Market Psychology & Analysis

Written by JS T Alexander | 18 May 2010

Behind the Market Sentiments

The focus of most traders are not in the economic reports concerning the US economy but rather the market reactions to the continued downward movement of the Euro and the Pound vs the USD. The overwhelming negative sentiments have spillover on the very start of the Asian session and through out the American trading hours.

As Bloomberg has asked a few renowned market analyst and traders from the top firms as to where they would call the market at this point. One has called a parity by the 1st quarter of 2011 or sooner. And the contrary sentiments from BNP Paribas stating otherwise and now should be the time to consider buying the Euro vs. the USD. Where would you stand?

It is quite obvious that the major players and banks have already started to ramp up their position trades in the forex market in relation to the amount of exposure each bank would have already been in the market even before the 1Trillion Dollar package. These would not be identified in the commercial and financial news since interbank trading may well be able to monitor the individual trades in packages made by these banks which also include the central banks through certain back door trading with other major institutions. With the recent continued increase on the London Interbank Offered Rates (Libor) in Europe; it basically means that swap transactions and forward rates are heavily traded in line with the continued decline of the two major currencies dominating the market in Europe. These has added more liquidity and magnifying volumes that may and may not be a signal that a close price reversal and pivotal price point can be accelerated if the market gets spooked somewhere along the time before the end of this month. But what may trigger this?

Technical Perspective :

On the technical stand point, whenever markets dramatically moves ahead of the weeks trading activities; most analyst and traders find it difficult as to what would be the best criteria to use to measure and provide an educated analysis. And not simply based on hindsight of the debt crisis and the package bailout scenario. However, no amount of technical outlook at this current time may influence a much reinforced market trend fueled by traders and investors betting against the Euro and the Pound. The Upward trend has been well established since the USDX showed its reversal signal last December 22, 2009 and continued to the 1st quarter and the first two months of the 2nd quarter as an extension of its high and is now targeting the major resistance price of 88.80 basis points. The leading June contract month for the USDX is within striking distance as it has touched it 86.74 initial objective as a primary attempt as it is currently on a corrective mode from a high of 87.23 basis point.

As for the USDCHF's 1st objective of 1.1380 has also been attained with an extension of 1.1445 and the GBPUSD to the low levels of 1.4250 respectively. Taking a gutsy move to take a short USDCHF and a long GBPUSD position on these extensions are only viable for larger account holders with no existing positions but also has a minimal risk factor. Meeting prices on extreme extensions are applicable for most experienced strategists. As a matter of trading principle of meeting headon with a rapid market may not be suitable for others as a relative loss may occur upon entry and could lead to trading confucion. Although, market timing an entry may well prove to be more manageable specially when a possible price reversal may be anticipated whenever such movements like these times are in the making from the Asian session. A reasonable recovery for the two major pairs are more likely to happen as position adjustments are made by the central banks as the time grows nearer for the package to be implemented. A word of caution is that a bottom can never called a bottom until a new high has been established and applies the same for contrary trends.

Meanwhile, the EURUSD low on the 1.2234 was close enough from its target objective of 1.2180 and a key price of 1.2380 on the way up would be the key price to watch for and the volumes on the futures market that may provide some signal of a slight recovery on a day to day basis until a clearer outlook could be gathered within the week. With the EURGBP penetrating its monthly symmetrical triangle has a clearer trend outlook more bearish in line with the negative sentiments of the Euro Zone; a temporary recovery for the GBPUSD may signal a near term corrective mode. The EURGBP cross may now be more favorable to trade as a primary choice rather than the Major pairs. This also goes the same with the corrective mode of the EURJPY slightly due to the tighter trading range the USDJPY is at currently working at the 92.62 above the higher support trendline of 92.25 which happens to be the opening price of the week. The weekly USDJPY weighs heavier on the downside with a technical noutlook of a spike and hammer candlestick bar formation indicating a negative tone contrary to the USDCHF market analysis as shown on this chart. The EURJPY would play a vital role of influencing the movements of the individual pairs to head lower as it is also defined bearish with a slight correction higher for this week on a day to day basis.

This goes the same with the Aussie and the Kiwi as both pairs again moved back down to the 0.8723 and 0.6986 respectively and would still move lower.The irony of the matter is that The Aussie loosing steam has turned cold a week earlier of this movement but now showing its true colors heading south. With the Kiwi making some relative low at 0.6914 right on it support line in the mid term may also pause in line with the USDX trading now closer to its reistance levels.

Gold prices and the USDX are still in sync to move higher as a decoupling factor vs. the Euro's weakness is much more than that of the US dollar weakness. Both commodity currencies are now a flight to quality investments and a safe haven process for most sophisticated investors. Our market view had called a 1250.00/oz from our last report where inflation adjusted Gold prices could be heading and it did. Watch for any changes in behavioral patterns on both instruments towards the end of this months trading.

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