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The indices show the performance of a particular currency vs G8 FX. A video on how to interpret these indices can be found in the Global Prime’s Research section.
I always begin my daily analysis by understanding the latest action in the equity market and nothing beats tapping into the S&P 500 as the ultimate barometer of where that risk balance stands.
So, what am I seeing as a new week kicks in? I must say that the technical stance in the S&P 500 as per last Friday left us with a fairly constructive picture for a potential retest of the range high. Note, this week will be huge as we get some big names dropping income expectations (Amazon, Apple…)
There is a lot to talk about this equity rally, as further upside may defy any logic when connecting the dots of where the real economy stands vs the valuation of assets, as legendary investor Icahn notes.
But we should not forget the magic hand played by the Fed, scrapping any moral hazard argument as it bails the very same companies that should receive punishment by over-levering pre-crisis. The increasing number of countries easing lock-downs, one may argue, is contributing to the narrative, even if the fear of a second wave of COVID-19 is a real tail risk.
The spike in the inverted VIX into new trend highs (lower implied vol) at a time when the S&P 500 still has technical room until faced with resistance at 2,900.00, tells me that further spells of demand into high-beta currencies is a scenario I can envision, which may see the USD backfooted.
But even if equities paint a rather benign backdrop for another leg higher in intraday, assisted by that spike in the inverted VIX, the environment is still very much characterized by range conditions as the main trading proposition, which makes one’s engagement having to be more surgical in picking locations and targets to be eyeing for.
For further insights in the anatomy of identifying and playing ranges, which seems very fitting based on the current dynamics, I recently put out an educational video where I dive into this topic. The core principles explained in this video are playing out before our very own eyes in pretty much all the instruments analyzed in today’s video.
Let’s start looking at gold, as even in this market, which has been trending nicely to the upside, we are getting sufficient technical indications to make a case for more balanced flows. Match that with the divergences spotted in the S&P 500 and USD index, and for now, I can’t see further follow through continuation, even if the technical as one zooms things out into the daily are undeniable.
As I shift gears into the FX market, the first thing that jumped out is the cheap levels advertised in the EUR/USD around the 1.0735/40. Why? Huge divergence in the inverted USD index, meaning that this bear trend was unjustified from an aggregated flows standpoint, alongside the fact that such level was the 100% proj move. Precisely the backdrop, in my book, that has inspired buyers to return and that has so far transpired in a very solid buy-side campaign.
I will follow by sandwiching together GBP/USD and USD/JPY, as the technical dynamics are very similar, with volatility compression the name of the game as we keep navigating tight ranges. That said, bottom-side engagement has so far been warranted in both pairs based on where we stand in the USD index and equities for this matter.
Lastly, the Aussie is a currency that continues to go through a round of outperformance as it acts as the ultimate proxy to play the current ‘risk on’ mood. In this new COVID-19 era, as equities got hammered, Aussie too did go through a sharp depreciation, proving to be the most sensitive currency in the G8 FX complex. By the same token, the recovery in equities keeps providing that lifeline to the currency alongside positive fundamental news as PM Morrison aims to reopen the economy faster even if negative divergence exist against the USD.
It’s worth noting that while this Monday sees the economic calendar completely vacant, things will turn out much more interesting as major central banks are back with monetary policy decisions by the BoJ (today), Fed (mid-US Wednesday) and ECB (Thursday). It’s been reported that in the case of the BOJ, expectations are for the CB to least double its corporate bond purchasing programme, triple its Commercial Paper buying target and a new loan programme for companies.
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This analysis complements one’s view by accounting for multi timeframe biases. Ultimately, it is the traders’ call, via a set of entries thoroughly backtested, to enter a position. This analysis is mainly intended as a way to educate traders in upping their analytical skills.
If interested in the best ‘free of charge’ News Indicator that displays data on past and future news in the Forex market via MT4, check this YouTube video I produced. The indicator allows you to save time, avoid mistakes. It’s spot on!
Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of market structures, refer to the tutorial How To Read Market Structures In Forex.
In order to assess the market momentum of a particular asset, I’ve promoted for years the idea of using what I call the smart money tracker. The settings and the indicator can be obtained via our Discord room, where traders from all walks of life interact frequently. In this video I lay out the elements I look into to call trend directions.
Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, horizontal areas of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed. The Ultimate Guide To Identify Areas Of High Interest.
It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term. Monitor the event risks via Forexfactory.com & refer to Fundamentals vs Technicals In Forex.
The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection