Call An Expert Trader:(03) 9021 2011


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  • How to Trade an Unexpected Event with Technical Analysis.

    Posted by Thomas Atkinson

    AFSL licenced within Australia

    Non-Farm Payrolls & The Resilience of the US Economy:

    2019 will likely be remembered in the financial world as the year of the trade wars. With Phase 1 of the trade deal now signed with China, the US economy is showing strong signs of growth,  causing a surge in indices such as the S&P 500 and the Dow. On Friday the 7th of February, one of the more important news events of the month  ‘Non-Farm Payrolls’ was released with the US economy adding 225,000 new jobs, far outpacing the 163,000 forecast. This news coupled with the trade deal and other strong numbers is giving traders an opportunity to revisit  their charts and potentially identify new trading opportunities.

    The Relationship between the US Dollar and other currencies:

    The US Dollar index USDX is a measure of the value of the United States dollar relative to a basket of foreign currencies. The index will rise if the US strength or value is greater compared to other currencies and weaken if the value is less than other currencies.

    The US Dollar index is made up of the following currencies:

     

    Euro (EUR), 57.6% weight

    Japanese yen (JPY) 13.6% weight

    Pound sterling (GBP), 11.9% weight

    Canadian dollar (CAD), 9.1% weight

    Swedish krona (SEK), 4.2% weight

    Swiss franc (CHF) 3.6% weight

    The US Dollar index has long been regarded as a great instrument to carry out technical analysis studies to evaluate the strength or weakness of a currency. This analysis can then be used to help traders apply a bias on dollar strength and more specifically,  compare it to the EUR/USD,  where the Euro makes up approximately  57.6% of the index weight. If a pattern or trend is presenting on the USDX, traders can generally assume that the EUR/USD will have an inverse reaction.  As an example, if the US dollar is strengthening, the EUR/USD will most likely be weakening. This cross analysis is specifically beneficial when looking at long-term timeframes and patterns.

    USDX Inverse Head & Shoulders Pattern:

    Even before the strong 7th of February Non-Farm Payroll result, we saw a strong pattern on the USDX. This is a great example of an inverse Head & Shoulders pattern where the right shoulder is higher than the left, indicating bullish momentum. Another nice technical in this trade was where the USDX broke past the neckline (The yellow highlighted area). You can see that price broke the 200 Daily SMA soon after.  This was followed by a cross of the 20 (EMA) and 50 (EMA) in the direction of the trade, providing a volatile but sound role reversal opportunity to enter the trade long after the break in the 97.26 zone.

    EUR/USD Head & Shoulders Pattern:

    As mentioned earlier, what happens on the USDX generally occurs inversely on the EUR/USD. Above you can see another Head and Shoulders pattern with a break of the neckline (The yellow highlighted area), followed by a cross of the 20 (EMA) and 50 (EMA), creating another role reversal opportunity to enter the trade short at the 1.1080 zone.

    The Risks to China’s GDP and Economic outlook:

    The recent outbreak of the Coronavirus in the Hubei province has shaken the world markets, and all eyes are now on China’s management of the situation with millions of people flocking to cancel their planned holidays. From an economic standpoint this couldn’t have happened at a worse time for China. With an already slowing economy due to the Trade Wars and the potential need for further stimulus from the CCP, China’s GDP figures are under a real threat and volatility is increasing.

    Trading Asia during an unexpected event, The CN50 Index Daily Support:

    The fallout from news of the Coronavirus was sharp and fast on the CN50 index, but as the yellow highlighted area on the chart above shows, a key level that has acted as support several times in the past is again propping up the price.

    The CN50 Index Divergence on the 4HR timeframe:

    The chart above shows a new lower low being formed by price into the daily 12500 support level. Meanwhile, the MACD indicates a weakening signal, with the new lower low formed by price not being replicated by a lower MACD level. This chart action demonstartes Class A bullish divergence. The break above the yellow highlighted zone confirms further bullish momentum, indicating that the intial selling of the market may now be over.

    Trading Fundamental news with Technical Analysis Correlation:

    The practice of cross colleration like the above USDX and EUR/USD examples are important tools in any technical analysis traders’ arsenal. Similarly, when unexpected news events occur, it is important to look at the key levels and wait for confirmation before making any trading decisions. The analogy ‘Never try and catch a falling knife’ is certainly a mantra that might be worth considering on the next news event.


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