Good Morning, Friends. We trade technically here, using the methods that Todd teaches to select entries with a good probability of success, with defined risk and profit targets. However, very few of the largest players in foreign exchange – sovereign wealth funds, central banks, macro hedge funds and currency management firms – start with the charts. They begin with a macro view, looking at a broad range of data and trying to anticipate the changes that will occur over a period of weeks or months. To paraphrase Wayne Gretzky, they attempt to skate to where the puck is going to be.Â
The footprints from the trades of these firms are what we see when we look at the charts, and determine where demand and supply are likely to appear. In addition to the groups that I mentioned above, there are other important players, including corporations buying, selling and hedging in support of their commercial activities, and traditional money managers, doing the same as they build portfolios of (usually) bonds and stocks for their clients. I’ve been in the market since the mid-1980s, and over that time, the leading players have shifted several times. When I started, corporates were the largest players, then “real money” mutual funds, then the hedgies, and today the gigantic sovereign wealth funds of the nations that run current account surpluses.
There is normally a broad consensus at any given time as to the appropriate ranges for currency pairs. It tends to be an economic or political surprise that shifts the trading range for, say, EUR/USD from 1.20/1.25 to 1.27/1.34. A look at the weekly chart shows a general downtrend from 1.4939 in May 2011 to 1.2041 in July 2012. That’s a decline of 19.4%, and that’s the kind of move that the hedge funds and sovereign wealth funds are looking to catch. Leveraged 5:1, that’s 97%, the sort of return that pays for houses in Greenwich and the third Maserati.Â
Most of the people at TCI are looking at shorter time horizons, less risk, and smaller profit targets. The trends are created by the behemoths and their reactions to changes in the macro environment. It’s helpful to have a basic understanding of the factors that are driving the consensus, but price action trumps all, and for guidance on that we look to the charts. One of the current macro factors that may be driving institutional activity is a reassessment of Europe’s prospects. The market consensus appears to be moving from “It is in a death spiral; the variable is timing” to “They just might pull through”.Â
That change is reflected in the charts of EUR/USD. On the weekly, the downtrend remains intact, but that isn’t the timeframe for most of us here. On the daily chart, there’s a pronounced roller coaster effect as sentiment swings, creating a range of roughly 1.2750 to 1.34. The current move is an uptrend, with support looking likely at 1.3060/65 or so, and below that 1.2990/95. I will be interested in a long around 1.3065.
If the dip ends above 1.2990, the expected move would be a retest of the recent 1.3255 high, or something close to it. It may take a while; the current Average True Range over the past five sessions is only 70 pips. ‘Tis the season. We’ll see how it plays out. As noted, second support should come in at or just below 1.30; anything much below 1.2950 would suggest a potential change in the trend to down, and I wouldn’t be inclined to hold a long at that point.
As always, best of luck!
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