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Fading EURUSD Rallies, The Longside in the Australia 200 index

Posted on: 26 February 2018 , by: Darren Sinden , category: Market Review

Contrarian -  Fading EURUSD rallies from the 200 DMA

We started the year with expectations of Euro strength and US Dollar weakness, and up until the 16th February, that was largely what we saw. But as sentiment changed, the Euro gave ground, rejecting $1.2556 (a new high for 2018) and selling off almost continuously since then. On the H4 EURUSD chart below, you can see that the 200D Moving Average has provided support for the falling Euro. Since the 18th of December 2017, this line has effectively acted as the uptrend in the rate. In fact, it played the role of support very well in the early part of this month.

H4 EURUSD chart - 200D Moving Average provided support for the falling Euro

So what might be behind this loss of impetuous in the Euro? We have seen a downturn in Eurozone PMI's or Purchasing Managers Index data. The chart below shows both the Composite and Manufacturing measures starting to head lower, and in doing so, it has moved below a simple four-period moving average, which had been rising.

Composite and Manufacturing measures starting to head lower

Recent Euro gains had coincided with rising PMIs. It’s not much of a surprise because PMIs are a leading indicator of economic activity and rising numbers equate directly to economic growth. Sufficient economic expansion would allow the ECB to end QE, raise interest rates and return to a normalised monetary policy - all of which would be Euro bullish. However, in conjunction with the weaker PMI data, we have also seen that the ECB balance sheet, far from contracting is actually continuing to expand, see the chart below. The ECB currently owns around 25% of outstanding Eurozone sovereign bonds. US Bankers, Goldman Sachs, predicts that this figure could rise to 28% under the current €30 billion per month QE schedule. 

ECB Balance Sheet

Taking this into account, I think traders are waking up to the fact that normalisation and rate rises in the Eurozone are still some way off ( 2019?). and that the US Federal Reserve will move once, if not twice, on its interest rates in 2018, perhaps by as early as March 21st, This thinking should be supportive of the US Dollar. 

Against this background then, there are two opportunities in EUR USD. 

  1. Sell a convincing break below the 200D MA line highlighted above. This line has been supportive of the recent uptrend and any break below it could signal a broader change in sentiment towards the Euro.
  2. Or should that support remain largely intact (as I believe it is likely) traders could fade any rallies in the Euro, as it tries to move higher from that line.

Note though that picking failure points in a countertrend rally is not a straightforward task. 
But $1.2345 has been near-term resistance, as has €1.2360, which was the high posted in the final H4 candle on Feb 21st. Perhaps the best policy will be to let the market tell us when it's fading.  To do that be on the lookout for :lower highs and lower lows in any counter-trend rally for guidance.

Signal -  Long the Australia 200 index 

The recent bout of equity volatility has made life difficult for trend-following traders. Since the lows of the 8/9th of February, the Australian 200 index has been consolidating and moving higher once more. To the extent that it moved back to bull trend in the model I follow, on the 19th of February. The Index has moved back above its 200 D EMA line and has been toggling between the 20 and 50-day lines drawn in turquoise and orange below. 

The model also tells me that just under 60% of the index constituents remain in a bull trend, despite the shakeout seen early in the month. And though not shown here the uptrend in the percentage of individual bull trends or index breadth, that dates back to early September 2015, remains intact. The index itself is a mid-strength bull trend, and the model has a three to six-month price objective of 6240.

ASX200 Index moved back above its 200 D EMA line

Closer to home it would be nice to see the 200 index move and close above the 20 and 50 day EMA lines, and resistance at 5992. From where 6050 and 6090 are potential upside targets. With 6121, the second of February high, beckoning beyond that. Benchmark equities, such as Qantas and BHP Billiton have recently reported good figures, and Credit Suisse expects the current Australian earnings season to be one of the best we have seen for 15 years. 

I note that more than 50% of the Australia 200 companies that have reported earnings, since the end of January, have posted a positive earnings surprise, according to Bloomberg research. Dividends and share buybacks are rising, all of which should be supportive of equity prices and the index in general. Of course, global equities and in particular US indices remain skittish, and that fact should be reflected in your trade sizing, use and placement of stop losses and any overnight exposure.

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