Sunday, December 16, 2007

Technical Analysis of Currencies

Many interesting developments occurred for this past week, so this week's posts will be more in depth than usual. Let's start off by looking at the Euro versus US Dollar. This currency pair broke down quite badly this week. In fact, the Euro did not experience this level of selling in one day since 2004. Here is a point and figure chart that outlines the damage:


This chart has 0.5 box size and a 3 point reversal. It goes back until the end of July 2007. As you can see in the above chart, the Euro has formed a triple bottom sell signal, which, of course, is very bearish. This shows that the bulls have lost a key battle at an important support zone, and that the bears are now in control.

The above chart also shows a triple top buy signal that occurred back in September. Because this pattern is the opposite of the pattern just mentioned above, you may want to check out this article.


A defeat for the Euro must mean a victory for the US Dollar, and the following daily chart shows that was in fact the case:


If you observe the above chart, you will see that the bulls are in control of the US Dollar right now. This is evidenced by the extremely tall white candle formed on Friday, and by the MACD Histogram, which is showing that the short term trend is up.

On the November 17th post, I suggested that US Dollar strength was in the pipeline. On December 1st, I showed that the US Dollar Index was putting in some bullish candles, and that the bulls won a battle at the 75 mark. It would be worth checking out these posts, since the lessons learned will inevitably be applicable to some market situation at some point in the future.

Here is final chart showing another perspective of the US Dollar. It is a weekly chart, and the indicator on the bottom is the ADX indicator:


I showed a similar chart using the ADX Indicator in this article. However, my predictions turned out to be totally wrong, and the indicator gave a false signal. One would think that after this failure, I would be dubious of using this indicator again, but the difference here is that the above chart is a weekly chart, and not a daily.

The way signals are generated is when the thin blue line crosses above 35. This indicates that the trend is near exhaustion, and that a period of rest is needed. I feel that this method of using this technical indicator is more reliable than the daily version.

There will be another post to come later on today. Thanks for visiting.

4 comments:

STOCK SNIFFER said...

Hey Danny,

You have been wonderfully correct in forecasting direction for the dollar and gold these last 6 weeks. I think your blog is incisive.

Best regards,

Rob said...

Thanks for your analysis. I'm mainly interested in Forex, but often visit your site to see what your thoughts are on gold. As for the ADX indicator - I haven't live traded using ADX, but will look into it. I find a slow 8, 3, 3 stochastic suits my style of trading, but I'm always looking for new indicators and trading ideas.

Danny Merkel said...

Thank you for the comment Paul. I am glad that you have realized this. It seems that there are only a handful of viewers that truly Get my analysis, and you are certainly one of them.

Danny Merkel said...

Hi Rob,

Even if you only trade Forex, it is probably worth checking out gold analysts, as you know.

Using the ADX indicator for day trading may work, but I have never tried it. Let me know if you find a technique that works.