EUR/USD Currencies: Too Far, Too Fast

After the plunge in the value of the Dollar over the past few days, I have begun to think that the Dollar had fallen too far, too fast. Likewise, the Euro had climbed against the greenback too far, too fast.

This wasn't surprising, given the shock delivered by the Federal Reserve on Tuesday. Even with the Federal Reserve's notice that it was reducing rates to 0%, and its new strategy of quantitative easing, the Euro had been rising rapidly (Dollar falling rapidly) for at least a week before the Fed's shock. By looking at the daily chart of the Euro (not shown, this chart shown here is the intraday for today), I couldn't help but notice that even the opening prices occurred outside the Bollinger Bands. That phenomenon can be easily seen on my previous posts of the Euro and Dollar over the past few days. That means that prices were printing at three to four standard deviations outside the norm. The statsitical probabilities of that occurring, much less being sustained at that pace, are astronomically and statistically small. Interestingly, today's retracement, as shown on the daily chart, is a relatively small one.

Needless to say, that is a parabolic price move by any standard or measurement. It is unsustainable for more than a few days. With such a rapid and powerful movement, we are more likely to see a Cahen bubble pattern rather than a long, sustained set of parallels (see earlier posts explaining the two, or Cahen's book). Thus, as I was reviewing my charts last night and noticing such extreme price movements, I began expecting either a regression to the mean (reversal) or a consolidation for a few days until the bands -- and market sentiment -- can catch up. We may then see another strong movement higher (for this chart, the Euro).

Does that mean the Dollar downtrend/Euro uptrend is over? Not necessarily, but we certainly need to take a breather for a few days, at the very least. After such a monstrous move in the currency markets so quickly, a consolidation period is not only warranted, it is expected. In fact, the more extreme a movement is, the more likely the market is to reverse rather than merely consolidate. We'll know which it will be within a few days. My bias is for further downside to the Dollar, but now that I have acknowledged my bias, I will try to ignore it in trading.

I have noticed also that after such a forceful and fast movement, there are often unintended consequences, or perhaps better said, unexpected effects, that follow within a few days. These unexpected effects tend to amplify the original movement. Forces are set in motion that become almost unstoppable, and we never know what those forces will be or what they will unleash! Sometimes those forces take a few days to creep through the financial system and take effect. Hence, my bias for a deeper Dollar plunge. But no one really knows. Anything can happen in the financial markets.

Waves of Buying

Today's stock market indexes provide an excellent case study in observing waves of buying activity. These tiny waves are referred to as "bubbles" by Cahen in his book. Each time prices close below my moving average (in this case, the dotted white line is a Weighted Moving Average), then I will buy at the top of the next green candle that passes back above the moving average. I will then sell the odd-numbered contract as close to the apex of this wave as I can best estimate. I use the Bollinger Bands to assist me in this. My sole objective on the even-numbered contracts is to not lose money, since I'm holding them throught the downturn of the wave. Of course, when these waves of activity occur as in this example, I make just as much from the even-numbered contracts as I do from the odd-numbered ones. In this way, I am using the patterns that Cahen describes in this book, combined with Rules 1 & 2 described in Phantom's Gift, to accelerate my earnings. On a higher time frame, these waves create a pattern that Philippe Cahen refers to as a pattern of "parallels". This chart shows a photo-perfect example of this phenomenon of . Wow!

Confused? Perhaps You Should Be

Real estate magnate Richard LeFrac recently said, "If you're not confused, you're not thinking clearly". At first, I laughed when I heard that. Then, I realized how true his statement really is.

We are constantly bombarded with data, much of which is conflicting in nature. We must analyze and weigh all the data, and eventually, make a decision. Sometimes those decisions prove wrong. Hopefully, there will be more right decisions than wrong ones, or at least the right decisions will be more profitable, while the wrong ones will be small. I have found that this is the more frequent scenario -- small, frequent wrong decisions, and large, less frequent good decisions.

This is a time in which the investment world is experiencing great turmoil. The market can, and often does, turn on a dime. I have also noticed that tops and bottoms -- reversal points -- often occur precisely at the time that we least expect them. Reversals most frequently occur when market sentiment feels like a reversal is the least likely event . It often feels like a continuation of the existing trend is most likely, and yet a reversal at a top or bottom occurs instead. I have also noticed that following parabolic, sharp movements or trends, a sharp reversal is also more likely, as markets become grossly overbought or oversold, like a rubber band that snaps back sharply after being stretched too tight. In Philippe Cahen's book, Technical Analysis and Volatility, this is called the Australia pattern. I have no idea why. On the other hand, if a trend occurs on a more gradual basis, it typically will last longer and is more likely to end with a consolidation rather than a reversal.

I have come to expect market turmoil and uncertainty. Making decisions -- and investments -- in those times of uncertainty are often the best investments I've made. That's why I learned technical analysis. It allows me to make decisions based upon a set of indicators that permit me to remove most -- not all -- emotion from my investments.

Soft Soybeans, Corn

The two charts shown at the top of this post are 3 minute charts of corn and soybeans. They are decidedly bearish today, but the bearishness lacks strong conviction. This is understandable, given the strong fundamentals for continued global demand for grains. However, note also the strong selling on the daily soybean chart at the bottom.

In these two charts, the Bollinger Bands are very important. The Bollinger Bands on the soybean chart are forming a "bubble" pattern, and the Bollinger Bands on the corn chart have formed a "parrallels" pattern, per Philippe Cahen in his book, Analyse Technique et Volatilite (yes, written in French). Both are profitable, but the bubble pattern tends to burn out more quickly and be less profitable, whereas the parralels pattern tends to extend itself over a longer period and be more profitable in the long run. Interestingly, a series of bubble patterns on a shorter-term chart will often form a parallels pattern on a longer-term chart.

Soybeans

Corn

Soybeans Daily Chart

The two primary indicators that I look for in deciding whether to go long or short are a crossover of the Exponential Moving Average, and a downturn in the Klinger Volume indicator that crosses above or below its moving average. Both of these conditions are showing right now on the daily soybean chart, shown here below. However, today hasn't closed yet, so until this occurs, a bearish trend in soybeans has not been confirmed. The bulls could easily step in and drive prices higher, perhaps even reaching a higher close today. Even if this happens, the bullish momentum on the longer-term charts is showing signs of waning, and exhaustion appears to be in the cards (see daily chart below). This has been a great bull run!

Most likely, at the end of a very strong trend, we are more likely to see a consolidation of prices at a fairly high level, rather than a complete reversal. Even if a consolidation occurs and a trading range sets in, this sets up my favorite trading conditions as a swing trader. Further, after a consolidation period of several weeks or even months, another break-out could occur and prices could move still higher.