Forex Trading Alert

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Gosh I must be crazy trying to call all these tops and bottoms.  I made a bottom picking call on the Dow Jones Industrial Average and now I am still calling for a top in the US dollar index!

Again I absolute hate trying to call tops and bottoms and who doesn’t.  It is not a very high probability business.  But sometimes if you watch markets closely enough you can make a good case for either a top or a bottom.  In this case we are looking here once again at the US dollar index chart.

This is actually the weekly US dollar index chart in candlestick formation.  What I find interesting about this chart is that once again we have what appears to be an indecision doji weekly candlestick.  A doji candlestick is something you want to watch out for when following price charts especially when they show up after a significant uptrend or downtrend.  In this case we have an uptrend in the US dollar index since the December of last year time frame.  But again keep in mind that this is a weekly chart and so the time implications are somewhat grander than daily charts.

Anyway the reason the doji is important is because it could be indicating a change in trend, in this case to the downside for the US dollar index.  The two orange arrows show where two dojis appear.  The other one that happened last year was the precursor (is that a word???) to a 4 week devastating plunge for the US Dollar Index.

We will have to see if it happens this time again.  But even if it doesn’t, a weekly decline next week for the US dollar could potentially make the statement this this new marginal high was a failure and a false break to the upside which has bearish implications going forward.

Incidentally a plunging US Dollar for the next 4 weeks would fit in perfectly with a US stock market major major bounce as I alluded to at the beginning of this post (see link at the top of this post).  It would also fit in quite nicely with a mega breakout in the gold price to new all time highs.

Is it possible that the US dollar index has topped here?  Picking tops is definitely not a high probability business.  However there may be some cross currents developing now that could suggest we are seeing the dollar put in a major top.  If true this would mean we will soon see large upside bounces in several European currencies as well.  Indeed, the Euro looks like it may have bottomed here.

Looking at the US Dollar Index chart you can see that in the last few days it has managed to squeak out a new 52 week high.

However if you look closely at the nature of the price breakout, to me it does not instill a lot of confidence that this was a valid breakout.  Why? Well whenever I see breakouts I like to see a wide price spread and then a possible retest.  But this breakout looks weak at best and then today in the US Dollar Index we had quite a sharp reversal back to support.

It would definitely be very bearish in my book if we see the US dollar index close back under 87.88 and then get a weekly close under there.  Will it happen? We will just have to wait and see. But for now this looks probably to me and I do think we have at least the potential for a significant top right here.

What if I am wrong?  Well the signal that I am wrong will be that we adequately hold support here at 87.88 and then resume higher very strongly.  So that is the play right now in the US Dollar Index. Lets see how it pans out.

The NZD USD New Zealand dollar is still in a downtrend. Near term there appears to be a falling wedge type pattern which has potential measurement implications back up to .6000 if the NZD USD is able to break above the near term down trend line of the falling wedge.

However let there be no doubt that NZD is definitely in a fairly persistent downtrend and should be assumed to remain so for now.

In a related story the US dollar index has broken to new 52 week highs and shows continued trend strength.  Apparently what is going on is that the US Dollar for now is still the ‘least worst’ currency of the world and hence we are seeing more flight to US dollars relative to other world currencies.

So it is not a bad idea to keep an eye on the US dollar index as a clue to when NZD USD will do a meaningful longer lasting turn.

A very bearish situation for the US Dollar index would be a failure in the next week or two to maintain these new 52 week highs.  If the US Dollar index falls back down under the new support level of the 88 level.  If we see a breakdown under that level it would be very bearish indeed and could indicate the beginning or a rotation out of USD and into European currencies and also cause the NZD USD to get a rally going.

The British Pound Australian Dollar (GBP AUD) pair still has a somewhat interesting trading structure.  After undergoing a very steep decline from mid September 2008 to mid December 2008 GBP AUD has managed to break that down trend and attempt to get a new trend going.

I would rate the current trading pattern as constructive.  It is working off the oversold decline that began last September-October.  The 2.25 level is formidable resistance and you can see that it is trying to chew through that level over the last several weeks.

The lesson here is that the trend is your friend. As long as GBP AUD can stay within this channel and not violate the lower uptrend line that makes the lower part of the channel, the uptrend is still intact.

It appears we may be soon close to a decision on whether GBP AUD wants to break out of this consolidation and test the upper boundary of the channel, or if it wants to break down.  Again, 2.2500 is key.

I am also noticing on the weekly charts that there are reasons to be constructive about the uptrend as well.  The weekly chart is suggesting we will stay in the channel and attempt to go over 2.2500.

Lets see how it shakes out!

GPB AUD

I am watching the British Pound Australian dollar pair right now live. It is in the process of a fast moving breakout. I meant to write about this a couple days ago, but I suppose better late then never at this point.

I am seeing a bullish bias on British Pound versus X currency pairs right now.

The GBP AUD has been building a very large symmetrical triangle since July 2005. That is about a 1 year symmetrical triangle. In other words this pattern has a lot of cause to it and hence I can make the conclusion at least for now that this run or breakout in the GBP AUD will have staying power and be a solid trend trade.

I see 2.3995 as the next resistance point which I expect to be broken successfully. Eventually I expect a move to 2.45 . But the first challenge is the previously mentioned resistance.

Symmetrical triangles have the potential to whipsaw and be unprofitable. Sometimes a false breakout occurs and then a pullback right back to the apex of the triangle pattern. I do not know if that will occur here yet but I am open to this possiblity always. So tight stops are definitely the proper course of action given this type of breakout.

The US dollar / Japanese Yen forex currency pair now appears ready for a run to 119.00 right at long term resistance. The USD/JPY chart is appealing because of a clear double bottom formation with 4 years between bottoms, giving the double bottom more significance.

