How Far Will the EUR, GBP and AUD Sell Off?
I have been teaching many webinars and classes over the last few weeks, and I have been running into some interesting questions across the board. One of them is how far will the EUR/USD, GBP/USD or AUD/USD sell off?
One other interesting thing to note was the follow up questions coming in like the birds from the Alfred Hitchcock movie, which was, where is a good support level to buy these pairs?
Of the two questions, the latter was the more disturbing but understandable. The EUR/USD has been trending strong since 2006. The pair had yet to complete more than one 61.8% retracement of any major up leg during that time and no real reversal pattern had shown itself on the charts (until now).
Thus, it led me to believe that traders were still married to the idea the EUR/USD was going up. Although I am not in disagreement with this view over the medium or long term, my guess is they were thinking more short term and did not have the account sizes to hold onto significant losses.
A look at the charts below could explain why I am not even remotely looking for levels to buy the EUR/USD. Just a brief look at the weekly chart could not produce one indicator that was in favor of buying. We had the largest weekly close in over a year (500+ pip decline) and a close 7 pips from the low, suggested there was no profit taking whatsoever. On top of this, look at the massive divergence in the Momentum and MACD histogram, all showing significant divergence between
the two tops.
The next chart on the daily time frame shows neither the momentum indicator, nor MACD histogram, nor 20 EMA, nor Bollinger Bands (set at 2.5 STD) suggesting a reversal was in the cards as they are all either: 1) pointing down sharply or 2) in the case of the bands, still in a relative expansion mode with the upper BB still not even turning downward (often a first sign the leg is coming to an end).
Also to note is the M Type Top. Of all the up legs for this pair over the last 3 years, none has produced a reversal pattern and the only close call of a potential double top (Nov ’07 to Jan ’08) turned into an upward wedge and broke out. Thus, to me this is really significant as it’s the only legitimate reversal pattern to get officially activated and could easily send this pair to the 1.45 and 1.4450 level which would be the completion of this M-Type top.
The third chart on the 1H shows how the price action was contained within the 1 and 2.5STD for the last 30+ hours of last week and only until recently has it been able to find a cameo near the upper band, suggestive of constant and accelerative selling.
Also, notice the hour the selling started. It was not a moody Zeus who struck lightning down on this pair, but the The European Central Bank (ECB) head, Jean-Claude Trichet, switched to a less than expected hawkish, albeit almost neutral stance and hence, the selling came in full force.
I personally have no interest in analyzing the fundamentals and really got all the information I needed from the charts. From what is being presented, everything in the charts suggests the pair has more to go. When the indicators turn upward, then we will no longer be looking to sell.
One thing we should see if a reversal is being brewed is in the 4th chart (daily) is a change in the BB’s. Usually the opposite BB starts to move towards the price action when the move is coming to an end and in this case would create a new low when the trend has ended for this leg. A great example of this was during the 1600 pip run from 1.44 to 1.60. Notice the two turning points in the lower BB, 1) the curling upward and 2) the making a new high which marked the end of the dance. Look for something similar to this on the daily charts for this pair before the leg is over.
Thus, unless the oscillators turn upward or the BB’s start to contract and turn in the method we noted, the likelihood of the 1.49 and 1.48 handles holding decrease significantly.
Chris Capre is the Founder of Second Skies LLC which specializes in Trading Systems, Private Mentoring and Advisory services. He has worked for one of the largest retail brokers in the FX market (FXCM) and is now the Fund Manager for White Knight Investments (www.whiteknightfxi.com/index.html). For more information about his services or his company, visit www.2ndskies.com.