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Range, Break or Trend Conditions for Dollar, Euro, Pound?

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Markets Talking Points::

  • We have seen some wild swings from the likes of the S&P 500 and oil recently, but these are not trend-type markets
  • Dollar is facing a restrictive range and persistent volatility and its deals with a host of competing fundamental themes
  • Brexit’s constant presence translates into erratic Pound ranges, Euro is perhaps best poised to find a range among majors

See how retail traders are positioning in the Dollar through pairs like EURUSD, GBPUSD and USDJPY as well as indices, gold and oil intraday using theDailyFX speculative positioningdata on the sentiment page.

There are Three General Market Types

There are many ways to define a market. We can look at it as more sensitive to fundamental or fundamentals. It can be qualified as an investor or speculative environment. Certain assets can be claimed to be favored over others with universal implications. However, I find one of the most appropriate designations of market type regardless of asset or regions is the qualification of conditions best defined as range, trend or breakout. Qualifying markets in this way, few traders would likely struggle to come up with criteria to identify what category an asset would fit into at any given time. Yet, recognizing these phases and establishing clear metrics to identify which we are dealing can significantly help our analysis. A trending market is one whereby there is a clear underlying direction for the market with tempo that is not readily sidetracked by congestion. Bias in response to event risk – where bullish news is leverage and bearish is downplayed (and vice versa) – can help as a fundamental litmus test. The opposite state is a range market where by progress remains elusive with relatively controlled volatility finding a reliable price span for which the market seems incapable of surpassing. As for breakout conditions, range boundaries may be in site, but the addition of volatility and growing speculative skew threatens to break the calm and establish some basis for a strong projection after the overt boundary is cleared. Normal markets pass through all three states, so it stands to reason we should be able to identify and trade through all three. That said, few traders endeavor to acclimate to this evolution and thereby put themselves unwittingly at a disadvantage.

Chart of VIX and Volume for the S&P 500 (Weekly)

Range, Break or Trend Conditions for Dollar, Euro, Pound?

A Systemic Backdrop Makes for a Strong Range Bias

While different currencies and different markets can experience unique and disparate states, the financial system typically supports a general backdrop by which most assets will abide at any given time. This reflects upon an environment that is unique from technical and fundamental considerations. More or less participation in financial markets, propensity for increased volatility, a channeling of capital towards riskier assets and other systemic considerations can do more to determine sustained market influence than any major technical patterns or broad fundamental theme. Taking stock of our present circumstances, it would seem rather clear that we are facing markets that are beholden to broader ranges but still exposed to higher levels of volatility. That is the general assessment drawn from the likes of the S&P 500, emerging market assets and other prominent benchmarks. What is creating this frustrating mix (most traders prefer large reversals or sustained trends)? After a decade of speculative reach promoted by central bank accommodation as much as a robust economic backdrop, we have developed a warped sense of complacency. There is a strong resistance to seeing a true collapse owing largely to habit, but recognition of troubles keeps new highs out of reach. With a laundry list of transitional fundamental themes and a thinned market awaiting clear indication of trend commitment, there is a ready channel for volatility but a high barrier to re-establishing trend.

Chart of S&P 500 and Fed Balance Sheet (Weekly)

Range, Break or Trend Conditions for Dollar, Euro, Pound?

Dollar, Euro and Pound Conditions

With the general status set, we can consider the world’s most liquid currencies stand in the spectrum. First, the US Dollar. The world’s most liquid currency is standing at the extreme end of the monetary policy curve with a hawkish policy effort that no other major central bank has come close to matching in the modern market epoch. Then again, a hawkish advantage will eventually be priced in and becomes a burden when such a significant advantage starts to deflate. Add to that mix, risk trends and the picture blurs even further. In extreme risk aversion, the Dollar is an absolute safe haven but charged speculative reach means its yield advantage is once again a prize. Lack of commitment on risk trends translates to an anchor when it comes to the USD. With these considerations, it is perhaps less surprising to see the 20-day ATR on the DXY Dollar Index drop to levels comparable to the holiday transition from 2017 to 2018 – and before that, the Summer of 2014. Expecting healthy volatility but observance of range is reasonable. For the Euro, many will reference EURUSD. Yet, when we look to an equally-weighted Euro Index, a more remarkable picture of the second most liquid currency comes into focus. Since the incredible rally through 2017 on the back of interest rate expectations, we have seen the currency only retrace a portion of its questionable gains. That said, it has made frequent and heavy visits to the same proximate support. Witch fears around ECB policy intentions and regional growth rising, this is perhaps one of the most likely currencies to establish a trend. As for the British Pound, fundamentals play an enormous role in its proclivities. Brexit is an overbearing uncertainty for the future of the currency and it is unclear just how the situation will play out. Headlines can generate sudden waves and the ‘right’ update can even trigger near-term breaks. Yet, short of an absolute setting for this open-ended threat, the Pound will find its convictions stall. As such, expect volatility with possible breaks but very limited follow through. We look at the market environment and trade setting for the world’s three most liquid currencies in this Quick Take video.

Chart of Dollar Overlaid with Euro Index in Blue and Pound Index in Green (Weekly)

Range, Break or Trend Conditions for Dollar, Euro, Pound?

If you want to download my Manic-Crisis calendar, you can find the updated file here.



