Technical Analysis: EUR/USD and S&P 500

This post will focus solely on technical analysis of currencies and indices.


EUR/USD (Bearish)

EUR/USD - Daily
EUR/USD – Daily

As you can see on the “Daily” chart, Symmetrical Triangle or contracting wedge (both very similar) has been formed. The trading range is contracting, not far away from breakout. You see the small yellow circle (around 1.1020) that EUR/USD is approaching? That’s where I would short EUR/USD. That’s the place where there are trend resistances, and Simple Moving Average (SMA) of 50 and 100 are approaching. Not only that, but Stochastic indicator should get close to 80 (overbought), as EUR/USD goes to that yellow circle. Let’s take a look at 4H (4-Hour) chart.

EUR/USD - 4H (4 Hour) Chart
EUR/USD – 4H (4 Hour) Chart

The first yellow circle you see on the “4H” chart was a sell single because support-turned-resistance at a rising trend line. Same thing is happening right now to EUR/USD, as it approaches the second yellow circle (around 1.1020).

The reason I’m shorting it in the tightening consolidation before the breakout is because there are many technical reasons to short it. Even if it goes opposite direction, my loss will be very limited (Just above the trend – around 1.1030)

Let’s take a look at 1H (1-Hour) chart.

EUR/USD - 1H (1 Hourly) Chart
EUR/USD – 1H (1 Hour) Chart

On 1H chart, I added Fibonacci Retracements indicator. Fibonacci Retracements basically act as support and resistance lines. The red lines you see on “1H” chart, are resistance lines. 61.8% level (or 0.618%) at 1.1012 is known as “golden ratio”. In my past expensive, 61.8% level has worked well. Plus, 61.8% level connects with the two trend lines in the yellow circle.

I would short EUR/USD as it approaches the middle of  the second yellow circle (around 1.1015). Stop loss: 1.1030 (just above the trends lines and golden ratio (0.618%) level. Target: 1.0890 (just above the support trend as seen in the charts above). My target level (1.890) will change as time goes on, to stay in-line with the support trend.


S&P 500 (Bullish)

Let’s take at look “Weekly” chart, going back as far as 2008.

S&P 500 - Monthly
S&P 500 – Monthly

As you can in the “Weekly” chart, ever since hitting bottom in early 2009, S&P 500 have been in a uptrend. If you look at the white-line, there’s a long channel (you can call it a trend if you want). Current price is just above the 50 SMA (Simple Moving Average). Plus, it’s much closer to the support line of the channel.

Let’s take a look at two “Daily” charts.

S&P 500 - Daily
S&P 500 – Daily
S&P 500 - Daily
S&P 500 – Daily

If you look at any of the two “Daily” charts, you can see that the current price is sitting on 200 SMA and on recent-uptrend support (yellow dotted line). Even though it’s a strong signal to go long, I would not. The reason is that it is a 3rd time in over a month that the price is sitting on 200 SMA and uptrend support (yellow dotted line) , and the recent highs in the uptrend range were unable to reach the trend resistance as well break the previous high. It shows that the bulls are losing control and bears are slowly gaining momentum.

Where I would go long is at the circle shown with yellow arrow (around 2042). It’s just above the strong channel (or a trend) support line (Bold-white line) as shown in all three S&P 500 charts above. My stop loss would be just below the bold-white line. My target would be at the resistance level of 2134.

If you have any questions, feel free to leave your questions in the comments section, and/or contact me. Thank you.

Expectations for the Fed to raise rates ticked higher

Last Friday (May 22, 2015), U.S Consumer Price Index (CPI) report for April was released and it was in line with expectations. CPI increased a seasonally adjusted 0.1% in April and core-CPI (excludes food and energy) increased 0.3%, largest since January 2013. CPI reflects what people pay for goods and services. It’s an important indicator for inflation. The Federal Reserve watches inflation numbers closely, to determine the health of the US economy and whenever to raise interest rates.

CPI and Core-CPI (Jan 2014 - April 2015)
CPI and Core-CPI (Jan 2014 – April 2015)

Over the past 12-months, CPI declined 0.2% (biggest year-to-year drop since October 2009), largely due to the plunge in energy prices (energy index), which fell 19.4% over the last 12-months. However, core-CPI (which excludes food and energy, the violent categories) increased 1.8% over the last 12-months.

The positive inflation report may suggest that the Fed may not be that far away from raising interest rates. Stronger numbers gives a sense of relief that the US economy is pulling itself out of a slump that dragged growth down to 0.2% (GDP report previous post) in the first quarter of 2015. However, the inflation is far below the Fed’s 2% target.

The positive change in core prices was driven by rising costs for housing, medical care, furniture, and vehicles, while clothing and airfare prices declined. Fall in the oil prices led airplane companies to lower their airfares, to complete with competitors. I believe clothing and airfare prices will start to rise soon because summer is here. In the summer, people tend to travel more often (demand increases), pushing prices up. Oil has rebounded to the range of $60, as oil inventory decreases.

The dollar rose after the CPI report. The greenback (the dollar) gained almost 1%, rising to a highest price level since late-April. US markets were flat on Friday after both the Dow and the S&P 500 hit new records this week.

Dollar Index (/DX) - Hourly
Dollar Index (/DX) – Hourly

According to Federal Open Market Committee (FOMC) meeting minutes released last Wednesday (May 20, 2015), FOMC expects inflation to gradually rise as the labor market improves and transitory effects such as low oil prices fade away. They believed that there would not be enough information of overall health of US economy to start raising rates at their next meeting in June. The next policy meeting takes place on June 16 and June 17.

Chances of rate hike in June are very low, but the door is not closed. If the next non-farm payroll and Prelim GDP (Gross Domestic Product) (Friday, May 29, 2015) comes out very positive, the Fed will likely raise the rates. Prelim GDP is the second estimate of the last quarter. If you want to know more about the first GDP estimate of the last quarter, click here.

Last Friday (May 22, 2015), Federal Reserve Chairwoman Janet Yellen spoke about the US economic outlook at the Greater Providence Chamber of Commerce Economic Outlook in Rhode Island. She said that the Federal Reserve is on track to raise short-term interest rates this year, but will likely proceed slowly and cautiously.

As to trading, I would go long on the dollar and short EUR/USD. Why would I short EUR/USD? Recently, EUR/USD rebounded all the way to above 1.1450. As of right now, it’s around 1.1000. The recent rise in EUR/USD is an opportunity to go short.

News: First, I believe the U.S economy will rebound and future US economic reports will be positive, sending USD higher. Second, I believe Greece will default and eventually leave euro-zone (Greece exiting euro-zone is also known as “Grexit”), which will plunge Euro. Current Greece headlines are just background noises, until we know for sure that Greece will be staying or not.

Technical: If you look at 1-HOUR chart of EUR/USD, you can see that EUR/USD broke a strong support level that used to be resistance. If you look at WEEKLY chart of EUR/USD, you can see that there is a Bearish Engulfing Pattern. Technical seems to be bearish.

EUR/USD - Hourly
EUR/USD – Hourly
EUR/USD - Weekly
EUR/USD – Weekly

 

If you have any questions/comments, feel free to leave comments below and/or contact me by going to “Contact Me” box above. I can also be reached on twitter (@Khojinur30). Thank you.