US dollar strength: Mid and long terms outlook

Once in a while, it’s a good idea to step back and look at the chart in a greater scale. Now that we made a killing in selling EURUSD, it’s good time to stop trading, and check where we are.

The first chart we are looking is performance of 8 cross-usd currency from November 26, 2009. In other words how much each currency appreciated (depreciated) against US dollar.  Click on the chart for an enlarged image.

The reason why I took November 26, 2009 as the origin in this chart is that it is the bottom of US dollar index so far.

20100124_cross_usd_2month

As of January 20th, performance from the top is CADUSD, AUDUSD, GBPUSD, JPYUSD, NOKUSD, CHFUSD, SEKUSD, EURUSD, but they are all depreciating against US dollar in past 2 months. And as you could have well expected, Euro is sold badly, nearing 7% decline in 2 months.

My trading plan is focused around the US dollar strength this year, and especially I will focus on Euro weakness against US dollar.

Among the 8 cross-USD currencies in the first chart, all of them except AUD and NOK are used to calculate US Dollar Index. It is a weighted geometric mean of the six currencies, and in fact EURUSD is weighted 57.6 percent.

So it is very natural, US Dollar Index and EURUSD charts look almost symmetric:

20100124-dx-vs-eur-daily

It is good to have these images in mind when we construct trading plans even for the short term trading.

From the next chart, I will focus on EURUSD. First I show you the very long term: monthly chart.

20100124-eurusd-monthly

In this time span, it is very difficult to count Elliott waves because we have very few waves in the past that we can use as the reference. So, I am not sure at all whether my purple .1 and .2 or even black labels are correct. But I can be more confident about the blue underlined labels. So, if you look around the black 1, you will see blue underlined 1 to 5 is complete. It is likely, from this count, we are in some kind of corrective wave. And because the blue underlined a was so severe downtrend (2008 financial crisis), I would expect the current wave to be blue underlined c in a a-b-c- zigzag wave. In zigzag wave, the initial descent (blue underlined a) can be used as a reference to estimate how far c wave would go (blue arrow in the chart). The end of the arrow is pointing around 1.1380.

EURUSD went down badly since November 26 of last year, but it looks like we have just started out journey.

Lastly, let’s look at daily chart. (I changed the label notation slightly to be sync with my Elliott wave count of US dollar index)

20100124-eurusd-daily

While I won’t be surprised to see another push down towards 1.4000, I think the initial 5 waves descent of the EURUSD has ended. I often see 61.8% or even 78.6% retracement after any Wave 1, so EURUSD may rebound towards 1.4720 in February.

So my plan is not to trade until EURUSD will break the gray trend line resistance, and count the wave in shorter time span, and probably we have time to long EURUSD once or twice to make some money before the purple II finishes.

$EURUSD Expect rebound to 1.4376 but hold on to the position.

Update: I completely closed this position at 1.4200.

It’s always good when the first news in the morning is the realized profit of 240 pips in a single trade.
The limit order to take the profit from my first half of the position entered at 1.4545 was filed at 1.4305. It gave me 3.6% return.

Now I am left with the other half of the position, entered at 1.4489. (The new US regulation requires first-in first-out transaction.)

If my count is correct, we have just finished the black 3 wave at 1.4250. I would expect a rebound towards 1.4376. A 130pips rebound might give shorter term traders a good reason to get out. There is nothing wrong with that, but it’s just not my case in this market condition.

For now, I will keep my 1.4430 stop loss. If anticipated black 4 shows enough 4th wave characteristic (i.e. complex wave within a range), I may consider selling more before the final descent towards 1.4171 level.

Also notice how well Fibonacci support levels worked, and they agree well with the support levels from trend lines and previous lows & highs.

20100119-eurusd-60min

$EURUSD Play by rules, not guesses...

I have not touched my short position yet. I am surprisingly patient.

I could have took partial profit at 1.4330 level, or even at 1.4385 when it broke up the short term trend line resistance (see the black line). But I was busy with other things…

Plus, my New Year resolution in trading is to keep on sitting tight unless it reaches to my initial target level, or it breaks Elliott wave rule for the trend to be an impulse wave (I only trade on impulse waves).

So, if EURUSD reaches 1.4454, it is a clear breaking of impulse wave criterion, so that is where my stop loss order sits.

And I use the travel distance of blue underline from the current resistance (1.4416), it is just around 1.4300. So I put my initial profit taking level there, but maybe a few pips above because of the bid/ask spread.

20100118-eurusd-60min

Real time trading tweets

The plan in the article may get rejected any time, so please check out my tweets on Twitter.

Current risk exposure:

"","","","","$29,058.30","","","","","","","","","","","","","","","","","","","","41.95%","","","2.00%","","","","","","","","","","","","","","","","","","","","","","","","","","","",""
Rational Move always use stop loss orders, and this is the worse case potential loss over the capital for the currently open positions. This is unrealized loss is less or equal to the risk exposure.

Capital growth

From recent 100 trades (%) The growth right before the 1st trade is set to 0%.
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Drawdowns

From recent 100 trades (%)
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Total returns

Since inception
(Aug 10, 2009)
Year-to-date Quarter-to-date
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This is a normalized value: the return on each trade is normalized against the capital just before the trade execution. This way, it is eliminating the effect by the capital change from deposits and withdrawals. The calculation thus reflects the trading performance of each trade. The value does not contain unrealized profits and losses. RM's trading strategy never risks more than 5% of the present capital. Not including subtraction by tax.

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