Last week trading did not go my way. Economic news from the USA was favorable with better than expected NFP and unemployment rate figures and yet the dollar responded in a v weak fashion. It may be the market just does not believe the Fed will taper and may even increase rather than decrease its bond buying in the near future. On the charts the dollar index looks like it wants to head south to 80.00 and if that support does not hold then 79.00.
Last week we also an illustration of how trades that are too obvious are obviously wrong. We saw massive short squeezes on the Yen crosses and AUDNZD. Remember there are literally millions of eyeballs looking at the same charts and playing similar strategies. Doing what every other trader does is a sure recipe for failure. Lets take EURJPY
as an example. This pair was in a rising wedge which is a reversal pattern and also showed divergence even on the weekly charts (if you are not familiar with these terms I would suggest Googling them). Given these set ups, traders piled in short as you can see on myfxbook here http://www.myfxbook.com/community/outlook
. 87% of retail traders (those on Myfxbook) are short. EURJPY took off like a rocket last week in order to shake out these traders. Luckily, I did not have a position on EURJPY but I did have some on CHFJPY and AUDNZD and had to take some losses.
Last week performance on AVA was – 1.56%. Worst week in a long time.
But this shake out also present us with a nice opportunity here now. These squeezes have a tendency to burn out when the weak shorts are dead and then a turn comes to work off the technical extremes we are now seeing. Since it is the nature of currencies to be mean reverting these are high probability set ups and the best way to play it is to short the pullbacks when the turn is confirmed. A sell extreme from the highs would be a great signal to confirm the turn but you often don’t see that from squeezes which tend to fizzle out rather than reject price zones. However, I do like to put a small position on so as to catch a early part of the move if the turn comes suddenly.
– Given the relatively good US economic news ( at least on the surface) and talk from the eurozone of negative interest rates and other measures, this strength in the euro is surprising many. In terms of the technical pattern, a head & shoulders pattern was visible on the 4hr chart last week and the shorts lying above that got blown out. Given how weak the dollar index is acting, I am not looking for a EURUSD short here. EURUSD actually looks like it wants 1.38 again but I think there are better opportunities that EURUSD long.
– Bias looks higher if we see continued dollar weakness. It is noteworthy that retailers are 73% short.
– Bucking the weak dollar trend the Yen looks even worse. Price should break above 103.78 soon.
and EURJPY – Per the comments above, I will be looking for shorts here to work off the technical extremes these pairs are now showing.
CHFJPY – is both at multi year highs and at technical extremes so its worth the risk of a little top calling here.
AUDNZD – Like CHFJPY this is another pair that went to tech extremes and is at the edge of its historical relative valuation. I am long from close to the lows. Hopefully the weak long shake outs are done and we see a nice rally of a few hundred pips.