Forex: Ding Ding...Round 2?!
Forex: Ding Ding...Round 2?!
If one were to look back upon the last year of price activity on the worldwide Forex markets, that person would be hard pressed to deny that it has been eventful to say the least. We have seen huge rallies and equal declines across the board for the US Dollar, hung Parliaments taking their toll on the Great British Pound, Juggernaut-like pushes through Parity Level and then back down again for the Australian Dollar, and that's all before we even give a mention to the Euro! But don't worry, we will get to the Euro in a little while.
Staying alert, sticking to a detailed trading plan and maintaining discipline across all money management practices has never been more vital than it is right now. The severity and ferocity of some of the moves we have seen this past twelve months in the currency arena is testament to uncertainty that the whole world faces on a global, economic and fundamental level. Attempting to read between the lines of any bit of information thrown our way could have rewarded the Forex trader handsomely one day, only to then go on to cripple him or her the very next. As discussed a few weeks ago in one of my previous articles, attempting to play the news releases in any currency pairing is a tough, and in many cases, almost fruitless exercise. We explored the price action and events leading up to November's earlier Non-Farm Employment figures with the below example of the EURUSD currency pair:
As we discussed, moving into early November of this year, we had seen a dominant uptrend for a number of weeks. We also talked about the difficulty of conditioning ourselves to only follow the trend, especially when faced with a strong wall of resistance or support, depending on the current trend. EURUSD showed itself to be rallying up to a key supply level of long-term resistance in the 1.4200 to 1.4500 area, which at the time, offered a low risk and high reward trading opportunity to sell. With support established at the 1.3500 to 1.3600 zone, we also had a significant area on which to focus our attention upon for any clues of further strength or pending weakness in the pairing. Looking at a chart of current activity on the EURUSD, we can see how things stand today on a Daily price chart:
In the last few weeks, the EURUSD did indeed fall strongly from the previous zone or resistance and easily broke through the previous demand offered by the daily price chart as expected. My reasons for looking at these examples are because they represent a unique and objectively based opportunity to discover a little insight into the short and mid-term future of the Euro against the US Dollar.
You see, as I mentioned at the start of this article, it has become increasingly challenging for any trader or investor to gauge the next move in the markets if they only choose to follow and reply upon the news and fundamental factors alone, mainly due to the ambiguity of emotions and opinions which news generally creates. We need to recognize that the market itself is a wide open space of variables and imbalances which are ultimately created by the uncertainty and behavior patterns which traders and speculators base their buying and selling decisions upon each and every day. No matter what events may transpire, it is virtually impossible to trade with a low risk and high reward edge if we ignore the subtle clues which price action alone presents us with.
As we all know, from a fundamental perspective, the Eurozone has been faced with an abundance of problems revolving around its issues with Sovereign Debt and individual nations' bankruptcies. First, we had Greece which eventually received help after weeks of debating among the members of the European Union and saw in the process a huge decline to the downside to the sub 1.2000 levels; albeit this drop in price was kick-started many months before this event when the pair was up and trading in the 1.5000 areas. So the price indeed did decline before the "official" fundamentals caught up, yet nevertheless, there were plenty of opportunities for the disciplined trader to join the downtrend of the time, only if they could wait for the best prices. However, once we hit the lows, the EURUSD put in an impressive rally back up to the previous highs of this month via an impressive rally in a relatively short period of time. From the sidelines of the economic world, the Eurozone's worries seemed to be contained for now and the trading world was once again more than happy to start buying the Euro again and dumping the relative safety of the Buck.
Fast-forward to right now. As we saw in the previous chart example, the EURUSD has been heading back down to the 1.3300 levels and momentum seems strong. Funny how from a fundamental perspective, the world has now been forced to deal with a much needed financial rescue package for a victim of bad debts within the European Union: Ireland. Is this a coincidence that price has fallen on the EURUSD alongside this damaging economic condition? While the answer to this question could be a collective "yes" from some trading and investing camps, it cannot be ignored that price was already falling in the currency pair before the actual Irish situation was confirmed - another instance where price and news are well out-of-sync with one another. As mentioned before, it is understandable why so many speculators struggle with reading the reports and using this information to make well-judged and profitable trading decisions.
Many of my readers know from my previous articles that I like to live a simple trading existence, and thus choose to use the price charts to find my next trading opportunity, as this allows me to focus my attention on remaining as objective and unemotional as possible. Sure, I do take an interest in the fundamentals in play, but I certainly do not use this data to guide the decision-making process. Rather, it becomes a guide of sorts for my longer term outlooks and forecasts when taking in the bigger picture. Having already seen a previous low risk and high reward trade opportunity on the EURUSD at 1.4200 from the technical charts, I can then combine this with my reading of the fundamentals, along with the bigger picture charts, to get a feel for what may be in store for the markets next. Let's go now to Weekly chart of the EURUSD
This chart shows us the current selloff in the Euro, with us sitting at the time of writing this article at 1.3373. However, of slightly greater concern is the fact that the last decent rally we saw in this pairing took place much lower than current levels and is highlighted in the article at the 1.2500 levels. If the serious players were only prepared to show themselves previously at this price point and the market has failed higher after a test of the 1.4250 benchmark, then we can only objectively conclude that should the fundamental situation with Contagion get any worse, prices on the EURUSD could well retest this support area in the coming weeks. Plus, the even larger-scale Monthly price chart confirms a subtle weakness in the currency pair as well:
Here we have the chart and price action both showing us clearly a series of lower lows and lower highs since the Euro topped out at 1.6000 back in early 2008. While the 1.2000 support may seem a long way off right now, we must do our best to remember that if price has traded there before, then there is absolutely no reason why it cannot ever trade there again.
First, we had the banks going under, leading to Round 1 of the Credit Crisis, and that left the economic community smarting. Now, we have the potential for Round 2: Whole-Nation Bankruptcy. It does offer a potentially overwhelming scenario for us all. Rest assured, whatever comes next for the Euro or the Broad Market as a whole, I would expect that with the scale of global uncertainty looming in the air currently, we could all be in store for higher levels of price volatility across the board. The beauty of trading Forex is that no matter if price goes up or down, there will always be an opportunity for profit around the corner for the well-planned and objectively positioned speculator if they are prepared to do the work.
Wishing you a great week,
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