Be as nimble as the market

 

Evening people,

The past two weeks have showcased a great lesson in bias and positioning showing that you need to be prepared to flip your trade thesis on a shorter time horizon when signals present themselves in the market.

No idea is ever set in stone and given the volatile nature of the market, you need to be just as nimble and be able to adapt to what the market gives you to take advantage of available opportunity.

A case in point for this particular example is the EURUSD trade based on perceived USD strength. From a previous post, my trade thesis centred around USD strength and one of those trades was shorting the EURUSD given a strong inverse correlation between the two. On the EURUSD, we finally saw a break of a head and shoulders pattern which for me, flipped sentiment on the pair to bearish which coincided with my USD strength thesis. A quick recap on the daily technicals below:

EURUSD – Daily

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I’ve labelled the left shoulder, head, right shoulder and a neckline for the pattern. Remember this is a bearish pattern given that price has failed to proceed higher off the top at the head and has also stalled at the same area as the left shoulder.

The H&S pattern is confirmed once we see a break of the neckline and more often than not a retest of the neckline. A general rule is to target the distance of the neckline to the head for the short and in this case, it was the 1.14 region which also coincided with the daily 200 EMA which presented a great target. From my point of view, it was almost all hands on for this trade to the short side however we saw it begin to stall at the 1.158 level in the form of a double bottom. Chart below:

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From my point of view, the trade short was still on given we were still below the neckline at 1.171-1.17.

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After finding support at the 1.158 level, we then saw bulls begin to gather momentum in the market where it then blew by the 1.17 taking stops along the way towards the 1.18 level.

Now, given that the neckline has been breached, my sentiment has shifted to neutral for this pair given I still feel there is USD strength on the horizon when you look at the USD Index chart from a weekly perspective.

For a shorter term vs longer term perspective, you could outline two cases for the EURUSD if you were looking at taking a trade.

Bear

From a bearish point of view, what we are seeing is a pullback to value from the 2014 high to the 2017 low:

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Price is sitting between the .5 and .382 fib retracement level and this could present a value area for bearish price action which fits in line with my USD trade thesis. This to me is the higher probability long term play given how technicals are lining up with the DXY.

Bull

From a bullish point of view, taking the fib from the point of the euro election to the 2017 high, we are at the .382 retrace level which presents a value area for bulls.

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Depending on the perspective you are taking, either could present a viable case depending on your timeframe. For me however, by looking at both charts, there are a lot of technical areas for bears to break through for a trade to the downside at this moment – weekly 50 & 200 EMA and 1.15 resistance turned support being key areas. With price breaking above the neckline at 1.17 nullifying the H&S pattern, it is now looking like a flag pattern which could present a possible breakout to the upside.

EURUSD – 4hr showcasing flag pattern

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If we compare our analysis beforehand to now, you can appreciate that there are two sides of this trade that can be perfectly viable depending on your trading style. For me, seeing the weekly chart stall at the .382 retrace level, supported by the weekly 50 EMA + a break above the neckline at 1.17 was a signal for me that there is still life to the long side for this pair in the immediate term.

More to come.

NT.

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