forex Charts

During the recent weeks Winners Edge Trading has released an entire series on trend lines and how Forex traders can use trend lines for their trading decisions. This article will use these trend line articles to review and analyze today’s Forex market and make a watch list of interesting pairs and setups.

#1 GBPAUD

The GBPAUD is in a chart pattern called the contracting triangle or wedge. Price is posting higher lows but also lower highs, which is a classical sign of a range. So which trend lines are important?

The red and dark green trend lines are the main ones to monitor: a breakout above resistance or below support is the main breakout scenario although waiting for the confirmation of a break is also merited. The other trend lines are good to keep on the charts to remember where the targets are located.

#2 USDCAD

The USDCAD is also caught in a tight consolidation zone. The green trend lines represent the falling wedge chart pattern which is often a reversal signal. The longer term trend is certainly still pointed up (green arrow) so a break of the falling wedge could indicate the continuation of the bullish momentum.

1. Bullish space is visible above the rising wedge and resistance (green zones);


2. Bearish space is visible up on the break of support (blue & green) trend lines (red zones);


3. Price is now in ‘neutral’ territory (blue zones).

#3 EURUSD

The EURUSD downtrend gave way for a massive bear flag consolidation (blue channel lines). Price is clearly at a decision spot:

1. The break of support for a bearish setup or;


2. The bounce at support for a bullish rally and further extension of the consolidation.

The screenshot shows you where I mentally have placed the bullish, bearish, and neutral zones (circles) and likely bouncing spots (arrows) depending on the trend lines:

#4 GBPJPY

The GBPJPY is rebounding back up strongly after an even sharper decline. The ‘Ferrari’ of the currency market has stalled at the -27.2 target after bouncing at the 38.2 Fibonacci retracement level. If price is able to make it up towards the -61.8 target then it would need to break through various layers of resistance. Bearish territory is only visible after a break of various support lines and channels. Please see this screenshot for the full visual picture.

Remember that these 4 currency pairs have interesting trend lines but before they can be actually traded it is always recommended to wait patiently for confirmation of one’s analysis as to remove the bias from our views on the charts and potential setups.

As our help to traders, we are offering you the opportunity to post your charts and got review for free of charge: pick a chart and draw all of the relevant trend lines on it. If possible, indicate or write which zones are bearish, bullish or neutral. Then after that we will post our feedback on it. Looking forward to your charts!

Thanks for sharing and wish you Happy Trading!

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Financial Market Forecast for October 27-31

Major commodities including gold, silver and crude oil resumed their downward trend, while the U.S. gained some of its losses back from earlier this month. This week the main events will revolve around the before last FOMC meeting for the…

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Asian Equities Higher After Most European Banks Pass Stress Tests

Markets in Asia were mostly up and European exchanges were expected to open higher on Monday, as investors appeared to shrug off news that most European banks received a clean bill of health from the European Central Bank.

The E.C.B. said on Sunday that 25 European banks had failed crucial stress tests to determine whether they could withstand a financial crisis, leaving a shortfall of 25 billion euros, or about $ 31 billion, in cash. The tests were widely watched as a measure of whether European banks, ravaged by the financial crisis, were finally turning the corner.

But no major European bank failed the yearlong audit, which was based on bank figures from the end of 2013. Since the start of the year, some of banks have raised fresh money to fill existing holes, but 13 of the 25 banks that failed have not yet raised enough money. These are mainly Italian and Greek banks.

NY Times

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