Index Trading: Consolidation Ranges Widen As US CPI Dodges Bullet

RCIS Index Trading

This method of using bespoke FX indexes to compare the strength of multiple currencies aims to find trading opportunities that can sometimes get lost in the noise and distortions of charting using individual currency pairs. Reasonably well correlated with key dollar pairs as a result of the index weighting but often significantly different, we are able to trade divergences between the index charts and the major dollar pairs. All of the indices have positive polarity, meaning that when the Yen strengthens for example, the JPY% index chart will rise. You can also purchase these indexes for NinjaTrader from the link at the bottom of this analysis.

Outlook

Dollar strength has resulted in us breaking the steeper bearish dollar index channel previously recommended and we have now entered a less desirable, more range-bound scenario for many of the fx indices. Without a confirmation from the FOMC regarding the impact of recent news on rate hike expectation (spurious chin-wag from the various members asserting their own private agenda does not count) then few will want to place big bets on the market, so at least we have a deadline for the tedious price action to hopefully end. Much like the price action on Wednesday, I have a bullish USD lean, although don’t expect dollar bull fever to be quite so pronounced this time around, we have seemingly reached a fairly comfortable level and require hard facts before making the next major move. US CPI was better than expected although at 0.1% rather than 0.0% it’s hardly time to break out the champaign. We seem delicately poised, and it really would not take much for the wheels to come off for the US economy.

Thursday is the monthly PMI extravaganza, with a whole batch of prints from around Europe, the US and China, along with UK retail sales to round things off.

If you have any questions or comments then feel free to tweet me @LFXMark

USD% Index

usd index wed 22 oct 14
Having redrawn the bearish channel we remain in correction mode and could well reject the currently tested minor resistance, but with further headroom until the top of the new channel, this is not a high probability trade and probably best avoided. There is no shame as an analyst to admit that the outlook is unclear and to recommend not placing a trade, keeping powder dry is an underrated skill. If we do retrace lower within the channel back towards the thick yellow previous multi-year high, this has proved to be reliable support although we have a frustratingly large range that is acceptable before a decision one way or the other has been confirmed which makes risk to reward ratios quite uncomfortable unless trading from the extremes of this range, which currently are a reasonable distance away. I am bullish USD% from 1.2850 and 1.2800

USD% Index Resistance (EURUSD support): EURUSD 1.2637, 1.2550
USD% Index Support (EURUSD support): EURUSD 1.2685, 1.2767, 1.2800, 1.2850

EUR% Index

eur index wed 22 oct 14
Continued Euro weakness as a result of slightly positive US data, a failure to hold above the 100 hour moving average and the continuing saga of the ECB purchase of corporate bonds. We remain inside a horribly wide bullish channel, which makes the support levels less reliable. We are below the 100, 200 and 400 hour moving averages so sellers currently have control in the short term and fundamentally, there is reason to think that they are right, however there is also the counter argument of a doubt regarding the Fed tightening due to continually poor inflation and other flies in the US data ointment. The last thing the world needs is a premature tightening cycle from the Fed right now and Yellen is too smart to take that leap of faith without good reason. The focus for near term direction will be PMI news volatility with the German number the highlight. At this stage it would almost be helpful of the data was terrible because at least it would break the stalemate for the markets and trigger real action from Europe. I am bearish EUR% but not from current levels

EUR% Index Resistance: EURUSD 1.2700, 1.2800, 1.2900
EUR% Index Support: EURUSD 1.2623, 1.2583, 1.2500

JPY% Index

jpy index wed 22 oct 14
We have redrawn the Yen bullish channel also, which seems a more accurate analysis of current conditions. The channel support that we are currently sitting at has now been met at the same time as the Kumo for Nikkei 225 futures so this confluence of signals may see the Yen rally from here in the short term, but longer term our view is that the Yen will not rally enough for USDJPY 104.50 to break. If the Yen does rally, we will see the 105.00 level for USDJPY a potential attractor for longer term USDJPY longs. I remain bullish JPY% while above the 400 hour moving average

JPY% Index Resistance (USDJPY Support): USDJPY 105.00, 104.50
JPY% Index Support (USDJPY Resistance): USDJPY 107.38, 107.86, 108.00

GBP% Index

gbp index wed 22 oct 14
I suggested in yesterday’s analysis that the pound could currently be thought of as the inverse of EURGBP. So while the dollar is less bullish and a little more indecisive, then every time the dollar pushes the GBP% index lower this could be a EURGBP selling opportunity, which will likely see the GBP% index retrace back again. As such the dollar strength on Wednesday did exactly that and we remain bullish GBP from key support areas and broadly bearish EURGBP. With UK retail sales a little off colour in recent prints though, the risk of a poor number resulting in real downside for the pound remains during these choppy conditions. Thursday’s outcome will be largely determined by the convergence or divergence of European and UK data performance. I am bullish GBP% but data dependant

GBP% Index Resistance: GBPUSD 1.6115, 1.6271
GBP% Index Support: GBPUSD 1.6000, 1.5900 1.5850

AUD% Index

aud index wed 22 oct 14
Aussie CPI increased to 0.5% from 0.4% which bolsters the bullish view as a result of a better than expected Chinese GDP and industrial production numbers. Longer term readers of this analysis will know that I often love to take the opposite trade to Goldman Sachs trade notes and this is a great example since they today came out with a bearish trade suggestion. This is a just-for-fun exercise though this time since I really don’t have high conviction for AUD upside currently as a result of the lacklustre price action and unsolvable Fed tightening puzzle at the moment (until the FOMC clarifies the outlook), but the Goldman short recommendation has certainly pushed me further into the bull camp. I am bullish AUD%

AUD% Index Resistance: AUDUSD 0.8814, 0.8850, 0.8921
AUD% Index Support: AUDUSD 0.8693, 0.8621

CHF% Index

chf index wed 22 oct 14
With EURCHF still going sideways around the recent major support level, the CHF% index has reacted in an almost identical way to the EUR% index so the analysis there will fit here. The only time that changes is when the SNB begin to manipulate the Franc, or if there is a fundamental shift, but with the threat of a EURCHF floor the only thing preventing it dropping, further strengthening the Franc, then there remains a policy divergence which favours Franc strength so we remain at stalemate. Support for the Franc comes in at USDCHF resistance in the 0.9557 region. A break there would be quite bearish for a push to the 0.9600 level. I am bearish CHF% from resistance

CHF% Index Resistance (USDCHF support): USDCHF 0.9518, 0.9466
CHF% Index Support (USDCHF resistance): USDCHF 0.9557, 0.9600

LittlefishFX Relative Currency Index Strength

All of the currency indexes used for this analysis are available as a NinjaTrader indicator from the link below. They are eight indexes, USD, EUR, JPY, GBP, AUD, CHF, CAD and NZD with each index made up of the remaining seven pairs, weighted in accordance with the distribution of global FX volume as measured by the Bank of International Settlements in their Triennial Survey.

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