Price and Time: A Contrarian's Paranoia

11/06/2014 9:00 am EST

Focus: FOREX

Kristian Kerr

Chief Technical Strategist, Forex Capital Markets LLC


In this video, Kristian Kerr, of DailyFX.com, offers a price and time analysis of three currency pairs, and explains how he, like the whole forex market, became excited and started looking for a resumption of the broader downtrend but also what he doesn’t like about the recent action.




Foreign Exchange Price and Time at a Glance:

Price and Time Analysis: USD/JPY

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Charts Created using Marketscope—Prepared by Kristian Kerr
Click to Enlarge

  • USD/JPY stormed through the 78.6% retracement of the 2007-2011 decline near 113.75 Monday to trade at is highest level in almost seven years.
  • Our near-term trend bias is higher in USD/JPY while above 112.00.
  • A close over 114.00 is needed to set off the next leg higher in the rate towards range expansion objectives near 115.00.
  • Minor turn windows are eyed Wednesday and early next week.
  • A daily close under 112.00 would turn us negative on the exchange rate.

USD/JPY Strategy: Like the Long Side While Over 112.00.

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Price and Time Analysis: GBP/USD

chart
Charts Created using Marketscope—Prepared by Kristian Kerr
Click to Enlarge

  • GBP/USD traded at its lowest level in several weeks Monday before finding support near the 78.6% retracement of the late October range.
  • Our near-term trend bias is lower in Cable while under 1.6180.
  • The year’s closing low around 1.5880 is an important downside pivot with a daily close below this level needed to confirm a resumption of the broader decline.
  • A minor turn window is eyed later this week.
  • A close over 1.6180 would turn us positive on the pound.

GBP/USD Strategy: Square for Now

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Focus Chart of the Day: EUR/USD

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Click to Enlarge

The decline in EUR/USD under 1.2500 over the past few days has gotten the FX market excited and looking for a resumption of the broader downtrend—us included—as we were looking for and got a reversal in the pair after last week’s FOMC meeting. What we don’t like about recent action is sentiment. One of our favorite measures of sentiment is the Daily Sentiment Index. Last month, when the euro initially traded down to 1.2500, the DSI fell to 3% bulls in EUR (signaling a looming countertrend reaction). After a month of corrective action and consolidation, we find the euro back around the same levels in terms of price and with virtually identical levels of extreme negative sentiment as the DSI fell to 4% bulls Monday. This is not ideal to say the least. We had hoped the price action over the past month, or so, would have cleared the market of some of its excess in terms of sentiment and positioning, but this clearly has not been the case as conviction is high that the single currency is about to head sharply lower again. This widespread conviction in the direction of the euro makes us nervous and has us questioning whether our timing is off. If it is, then the next couple of days should be the tell as a close back over 1.2580 would warn that the exchange rate is headed higher, possibly for a couple of weeks. A close, on the other hand, under 1.2450 (along with a close over .9700 in USD/CHF) this week would help alleviate some of the contrarian’s paranoia we are experiencing and signal the herd indeed has it right.

By Kristian Kerr, Senior Currency Strategist, DailyFX.com

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