The difference between success and failure in Forex / CFD trading is highly likely to depend on which assets you choose to trade each week and in which direction, and not on the methods you might use to determine trade entries and exits.
When starting the week, it is a good idea to look at the big picture of what is developing in the market as a whole and how such developments are affected by macro fundamentals, technical factors, and market sentiment.
Read on to get my weekly analysis below.
Fundamental Analysis & Market Sentiment
I wrote in my previous piece on 10th December that the best trade opportunities for the week were likely to be:
- Long of the NASDAQ 100 Index. This rose by 3.40% over the week.
- Long of Bitcoin in US Dollar terms. This fell by 4.54% over the week.
- Long of Cocoa futures. This fell by 0.73% over the week.
This produced an overall loss of 1.87% which averages to a loss of 0.62% per asset.
Last week saw renewed risk-off sentiment in the market after US inflation data came in slightly lower than expected, at an annualized rate of 3.1%, while the next day the Federal Reserve telegraphed a more dovish schedule of rate cuts, which the market consensus now expects to start in March rather than May 2024. This sent the US Dollar lower while US stock indices soared.
There were several other important central bank releases and other major data points last week:
- US PPI – came in at zero, as expected.
- US Retail Sales – notably stronger than expected, pointing to a buoyant US economy.
- Bank of England Official Bank Rate and Monetary Policy Summary – rates left unchanged as expected, Bank warned “some way to go” on inflation.
- SNB Policy Rate and Monetary Policy Statement - rates left unchanged as expected, Bank warned on inflation.
- UK GDP – this was worse than expected, showing a monthly contraction of the economy by 0.3%.
- New Zealand GDP - this was considerably worse than expected, showing a monthly contraction of the economy by 0.3%.
- US, UK, German, French Flash Manufacturing & Services – the data was mixed but was better in the USA and better overall in the Services sector.
- US Unemployment Claims – marginally better than expected.
- US Empire State Manufacturing Index – notably worse than expected.
- UK Claimant Count Change (unemployment claims) – marginally better than expected.
- Chinese Industrial Production – worse than expected/
The Week Ahead: 18th December – 22nd December
The coming week in the markets is likely to see a considerably lower level of volatility, as there will be fewer highly important data releases, although there will be statements from the Bank of Japan and the Reserve Bank of Australia. This week’s key data releases are, in order of importance:
- US Core PCE Price Index
- US Final GDP
- US CB Consumer Confidence
- Bank of Japan Press Conference
- UK CPI (inflation)
- Canadian CPI (inflation)
- Canadian GDP
- Reserve Bank of Australia Monetary Policy Meeting Minutes
- US Unemployment Claims
- US Revised UoM Consumer Sentiment
- UK Retail Sales
Technical Analysis
US Dollar Index
The US Dollar Index printed a largeish bearish engulfing candlestick last week, although it closed some way off its low. The weekly close was down on price of 3 months and 6 months ago, again presenting a long-term bearish trend. However, bears should be cautious for two reasons:
- The price seems to have rejected a major support level shown in the price chart below at 101.56, although a higher support level was invalidated.
- There is a substantial lower wick in the weekly candlestick.
On the other hand, bears are supported by lower-than-expected US inflation, and more dovish signals from the Fed about rate cuts coming sooner rather than later.
The Dollar is difficult to predict over the coming week. One approach for bears could be to wait for a daily (New York) close below the support level at 101.56.
USD/JPY
The USD/JPY currency pair again made a strong downward move last week, with the Japanese Yen the strongest of all the major currencies over the week. This is the fifth consecutive weekly fall, and last week’s move was the strongest of these. The price is now in a 3-month downtrend and very close to making a 6-month downtrend too, suggesting trend traders might start thinking about getting involved here on the short side.
The Yen is very strong right now as the Bank of Japan begins to signal that they will be able and willing to abandon their ultra-loose monetary policy during 2024, assuming wages rise as expected. However, these expectations have been tempered by further remarks from the Japanese monetary establishment. The Bank of Japan’s press conference Monday will be closely watched for relevant remarks concerning when inflationary pressures might be deemed to have risen enough to finally abandon the years-long ultra-dovish monetary policy at the Bank of Japan.
The Yen has a lot of direction and volatility so will be of interest to traders next week, especially day traders.
EUR/USD
The EUR/USD currency pair printed a weakly bullish candlestick over the week but gave up much of its gains earlier in the week. The Euro is not showing much relative strength yet, despite the renewed weakness in the US Dollar.
What really stands out in the daily price chart below is the double top which now seems to have printed off a very key resistance at $1.1008. This is very confluent with the huge round number at $1.1000 and is likely defended by large options, so it is definitely a level worth watching.
It might not happen this week, but if we see a strongly bullish daily close above $1.1008 which seems to have decisively broken this resistance level, a long trade entry could make sense.
NASDAQ 100 Index
The NASDAQ 100 Index printed a seventh successive bullish candlestick, rising powerfully to make its highest weekly close in 2 years, and breaking to a new medium-term high. We have a strong bull market in US stocks, and the NASDAQ 100 Index has historically been a great investment during bull markets.
US stocks experienced a major tailwind last week from lower-than-expected US inflation data and a dovish tilt from the Fed resulting in the market expecting rate cuts to begin in March 2024.
I am happy to be long of the NASDAQ 100 Index, especially now that we have seen a simple moving average crossover with the 50-day crossing above the 100-day.
Cocoa Futures
Cocoa futures have been in a strong bullish trend for over a year although last week saw a weak bearish retracement. The price chart below applies linear regression analysis to the past 64 weeks and shows graphically what a great opportunity this has been on the long side.
The weekly candlestick was again bullish. It was an inside bar.
Now we have seen a pullback, it may be a better time to enter a new long trade, despite the price action sitting above the upper band of the linear regression channel. This strong trend shows no sign of stopping the ever-increasing global demand for the superfood cocoa.
Trading commodities long on breakouts to new 6-month highs has been a very profitable strategy over recent years.
Bottom Line
I see the best trading opportunities this week as:
Long of the NASDAQ 100 Index.
Long of Cocoa futures.
- Long of the EUR/USD currency pair following a daily close above $1.1008.
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