First resistance on re-tracement – short AUD, EUR

With the London market closed today markets are not showing much direction. EURUSD has reached the first resistance in the retracement – the 38.2% level which also coincides with the down sloping trendline resistance at 1.2500.

The AUD has fallen back after recovering exactly 50% of the last swing down from 0.9898 – 0.9582. With the rate decision due tomorrow, the Aussie is in for a big move either way. I prefer to go with the flow as indicated by the daily and weekly charts, and am going short.

I have entered limit orders as follows:

Short EURUSD @ 1.2495, s/l @ 1.2513

Short AUDUSD @ 0.9721, s/l @ 0.9771.

I think the risk / reward is very good at these levels. If the SL is hit, it means the pairs are very likely going higher. If the SL is not hit,  both the pairs have 100s of pips to the downside.

Update 16.00 gmt:

Both my limit orders have been executed.

p.s. As part of my effort to keep a full diary of my trading on this blog, I have created an order table on the ‘Trades’ page to track orders and P/L performance in real time.

Beginning of the re-tracement. Long EURUSD

15.20 gmt

I have just entered a long EURUSD trade, 5 lots @ 1.2376. Here is the 4hr chart:

This pair has run into an area of strong support, the confluence of previous resistance and Fib levels. Today’s price action is a first sign of a reversal. The first resistance on the topside is the trendline near 1.2500. This is a good long entry with a stop just below 1.2350, and a target of 1.25.

Edit 16.20 gmt:

Turns out I picked a good entry level – EU is currently at 1.2412 and looks likely to close higher. Looking at the charts again I have modified my profit target to 1.2550 which is where the down-trend line comes in, as well as a significant Fibo level.

Edit 16.40 gmt:

Spoke too soon! I have got stopped out of this trade @ 1.2388 for a +12 pip profit.

New Trade: long EURUSD @ 1.2389

Watching the price action I think we should see a massive rebound, up to at least 1.2455. I’ve gone long 10 lots EURUSD @ 1.2389.

Update 13.36 gmt:

Closed the above trade at 1.2431 after the pair bounced off the s-t 50% target at 1.2455. A quick 42 pips, I’m satisfied. We’ll get another opportunity later today or Monday.

Post NFP: closed all EU shorts

30 minutes after the NFP, the smoke has settled a bit. There is an ongoing battle between those who see more gloom ahead and those who see the bright lights of QE-3. At this stage, my reading is that the QE3 crowd is winning this battle. I have closed all my EUR shorts at 1.2345.

Profit from the earlier shorts is 241 pips, the loss from the ill-advised jump in immediately after the NFP = -47 pips. Net profit 198 pips.

No more trading for the week unless the EU tests 1.23 again, which would be a good low risk long entry.

Market Commentary

14.00 gmt, Thursday 31-5-12

The short EURUSD trade entered at 1.2586 was timely, and there is nothing more to do but monitor the market. Today there has been a slight bounce in this pair, but the fact that it did not reach even the 38.2 Fib level of the swing down from 1.2625 shows how bearish this market is. I’m looking for good entry levels in other pairs. I expect the fireworks surrounding the NFP tomorrow should provide a good entry level for further shorts in EURUSD or new trades in some other pair. I’m watching EURJPY, AUDUSD and AUDJPY – all from the short side. We may see an opportunity tomorrow or Monday next week.

SP500 – retracement in a bear market

Earlier this week I wrote about the SP500 breaking out of a s-t down trendline. It has closed the week at a re-test of the break-out from the t-l, at 1317. For aggressive traders this is a good long entry, with a target of 1352 – 1367. The swing up is a classic correction in a bear market. I prefer to wait for this swing to complete and go short at about 1355-60 with a stop at 1370.

EURUSD – more downside to come

Here’s the weekly chart of EURUSD:

This chart is unequivocally bearish. The Euro has closed the week BELOW the last remaining level of support between here and the multi-year low at 1.1875 made in June 2010. It is almost inevitable that the pair will now test the 1.1875 level over the coming weeks. On the weekly chart we can see the well-formed H&S pattern, with its head at 1.4940 in May 2011 and the neckline passing through 1.2587. We have closed below the neckline. A measured move target from here is 1.0090. Although this seems unlikely today, my experience with patterns like this is that we may see wild swings along the way, but in almost all cases the target is eventually achieved.

I have not done much research into figuring out the likely time frame for achieving this target; I suspect a study of cycles will help here. But an old rule of thumb from the stock market is that it takes as long to drop to the target as it took to reach the highs at the head. My preliminary observation is prices drop faster than they rise, particularly in the FX market. Given these observations, I would expect EURUSD to reach 1.1 by December 2012, if not sooner.

Other factors in support of this trade are i) The DXY  has made a clean break and closed above the long time high of 82. ii)All other EUR crosses are also weak. iii) The fundamental picture is in line with this outlook.

SP500 – Up or down?

Here are 2 charts of the SnP500 – daily and 4 hrly.

The SnP is bumping up against a down-trend line from early May, also coinciding with the 61.8 Fib of the swing down from 1373 to 1290. The question is if it’s worth a trade, and if yes, in which direction?

The Bullish case: The daily down TL is broken, so I expect a move up to test the earlier broken up-trend line and the 50% of the swing down from 1415 to 1290 which comes at 1353. That gives a likely move up of about 40 points from the current level of 1318. The second point in favour of an upswing is that since the break of the major up-trend line, prices have not gone back to test the broken level, which is very unusual. One minor argument against this is that the current down TL is relatively steep and of short duration, so the re-tracement may only go to 38.2% ie 1338.

The Bearish case: The current correction is the first in the SnP since the rise from 1149 in Dec 2011 to 1415 in April 2012. So far, this has corrected exactly 50% of that rise, and I expect another test of this 50% level at 1289 before the SnP makes up its mind if its rising or dropping lower.

Verdict: Either way, the trades are not very compelling. My preference would be to wait and either go short at 1352 with a stop at 1360, or go long at 1298 with a stop at 1292.