As predicted in the last article sideways trends were observed on the major currency markets during the week. However, there is a question traders are concerned the most. What is going to be next: continuation of flat trends, downtrend or uptrend, and how far?
Using the Commitments of Traders (COT) data published on 30th of November, intermarket and graphical analyses I will answer this question with detailed take profit targets. At the end of the article you can find specifications of the discussed indicators.
The USDX market
According to the last Commitments of Traders (futures and options) report published on Friday 30th the COT indicators do not provide a buy signal anymore. However, indicators are close to the critical bounds. The hedger COT index has slightly changed its value and is equal to 79% (-2 percent points), meaning hedgers still consider the USDX to be quite undervalued relatively to major currencies. But the William Commercial Index dropped to 62% (-7 percent points) and is far from any critical bound. It is not surprising because even with a correction observed on the market the USDX value has significantly increased comparing to its September values.
Other COT indices have not changed their values significantly as well. The large speculator COT index value is 22% (+2 percent point). The small trader COT index decreased from 28 to 27% (-1 percent point). The open interest hit a new record low level; it dropped from 40,328 to 36,621. As a result, the open interest COT index is equal to 0% (-5 percent points). It is an indication that traders moved the USD index below its fundamentals and on the level of 80.89 it is undervalued. Clearly, as I mention in my last review, current price of 80 is too low.
Figure 1: USDX futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
As it was predicted in the last review, during the last week we observed low volatility in the USDX market; the index varied from 80.05 to 80.50. The volatility significantly dropped which is indicated by a drop of Standard Deviation based on last 5 days to 0.0793 (see green line in Figure 2). It is interesting how the weekly resistance at 80.05 worked as a supporting level. For now the market behaves as predicted, thus I expect the uptrend continues with new strength next week.
The long-term forecast is the following the USD rally will stop in several weeks at the level of 82-83. The motivation to correct the long-term forecast is twofold. First, despite a significant increase since mid-September, hedgers, large speculators, and open interest still indicate that the USD index is undervalued. Second, there is a set of daily resistance at 82.80 and 83.40 before the monthly resistance at 84.00, thus there is a high probability that current uptrend will stop either before first or second daily resistance.
Figure 2: USDX, daily candlesticks. History: from Dec 2011 to Nov 2012.
The EURUSD market
After the COT indices exited the critical bounds of 0-20 and 80-100% last week, according to the last COT report published on 30th of November the COT indices returned back and indicated a sell signal on the EURUSD market. It is not surprising because the previous COT report showed market participant expectations when the exchange rate dropped to 1.27.
Currently, the hedger COT index is equal to 11% (-14 percent points) while the Williams Commercial Index is equal to 31% (-26 percent points). Both large speculators and traders bet that current uptrend correction on the market is going to continue, as a result the large speculator and small trader COT indices are equal to 89% (+14 percent points) and 86% (+13 percent points), respectively. The open interest COT index is equal to 0% which indicates that the market is undervalued, a signal for uptrend. However, the open interest had benn very low for the past 10 weeks, therefore it is not an indication that current uptrend correction will continue.
Figure 3: EURUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
A significant volatility decrease was observed on the EURUSD market. Ignoring the intraday volatility, the exchange rate varied in a thin channel of 50 points (see Figure 4). I expect the major downtrend to continue. I have made some corrections in my graphical analysis. Therefore, my long-term forecast is changed from a fall up to 1.21-1.22 to a fall up to 1.22-1.23.
Figure 4: EURUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The GBPUSD market
According to the Commitment of Traders reports the British pound is not strongly overvalued relatively to the USD for quite a while. However, after the exchange rate returned to the level of 1.6 the COT indices returned to the critical bounds, as well. The hedger COT index is equal to 29% (-17 percent points), while the Williams Commercial Index (WILLCO) is equal to 24% (-23 percent points). The large speculator COT index is equal to 64% (+17 percent points) and the little speculator COT index is equal to 80% (+18 percent points). The open interest COT index is equal to 63% (+10 percent points) indicating an average level of the open interest on the market. None but the small trader COT index is indicating a downtrend on the market. However, some indices, for example the hedger COT index and WILLCO are close to the critical bounds indicating most of the hedgers believe that at the rate of 1.6 the British pound is overvalued relatively to USD.
Figure 5: GBPUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
The GBPUSD exchange rate behaviour is very similar to EURUSD . Ignoring the intraday volatility, the exchange rate varied in a channel of 50 points. A significant volatility drop is also well indicated by a Standard Deviation decrease (see Figure 6).
After observing the COT data (see Figure 5) it is clear that at the level of 1.6 hedgers consider GBP quite overvalued relatively to USD because the COT indices moved to the critical bounds of 0-20% and 80-100%. Thereforeб I believe we can keep the long-term target at the level from 1.55 to 1.57. If you are not very optimistic about the market, your take profit should be before the daily support at 1.5660; otherwise, after it.
Figure 6: GBPUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
The USDCHF market
Not surprisingly, after the USDCHF exchange rate returned to its mid-October values last week, the market participants reacted and the COT indices rushed back into the critical areas of 0-20% and 80-100%. According to the COT report published on 30th of November (notice that the report is collected for the inverted exchange rate, not USDCHF), the hedger COT index is equal to 12% (-26 percent points), while the Williams Commercial Index is equal to 21% (-37percent points), almost in the critical area. The large speculator COT index is equal to 84% (+25 percent points) and the little speculator COT index is equal to 90% (+23 percent point). The only conflicting indicator is the open interest: the COT index is equal to 14% (-5 percent point). However, as in case of the EURUSD market, the open interest was very low for the past 10 weeks, therefore it is not an indication of current downtrend soon reversal.
Figure 7: CHFUSD futures and options data, the COT indicators. History: from May 2012 to Nov 2012.
Although in the last report I corrected the long-term rate from 0.9960 to pessimistic 0.96, this week I would like to correct it again but to a new level. The motivation is twofold. First, I have changed my graphical analysis and the COT data provided fresh inside information.
The resistance and support levels on the USDCHF market are very similar to the ones in the USDX market. The long-term target should be corrected from 0.975 to 0.985, just before the first or the second daily resistance at 0.9800 and 0.9870 respectively.
Figure 8: CHFUSD, daily candlesticks. History: from Dec 2011 to Nov 2012.
Clearly, there are signs that part of major trends has already passed and some fundamental indicators do not provide strong signals. However, graphical chart analysis shows that there is place for trend continuation, for example the USDX and USDCHF will increase and a downtrend is expected in the EURUSD and GBPUSD markets. Please notice that I made corrections in the long-term targets due to change of my graphical analysis style, as well as do not forget that Christmas and New Year are coming. Vacation time may result in unexpected variations in the currency markets.
Information about the analytical review and forecasts
The fundamental analysis is based on the Commitments of Traders (COT) data published by the Commodity Futures Trading Commission (CFTC) and the cross-market connections. The technical analysis is based on support and resistance levels.
More information regarding the COT data can be requested from the author of this review or found on the Commodity Futures Trading Commission’s website www.cftc.gov.
Information regarding the interest rates mentioned in this article can be found on the ECB and BoE official websites.
The COT Indices used in this review are calculated using 26 week historical data. The Standard Deviation indicator takes into account volatility of last 5 days.
Open or close your position only after a careful consideration. The additional analysis is needed to identify the points for the entrance into and exit from the markets bearing in mind your own money management strategy. Author is providing the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.
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