The difference between success and failure in Forex trading is very likely to depend upon which currency pairs you choose to trade each week, and not on the exact trading methods you might use to determine trade entries and exits. Each week I am going to analyze fundamentals, sentiment and technical positions in order to determine which currency pairs are most likely to produce the easiest and most profitable trading opportunities over the next week. In some cases it will be trading the trend. In other cases it will be trading support and resistance levels during more ranging markets.
Big Picture 14th January 2018
In my previous piece last week, I saw the best possible trades for the coming week as long of the S&P 500 Index, long of the precious metal Palladium, and long of the Forex currency pair EUR/USD. The individual results were all excellent, with the S&P 500 Index rising this week by 1.73%, while Palladium rose by 2.89%, and EUR/USD rose by 1.46%, producing an average gain of 2.03%.
The Forex market over the past several weeks has been bearish on the U.S. Dollar, despite last month’s interest rate hike. Technically the Dollar is below its prices of three and six months ago, which puts it in a long-term downwards trend. Despite slightly stronger than expected U.S. inflation data being released at the end of last week, the Dollar continued to fall and ended a strongly downwards week right on its low. The Euro has the greatest long-term strength of any major currency.
The news agenda this week is almost certainly going to be dominated by a slew of key data from China, Australia, and the U.K. plus the Bank of Canada’s monthly guidance. This may move the spotlight away from the U.S. Dollar.
The American stock market is in a strong long-term bullish trend, and it made a new all-time high price on Friday. Of the three major Forex pairs, both the EUR/USD and to a lesser extent the GBP/USD are in convincing long-term bullish trends. The EUR/USD currency pair just made a new three-year high price.
Following the current picture, I again see the highest probability trades this week as long of the S&P 500 Index, long of the EUR/USD currency pair, and long of the precious metal Palladium in U.S. Dollar terms.
Fundamental Analysis & Market Sentiment
The market is largely bullish and “risk-on”, with the stock market looking particularly strong, while the U.S. Dollar looks bearish. Fundamental factors are mostly supporting the U.S. stock market and the Euro.
U.S. Dollar Index
This index printed a large, strongly bearish candlestick, which closed very close to its low. There is a long-term bearish trend, and a bearish trend line dominates the price chart shown below. The signs point to a continuing fall this week, however the price is in an area where it has found support previously, so a bullish bounce would also be possible. Finally, note that the Index has made a new 18-month low, which is another bearish sign.
S&P 500 Index
This pair is in a strong long-term upwards trend, and just made a new all-time high price on Friday, which means it will probably continue to rise further. Buying stocks at all-time highs of the major index is usually a good strategy, even though the financial media is full of warnings as to how stocks are about to crash. These warnings have been coming for months; those who ignored them and bought have been rewarded. The market will probably crash or correct sharply eventually but meanwhile, there is money to be made on the long side. The fact that the week closed very close to its high is a bullish sign, further supported that January is traditionally a good time to buy stocks in a bull market, as evidenced by last week’s very strong bullish candlestick.
This pair is in a long-term upwards trend, and just made a new multi-year (three years!) high. Last week’s candlestick was large and strongly bearish, with a big lower wick rejecting a new key support level, suggesting that the price is likely to rise higher still. The only reason for caution is the cluster of resistance levels just above the weekly high, which have already made their presence felt, as shown in the price chart below.
This pair is a long-term upwards trend, making new all-time high prices, and it has been rising since the start of 2016, since when it has more than doubled in value. Palladium is a rare metal whose most major use is in manufacturing catalytic converters. While the weekly movements are difficult to predict, trend traders who are prepared to hold for the long term could find a long trade here interesting. One potential difficulty with this trade is the fact that many CFD brokers either do not offer Palladium, or if they do, they charge a large spread. Last week’s candle was strongly bullish, and the overall bullish pattern looks extremely healthy.
Bullish on the S&P 500 Index, Palladium/USD, and EUR/USD. A long in crude oil might also be interesting.