EUR/USD Tapped Out, Rally Likely – Notes Looking Higher

Sentiment

EUR/USD tapped out, rally likely – notes looking higher.

It’s easy to get caught up in a trend. The trade is working, why fight it? This is true, but naturally, one’s time frame for the trade has to be the #1 consideration. As mostly shorter-term traders here at Aspen (trade duration of several days/weeks), we must be aware of times when markets get a bit ahead of themselves and the masses are acting out in a manner as seen below.

Currently, it is really hard to find any bulls in EUR or CHF. Sentiment readings of 11 and 12, respectively. Tho’ sentiment is not a terribly useful timing indicator, it is factored into my trade selection process. Below are some relevant points to consider.

  • EUR/USD displaying bullish momentum divergences into this weeks price lows
  • USD/CHF displaying bearish momentum divergences into this weeks price highs
  • Price reversal signals on both pairs via TD Sequential
  • DXY (Dollar Index) shows bearish divergences and break of trend-line off the Jan 30th low
  • Elliott Wave counts for above-noted instruments also suggests a reversal of some degree

Bear in mind that these are trade set-ups that run contrary to what I see as the dominant trend for my time frame….and that trend is a stronger DXY.

I will use these forecast counter-trend moves to:

  1. Be a nimble trader and get long EUR/USD and/or short USD/CHF
  2. Or, for those who are less nimble, use the forecast moves to establish shorts and longs respectively.
  3. Or both #1 and #2

Market Outlook: Week of  February 17th

The debate remains alive. Was the low on Dec 24th the end of the correction/bear market? Perhaps. With the Fed now backtracking on their raising rates policy, it seems yet another financial skinned knee has been avoided. Not exactly a free market, but that is a topic for a different day.

From an investment standpoint, we are in the midst of the 2nd longest economic expansion in history. This is not a time to be pushing the bullish argument to the max; a prudent and defensive measure seems the best approach. 

We run a Model Portfolio that gives clients broad-based exposure to the market while allowing for a cash position to take part in our Alpha Trades. This combination provides an extra lift to outperform the benchmarks.

We currently run it as a 60/40 split. Within that 60% of the Model Portfolio, however, we are currently 37% in cash. This is a defensive posture as we do not think the market has completely worked through the volatility and downside price action seen in December.

Here was the Jan 28th Outlook – it was pretty spot on:

It’s pretty basic: the dollar poised for higher levels – cautiously bullish on S&P’s.

The rally in the Dollar Index (DXY) appears to be reasserting itself. I had noted this last week here in this letter, and with this week’s price action now behind us, the evidence remains intact.

The current chart of DXY is really the easiest way to illustrate this.

  • 5-waves off the January low
  • A correction lower that is now testing typical Fibonacci support
  • Next leg higher should get underway shortly

As you can tell, I am not trying to make a long-range forecast here…simply looking ahead several days/weeks. Given how the market is trading, shorter-term forecasts may be the best strategy.

In terms of the S&P’s, I am using the same forecast time frame….a few days/weeks. I have seen several arguments lately suggesting a completion of this corrective rally off the December 24th lows. I get it. Many of the arguments make sense. But as of now, price action is not pointing lower.

When I look at the markets most closely correlated with the S&P’s, 2, 5 and 10-year rates, these markets are moving higher and thus too will the S&P’s.

Week of January 13th Market Re-Cap/Outlook

Week of January 28th Market Re-Cap/Outlook

Closed FX Trades:

  • Long NZD/USD +30 pips
  • Long EUR/USD –22 pips
  • Long EUR/USD +30 pips
  • Short USD/MXN -35 pips
  • Short AUD/NZD +45 pips

Closed Stock/Futures/Options Trades:

  • MHK Call Spread +224% (in at $3.93, out at $13)

Open FX Trades 

  • USD/CHF
  • EUR/USD
  • AUD/NZD
  • USD/NOK

Open Stock/Futures/Options Trades 

  • 10-year notes or TLT
  • TSLA
  • SC
  • MHK (stock)

Additional Reading/Listening:

Aspen Global Partners Launching Soon

I’m excited to announce the formation of my new managed account offering – Aspen Global Partners. The offering will build upon the success of the current program that has been on offer for the last 4-years to non-US clients. We expect to be up and running by mid-March. Please register here if you would like to be notified when we are accepting new clients.

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