The summer of 2019 has been unusually active in the financial markets. Such a volatile vacation season happens once a decade and most of the events should have long-term consequences. Many traders are scratching their heads trying to understand what those events might lead to and how to position themselves on a long-term basis before the active Autumn season. I decided to focus on Euro cross-rates today. The reason is that besides an interesting technical picture, there is a fundamental divergence which has the potential to break many existing chart setups.
Before I start analysing the main charts for this outlook, I’d like to have a close look at German DAX 30 Index. The monthly chart below shows that despite the decline of 2% in August, equity investors are still interested in purchasing German securities. The long downside shadow on the monthly candlestick underlines the demand for DAX 30 as traders step in when the overall rate becomes more attractive. As a result, over 5 months of volatile price action, the benchmark did not go far from one-year highs printed in August 2018. A second observation is more important for the technical analysis and it reflects the generally bullish sentiment. August closed one point above Ichimoku’s Base Line support after testing the upper band of the Cloud and in my view that should signal an end of the bearish retracement. Of course, the index might have more whipsaws on the bearish side, but the next monthly candlestick should be green, according to the Ichimoku Cloud trend indicator which I favor.
The EUR/JPY currency pair traditionally reflects equity traders’ sentiment. However, if I looked at the same timeframe for the cross-rate, I would be lead to believe that the DAX30 and other European stock indices plunged deeply in August. That’s exactly the divergence I mentioned above. EUR/JPY is in a strong downtrend with a risk to accelerate the decline. The pair charted the lowest monthly close rate since October 2016. The Ichimoku leading span turned bearish again, while both lines are in the right order to proceed the downtrend. Given the speed of the bearish action, I would suggest that the bears would not stop before the nearest blue horizontal support was tested. In June – October 2016, the cross-rate had found a bottom at around 113.93 (the lowest monthly close) with several whipsaws toward 112.00 approximately. Therefore, if I was a Bank of Japan official, I would start intervening right there. Or if I was a hedge-fund manager operating billions I would hide my longs in that range.
Of course, a distance of 300-500 pips more might be a lucrative bargain for a comparatively slow-moving pair as EUR/JPY. What’s more, I’m still holding shorts for EUR/JPY. However, my point is that the market might start getting ready for a long-term reversal as early as September. Sharp bounces and long shadows will signal such a process. The same story happened in Summer 2016. EUR/JPY went rather far from 89-weeks simple moving average, RSI became extremely oversold and the MACD histogram increased the negative sentiment. After long shadows on the weekly candlestick, the pair began a consolidation period which led to a sustainable bullish 18-month uptrend. And the main part of the story was that it coincided with the uptrend in DAX30. Take note and best wishes in the markets this first week of September traders!
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