Daily Trading Edge

I’ve received a number of questions regarding the USD/CHF breakout. Let’s look at the move and also what the options are now as the bulls are in control and how to play this pair if they lose it.

The daily USD/CHF had been moving sideways at a “two to four o’clock” angle for some time putting highs at 0.9314 and 0.9339 which created a 25 pips short sell zone. The zone would be the exhaustion area within which a short sell could be triggered if the Stochastics (21, 1, 3) reading was over 80, thus confirming an overbought environment within the chop. Distribution fades such as this one capitalize on the confusion that is the hallmark of a sideways, choppy market where follow-through higher or lower through the range typically does not occur. If it does however, the stop loss placement offers a 10-12 pip cushion to allow for exhaustion around the range high or low but also takes the trade off the table if momentum ensues.

Past performance is not indicative of future results

This is a great look at two strategies on the daily USD/CHF. The first was the fade that worked nicely as prices entered the fade area and exhausted as the Stochastics (21, 1, 3) read overbought. The second is the failure of that trade as prices were able to break the high of the area at 0.9339. The stop loss for the distribution short was 0.9339 plus 10-12 pips which put the exit at 0.9349 to 0.9355 which also put the 0.9350 major psychological level into consideration.

Past performance is not indicative of...

The answer is possibly yes in the very near-term.

On December 2 I wrote an update called “The EUR/USD downtrend will resume”. I followed that up with a look at two important near-term lows that could dictate where selling momentum could accelerate OR create a trading range. With both the near-term lows broken, here’s the next hurdle for the EUR/USD bears: 1.3144.

The downtrend on the daily EUR/USD bounced to within the 34EMA Wave four times and trades to the 34 period EMA low another three times. Each of the three times that prices traded within the 34EMA Wave, bulls were met with selling pressure and prices exhausted. The confirmation that the sentiment was on the side of the bears came not only with the consistent red GRaB candles but the lower highs and lower lows that pushed the pair towards what was an inevitable acceleration and what could be a double bottom.

Past performance is not indicative of future results

The bulls gave a valiant effort and it seemed that the near-term lows may hold and possibly transition the EUR/USD into a sideways range - and this frankly is still a scenario that must be considered  as long as the 1.3144 lows holds. If it does, a daily double bottom will have been created.

The double bottom has to be respected because breaking it would likely mean a test of the December 2010 and then perhaps the August 2010 lows.

If the bulls can succeed in...

The downtrend on the daily time frame is still intact but without a push to lower lows the bearish trend will lose its organization of negative sentiment and momentum. There are two previous lows that could hold the key to a significant push lower or a transition into a range near the lows.

Here’s where things could become interesting. I want to mention that this analysis is about one scenario we could see in the EUR/USD.

The scenario begins with bears unable to press the pair to lower lows but I’m not necessarily talking about a new low which would mean taking out the October 4 floor at 1.3144. What would telling is the near-term is a lack of momentum lower through the recent lows at 1.3362 and 1.3258. Without a series of lower lows there will begin a transition to a range-bound chop hovering just above the October 4 and perhaps the November 25 low at 1.3211.

Past performance is not indicative of future results

The daily chart is still indicating a downtrend and bearish sentiment and momentum but a lack of lower lows could begin a transition to a choppy, sideways market. The swing entries that are triggering at the 20 period SMA close and 34 period EMA low are still valid but the follow-through may be more difficult without selling pressure at 1.3400.

For now it seems that the erratic flow of optimism coming from Europe is maintaining enough buying support at 1.3400. Perhaps traders fear a major launch from the lows if *suddenly* a solution is found and the euro looks appealing once again. For now it remains weak and until support can be established above 1.3600 which is also the 38.2% Fibonacci Retracement from the October 27 high to November 25 low there is less chance...

The Fed cut the cost of dollar funding for European banks from 100 basis points to 50. We all know that this will weaken the dollar and with a RISK ON attitude today in a big way across all major financial centers. Equities will rise in the wake of Fed and five other central banks agreeing to lower interest rates on dollar liquidity swaps.

What does the dollar-liquidity swap program do? The program was set up so that the Fed could lend dollars to the ECB (along with other central banks) in exchange for their currencies. The central banks then lend the dollars to commercial bank via auction. Now that initial rate to borrow from the Fed is 50 basis points less.

This was purely done to save the private banks in Europe (think: SocGen and the like) and this move was not previously prices into the market in any significant way. The supply of credit is a necessity for a modern economy. We saw in the U.S. what happened with credit dried up; it put a major burden on businesses and the Fed had to act. Why act now? Year-end finding pressures likely were partly to blame but despite the availability of dollars in Europe, the cost to borrow and therefore also to lend was prohibitive. It could be hypothesized that a major banks in Europe was dangerously close to collapse as Europe is likely also in a recession. Germany’s economic strength is the lone shining light but they can’t carry the load alone. Let’s also face it I’m pleased to see that globally we seem to have learned a lot from the 2008 crisis.

How do we know and measure this? One look at the Euribor-OIS spread explains it. The reading increased to 98.2 basis points which means that as of yesterday the cost to find in dollars rose to the highest levels in October 2008 - when the U.S. was going through a confidence and credit crisis of its own.

For those of you wondering what the heck an Euribor is, it stands for Euro...