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 8th January 2018
In my previous piece three weeks ago, I saw the best possible trades for the coming week as long of the S&P 500 Index, and long of the precious metal Palladium. The individual results were mixed, with the S&P 500 Index rising that week by 0.13%, while Palladium rose by 1.50%, producing an average gain of 0.81%.
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. Last week’s disappointing Non-Farm Payrolls data release suggests that this bearish sentiment will continue until at least the end of this week. 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 U.S. data on Friday, with little else of importance scheduled.
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, EUR/USD and to a lesser extent GBP/USD are in convincing long-term bullish trends.
Following the current picture, I 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.
Technical Analysis
U.S. Dollar Index
This index printed a relatively small bearish candlestick, which closed down within its lower half but with a visible lower wick. There is a long-term bearish trend, and a new bearish trend line can be drawn. 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 normal.
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.
EUR/USD
This pair is in a long-term upwards trend, and just came close to making a new multi-year high. However, the fact that last week’s candlestick was small, with a large upper wick rejecting a key resistance level, suggests that it may struggle to rise much further – this is the pair in focus this week to be most cautious about.
Palladium/USD
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.
Conclusion
Bullish on the S&P 500 Index, Palladium/USD, and EUR/USD.