Day after Martin Luther King Day

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Day after Martin Luther King Day

Yesterday the U.S. was out on a holiday as Americans celebrated Martin Luther King, Jr., an American activist who was best known for his work towards the advancement of civil rights. However, the European markets failed to pick up the slack.

Bringing the two nations’ currencies together, I’m eyeing the Euro vs. US dollar on the forex dance floor* for a possible trade.

Fundamental Points

When talking about euro zone’s economy, you’ve got to keep an eye on the Germans. Their ZEW (pronounce “zoo”) investor confidence unexpectedly fell this morning for the first time in six months, signaling caution over the outlook for the whole euro area’s economic recovery.

On a more overall European outlook, the region’s banks are looking very ropey under the scrutiny of a recent study surrounding capital ratios. European banks face a $1 trillion dollar shortfall before the ECB’s probe into the financial health of the Eurozone regions lenders. French banks are leading the pack chalking up 285 billion euros followed by Germany at 199 billion, Spain at 92 billion, Italy at 45 billion. The ECB’s Asset Quality Review will most likely reveal a substantial capital shortfall amongst the 130 European banks it is reviewing. The figures assume a 7% capital reserve to lending ratio rather worryingly.

As for the dollar, The WSJ Dollar Index, which gauges the dollar against a basket of major currencies, is up more than 1% since Dec. 18, when the Fed announced it would begin scaling back its bond purchases. The U.S. Federal Reserve is cutting back stimulus, and U.S. government bond yields are expected to rise as the government rolls back its monthly bond-buying operations, making the dollar more attractive to yield-seeking investors.

Technical Points

EUR/USD finally broke the long-term uptrend that we talked about last week on the daily chart. Then I started the search for Mr. Elliott on the 6-hour chart. The count for the first five impulsive waves starts from January 14th, 2014 at 1.36878. The bearish movement seems to be completing with wave 5 forming as we speak. Checking with Elliott’s Three Eternal Rules, we seem to be on the right track.

Please click on the charts below to enlarge.

From here on, our assignment is to identify the lowest point of wave 5, and then ride on the three corrective waves. Once the correction is confirmed, we can then throw in Mr. Fibonacci to set our exit strategy because the three corrective Elliott Waves usually end at 50% Fibonacci level which is often times where the market holds.

Sentiment Points

On one of the major forex trading platforms, 38% of traders have long positions on the pair today, 4.2% higher than yesterday. The speculative Sentiment Index which can be used as a contrarian indicator shows the trading crowd has grown less net-short from yesterday and last week. But still the majority of traders are short. The combination of current sentiment and recent changes gives us some mixed trading bias.

Capital & Overall Points

Good things happen to those who count to five. Confirm your investing eligibility and check in with all five points of your Invest Diva Diamond before making a final trading decision.



* “Forex dance floor” is an Invest Diva metaphor used both in the book Invest Diva’s Guide to Making Money in Forex published by McGraw-Hill, and the Forex Coffee Break with Invest Diva’s education course.