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Forex

Traders Net-Short Are 63.3% Higher from Last Week

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US500,SP500

TRADERS REMAIN NET-SHORT

US 500: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.07 to 1. In fact, traders have remained net-short since Jan 07 when US 500 traded near 2473.53; price has moved 11.9% higher since then. The number of traders net-long is 1.7% higher than yesterday and 1.6% lower from last week, while the number of traders net-short is 5.2% higher than yesterday and 63.3% higher from last week.

For more in-depth analysis, check out the Q1 2019 Forecast for Equities

S&P 500 SUGGESTS STRONG BULLISH BIAS

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bullish contrarian trading bias.

— Written by Nancy Pakbaz, CFA, DailyFX Research

Follow Nancy on Twitter @NancyPakbazFX



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On to the Next Big Levels of Resistance

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S&P 500/Dow Jones/Nasdaq 100 Technical Highlights:

  • S&P 500 nearing 2800-area, several swing-highs from last year
  • Dow Jones 26k-ish stands between it and record highs
  • Nasdaq 100 trading around resistance already

Check out the forecasts for Global Stock Indices and other markets on the Trading Guides page.

S&P 500 nearing 2800-area, several swing-highs from last year

The S&P 500 is continuing to show impressive strength since its v-bottom began the day after Christmas, with it having a few points along the way where it could have been stopped in its tracks. But it wasn’t, and this has levels prior to the December swoon in view. The area surrounding 2800 is a big one.

From 2800 up to 2817 there were three peaks created from failed rallies, a logical area, with the rally having come this far, to look for stocks to weaken from. Watching price action will be key, as always, but especially around the levels just ahead.

While resistance looks likely to get tested soon, the upward channel structure over the past month will keep stocks pointed higher for as long as it holds. If the S&P is rejected off resistance, to further bolster the notion of a sizable retracement we’ll need to see the underside parallel undermined.

For now, the top-side must be respected, but the time for material weakness may be nearing…

Stocks are rallying, but will it last in the long-term? Find out where our analysts see stocks headed in the Global Equities Forecast.

S&P 500 Daily Chart (2800/817 big spot)

S&P 500 daily chart, 2800/817 big spot

Dow Jones 26k-ish stands between it and record highs

The Dow is nearing the 26k-area, a spot which is basically the equivalent of what 2800 is to the S&P 500. The zone runs up to near 26300. The focus is primarily on the S&P right now as it is the broader index, but depending on how price action plays out, the Dow may be the better index to short at some point if it shows relative weakness to the broader market.

Dow Daily Chart (26k-ish stands in the way)

Dow daily chart, 26k-ish stands in the way

Nasdaq 100 trading around resistance already

The Nasdaq 100 continues to lag behind, which is something to continue monitor given it was the bull-market leader with its leading group of stocks – FAANG – dominating price action and sentiment. The NDX is trading around the 200-day and near late-year swing highs equivalent to the ones discussed with regard to the S&P 500 and Dow. So far, relative weakness is making the 100 the preferred fade if the S&P finds material selling off resistance surrounding 2800/17.

Nasdaq 100 Daily Chart (trading around resistance)

Nasdaq 100 daily chart, trading around resistance

To learn more about U.S. indices, check out “The Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities.” You can join me every Wednesday at 10 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.

Tools for Forex & CFD Traders

Whether you are a beginning or experienced trader, DailyFX has several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX



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Aussie Dollar Falls on RBA Minutes, US-China Trade Talks Eyed

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TALKING POINTS – AUSSIE DOLLAR, RBA MINUTES, ZEW, TRADE WARS, CHINA

  • Aussie Dollar, commodity bloc FX down on downbeat RBA meeting minutes
  • Germany’s ZEW survey may compound worries about slowing global growth
  • Trade wars in focus on US-China negotiations, fears of US auto tariff hike

The sentiment-linked Australian, Canadian and New Zealand Dollars weakened in otherwise quiet Asia Pacific trade. The move appeared to be inspired by an ominous tone in minutes from February’s RBA policy meeting. Meanwhile, the US Dollar corrected gently higher.

RBA officials cited “significant uncertainties”, noting that trade tensions and cooling domestic demand have increased negative knock-on risks from China. They added that consumption may fall if domestic house prices fall much further. They suffered the worst drop since 1983 in the three months through January.

TRADE WAR DEVELOPMENTS, GERMAN ZEW DATA MENACE MARKETS

Looking ahead, Germany’s ZEW survey of analyst sentiment may compound the downbeat mood, especially if it echoes the disappointing trend in regional data outcomes since September. A small improvement in the forward-looking Expectations index is nevertheless expected to keep it within a hair of six-year lows.

The tone of US-China trade negotiations may also be formative as a delegation from Beijing arrives in the US for continued talks. Both sides painted a rosy picture earlier in the week, but the Trump administration may be preparing a spoiler as the President ponders raising auto import tariffs.

What are we trading? See the DailyFX team’s top trade ideas for 2019 and find out!

ASIA PACIFIC TRADING SESSION

Asia Pacific Trade Economic Calendar

EUROPEAN TRADING SESSION

Europe Trade Economic Calendar

** All times listed in GMT. See the full economic calendar here.

FX TRADING RESOURCES

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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