EUR/USD vulnerable, close to M/A flip to the downside

It’s been just over a month since our last update on EUR/USD (September 25th) and in the interim price action has been much as we expected. We updated that report with EUR/USD situated around 1.1000, off a tad from when we started preparing the report (1.1028) We made a few salient observations, primarily:

  • We were targeting EUR/USD to retreat to 1.0889 over the next few weeks
  • We noted our blended Bollinger Band / moving average model would enter heavily oversold territory on various components between 1.0945 and 1.0860
  • The intermediate model (21-55 days) targeted 1.0889
  • The medium term model (75-110 days) targeted 1.0856
  • We also stated “The Sep low was the lowest since May 2017 which hints at further downside”We advised that “trailing stops and oversold targets are probably the way to go”
  • We also noted that our trading model was maximum short 15 units on Sep 24 and was at its most vulnerable

The low was plumbed around 1.0878/79 on October 1st. EUR/USD closed Sep 24 by 1.1020, traded to the lows mentioned above and rebounded to almost 1.1180 on Oct 21. On Sep 24 the intermediate model’s overbought level was 1.1189 (+2.0) and as that model spans 21-55 days would be the indicator we’d have been looking for to indicate where we expected a bounce to start finding resistance.

The ultra-short and short term models are only useful for projecting technical levels for the next week or so and the medium to long term models only influence the shorter averages when they are in close proximity to the shorter models’ overbought or oversold extremes (unless spot is trading right at the longer term models extremes.

This is how the blended model disciplines itself, due to the fact that short term movements are limited by how many standard deviations they can move before they become statistically impossible to attain or sustain at those levels. Therefore they dictate that you can’t rebound too far without spending sufficient time to impact the medium and long term models. Therefore the intermediate model becomes the best forecasting tool when trying to assess potential movements over the next 2 – 3 months.

On Sep 24 the intermediate model indicated oversold at 1.0949 and overbought at 1.1189 with heavily oversold/ overbought 1.0889/1.1247. The actual range was 1.08785-1.11786 on our pricing platform. So price action penetrated the “heavily oversold” levels at the lows and probed the overbought levels at the recent high.

Prior to today’s nonfarm payroll release EUR/USD remains close to overbought levels on the shorter term models, the ultra S/T models shows overbought at 1.1180-1.1200 and the S/T model 1.1177/1.1205. Oversold is way down below 1.1100 and even a strong NFP print shouldn’t give EUR/USD the legs to run that far.

For M/As out to 55 days the blended mid range is 1.1201 and heavily overbought levels span 1.1200-1.1250, longs should look to square up on a pop above the figure and may even consider a stop and reverse for a quick play. The blended model is long 9 units, will add above 1.1156 on an hourly closing basis to +11 units and will pare back to +7 at 1.1149. The blended model flattens out around 1.1125 and starts to get short below that. Caution is advised as the blended model’s M/A is 1.1114 which means that any algos based on moving averages are vulnerable to flipping short.

We’ll update after NFP.

 

Good luck !

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