EURUSD January 2014 Forecast
The EURUSD is probably the most popular currency pair to trade amongst retail forex day traders, and as 2014 begins, it is worth stepping back to take a bigger picture view of the scenarios that may be developing for this pair. End-of-day traders in particular will find this information useful, but even intraday traders cannot afford to ignore the influence from the general trends moving through the market.
This type of analysis must necessarily go from the top down, so the monthly chart provides the first stopping point.
Monthly Chart: Consolidation in a Triangle
The triangle type consolidation pattern will be familiar to most traders. This pattern is actually mildly bullishly biased, favouring a break to the topside. This is due to the fact that the move prior to the consolidation was a rising one. Nonetheless, betting on an upward move that could be years in the making is hardly worth it for active traders - that is within the purview of investors.
Classical technical analysis and charting theory do not offer much in the way of telling traders how long a triangle may last. However, Elliott wave theory does - there should be five legs to the pattern. The author's preferred count has been labelled in the chart above. It is entirely possible that someone else may choose a different wave count, but it is a workable assumption, and that suggests that a move down on the test of resistance may well develop in the coming months.
This is corroborated by basic charting principles, which state that in a sideways move, traders can buy the low of the range and sell the high. As price is close to the high of the triangle, there is a case for selling.
Weekly Chart: Price Struggling for Resolution
On the weekly chart, the picture becomes far less clear. Price has previously struggled to break the resistance offered by the 61.8% Fibonacci expansion, which has been drawn on the chart. On the other hand, it is currently testing the rising trend line that is coming up to meet it. A break of this line will likely result in a move lower to the next rising line of support.
Daily Chart: Pullback to Support
On the daily chart, the conflict of the price move down and the rising trend line becomes more obvious. The move with the best potential reward is still the buy, which is the trade which side with the bouncing action of price. The reason for this is that in spite of the bearish larger picture, the stochastic is oversold, and an uptrend is still in force on this timeframe. The smart thing to do would be to stick with the trend even though there are signs of it potentially beginning to end.
One of the key reasons for this is that the weekly chart still shows some room left to the resistance, and it would be perfectly within the bounds of reason to expect price to go up higher one more time before finally turning down. The higher timeframes merely indicate that conditions for a larger down move are ripening - they do not dictate that it has already happened.
Of course, if the daily chart successfully broke the support, then there would be an intermediate case for shorting the EURUSD pair. Until then, end-of-day traders AND intraday traders both should be biased to buy unless the trend line breaks. However, if the trend line breaks down, then the intermediate view should be towards getting short positions in.
EURUSD Weekly: Alternative Scenario
Finally, even if the price rises, one should continue to monitor the daily chart for the potential to turn bearish when it reaches the declining line of resistance on the weekly chart, as shown.
Kaye Lee is a private fund trader and the Head Trader Consultant/Mentor for StraightTalkTrading.com.