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 21st 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 mostly positive, with the S&P 500 Index rising this week by 0.85%, while Palladium fell by 1.59%, and EUR/USD rose by 0.13%, producing an average loss of 0.20%.
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. There was no truly significant U.S. economic data released last week, so there was nothing to change the bearish sentiment and the Dollar continued to fall over the week, although it recovered on Friday to some extent. The Euro has the greatest long-term strength of any major currency.
The news agenda this week will probably be dominated by some key U.S. data on Friday, but there is also central bank input due from the European Central Bank and the Bank of Japan.
The American stock market remains in a strong and clear 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 GBP/USD currency pair just made a new 18-month high price.
Following the current picture, I see the highest probability trades this week as long of the S&P 500 Index, and long of the GBP/USD currency pair.
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 an average sized, reasonably bearish candlestick, which closed in its lower half but with a significant lower wick. 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, and the large lower wick is increasingly suggestive of this outcome. Finally, note that the Index has made a new 18-month low, which is a 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 18-month high. Last week’s candlestick was large and closed up, but there was a fairly large upper, suggesting bulls need to be cautious. The proximity to the psychologically key major round number of 1.4000 might also be another cap on the rise. This bullish trend is slow, but it has proved to be relatively stable.
Bullish on the S&P 500 Index, and the GBP/USD.