The price close as of this writing of 114.36 confirms that the double bottom is valid.

The US dollar index appears to be in an elliot wave 5 up which provides the necessary hint for further strength in USD/JPY.

The long red down trendline since late 1997 looks like a very strong magnet to me and my forecast is that we will see 119.00, probably before the end of this year.

This is a High Confidence Forecast!

The macd histogram chart confirms my bullish conclusions. RSI seems ready to breakout from mid range level and above previous RSI resistance levels going all the way back to 1995.

That red down trendline is a magnet!

Look for a big move in the USD/JPY soon.

This is a high confidence forecast, almost a converse to my NZD/USD bearish forecast several months ago.

The most striking thing about this chart is the beautiful confirmed double bottom! It is not too often that you see a double bottom with such a large time factor between bottoms! A very powerful signal to say the least!

The writing is on the wall! Bullish the USD/JPY !

Thomas

Last weekend I saw a TV commercial for forex trading seminar. It was one of those infomercials you have already probably seen for various other products and information. They advertised a free seminar for three separate locations and dates near my area. I wrote down the details and I went there yesterday late afternoon.

The presentation was at the local Holiday ‘Turf Inn’ Hotel. It sure was nice and cool in there considering lately it has been about 90+ degrees fahrenheit here. Only about five or 6 people showed up. It was basically a sales pitch for 4x made easy software. They are trying to market forex trading the mass public. It was a pretty light presentation and I really did not learn that much new other than a few minor facts (ie. that the forex markets have only started to open in America since the year 2000).

Their software is simply a trend following system that appears to use MACD as a buy and sell indicator and then gives buy or sell signals on various time frames. The approach sees somewhat workable for someone completely new to trading, never having done it before. And I like the fact that they emphasized the use of stops.. although he mostly or only talked about trailing stops.

The problem with this type of mechanical system is that it does not take into account the actual price bar interpretation and other technical factors that are always crucial for trading any type of market. Following MACD like a blind mouse can get you into trouble. At least it is always a good measure to use classical trendline, and TA pattern analysis to supplement a simple oscillator. An indepth understanding of price action itself, supply, demand, support and resistance is crucial in my opinion.

But now here is the real kicker..

They wanted $3000.00 for the software!

There really should be no need for anyone wanting to get started in forex trading to have to spend that amount of money. There are enough online courses books and other information that are more than suitable for the new trader to enter these markets with a reasonable degree of confidence…

If you are completely new to trading in general or forex for that matter, do not get suckered into a sales pitch like this. There are plenty of very good informational resources and $50 to $100 kits and tutorials to help you learn the essentials of forex trading.

If you need some recommendations then send me an email or post a comment here.

Thomas

Summary: I believe intermediate term weakness is in store for the NZD USD based on similar price chart action of the EUR USD.

The NZD USD, or New Zealand dollar / US Dollar foreign currency pair is setting itself up in my opinion for a potentially very attractive forex trade. I discovered this potential forex trading setup after examining the Euro Dollar long term monthly price chart.

Please let me explain…

The US dollar index has shown expected strength over the course of the last 5 or 6 months. It has been a major trend change and profitable for those who knew ahead of time this turn was coming. Did I know about it? Well in truth the answer is yes. I have been watching the US dollar index for quite a long time now… I have known also that the decline in the US dollar index was unsustainable given its depth and degree of decline. I have also witnessed the dollar hit MAJOR long term support coupled with a bullish beginning turn in the MACD oscillator. All of these clues led me to believe that a strong bounce with staying power was in the cards.

A long time ago I also was able to identify the major top in the US Dollar index. At that time the opposite situation existed relative to about 5 months ago. Chart 4 at this old gold bull market page link shows you my observation on the US Dollar index at that time.

The Sympathy Trade in the New Zealand Dollar
This is what I describe as a sympathy trade. It is based on the same concept in the stock market that the little fish usually follow the big fish even if there is a minor delay.

If you take a look at the chart to the left of this text you can see that it is a chart of the Euro / US Dollar forex chart. The forex chart is on a monthly scale so that each price bar equals one full month. As I discussed briefly in several previous paragraphs, the US Dollar index has shown strength and therefore the Euro has headed into a correction from its blistering run since 2002. This major trend change was clearly identified by the bearish monthly MACD crossover which occured several months ago. So the bottom line is that we currently have an intermediate term bearish overall trend in the Euro. For now I view this as overall corrective action from the run up in 2002.

This next chart is of the New Zealand dollar (NZD/USD). It is also a monthly chart. As you can see there again also exists a bearish negative MACD Crossover similar to what has occured in the Euro. However, to date the New Zealand dollar has not broken down in terms of price on a monthy basis as the Euro has. I believe there is a delay of sorts and hence this is why I believe this sympathy trade exists. Although I do not have the charts posted here, if you look carefully at the daily price action of the Euro dollar and the New Zealand dollar you will see some similarities. The Euro looked bearish on the daily chart with its 3 lower tops meeting a support area. Support did not hold and we saw a major one month break down in price to 1.2166

The NZD has similar bearish patterns on the daily chart, 3 lower tops and barely holding onto support. The 6 to 8 month pattern looks somewhat like a head and shoulders top. Right now we are critical support and the NZD is barely holding on. The 3rd chart displayed within this paragraph is a side by side comparison of the monthly price bars of the EUR and NZD. The month of July is only days away and you can see that based on this sympathy setup, the 6th month for the NZD should result in similar downward break to what the Euro has done.

I have recently opened a demo FXCM trading account with fake money.

Here is a screen shot of the virtual trade I made in the NZD / USD.

You can see that I opened this short trade on the NZD at .7045

I will hold the position into July awaiting the wide monthly price bar move.

Thomas.