January Effect high in place in EURUSD


January Effect in progress in $EURUSD — target remains 1.0800

I have posted extensively about the January Effect in the forex markets in recent weeks. See recent posts

The January 30 post was written by guest editor, Steve Briese, probably the preeminent expert on COT data. There has been much discussion lately on the profile of the open interest in futures, whereby commercials have an all-time record long position and large specs have an all-time record short position. This profile has been interpreted by some traders as a bullish factor in the forex cross. Steve explains that the COT data do not alter the dominant bear trend in the EuroFX ($G6E_F).

It now appears possible that the January 27 high in $EURUSD at 1.3234 will be the high for the next four to six months, and possibly longer.

IF the January high is in place, and IF the historic price change occurs, $EURUSD should decline 17% from the Jan 27 high, resulting in a target of $1.0984.

The Jan 27 high at 1.3234 must hold for the entire analysis above to remain valid.

Another way to play a bear move in the EuroFx is through $EURGBP. I actually quite like the Pound technically and think the EuroFX will lose to the Pound. Quite a strong trend has developed in support of this trade on the daily chart, as seen below.


A small flag dating back to Jan 9 can be seen on daily graph. The chart below is the expression of this flag on the hourly chart.

Markets: $EURUSD, $G6E_F, $EURGBP



Another update on the EURUSD January Effect


Composition of open interest is a story for the history books

Earlier this afternoon I posted a piece on the January Effect in EURUSD, posing whether today’s high (or the high in the next few days) will become the January Effect high or if the Jan 13 low will be the January Effect low (or if there will be no January Effect).

I did go home short $EURUSD at 1.3109 (spot). However, upon further study I am starting to believe that we have a January Effect low in place. I am employing a zero tolerance policy on my short position. If my position blinks wrong I am gone. With split stops, I am risking a net of 28 pips in the trade — the noise alone will get me. This is a hail Mary pass. I consider the risked amount as the cost of a ticket to a trading war.

There is an absolutely historic story to be told in this market regarding the composition of that open interest of futures contracts.

The graph below shows the EuroFX futures contract and the composition of open interest at the bottom (upper thick line is the commercials, lower thin line is the large spec). WOW!


Since early September (with the hype of the collapse of the EU) commercials have established a net long position of 187,185 contracts. That is equal to E23,4 billion Euros. Big number for the future market. The large spec has established a net short position of 160,030 contracts, equal to E20.0 billion Euros.

Folks, there is a war about to happen. This huge differential between the commercial and large spec will have to be unwound at some point. So, which group is going to blink first?

The obvious guess is that the commercial will win out in the end. But, it is not that easy. Since the May peak the commercial has gone from net short 124,000 contracts to net long 187,185 contracts, for a net purchase of E38.9 billion Euros. During that time the market has dropped from $1.480o to the present level of $1.3100. Anyway you count it the commercials have lost a ton of money and the large spec has an enormous open profit.

What we know are the COT data in futures. We do not know what is happening in the spot market — and spot forex is where the big dogs play. Does an imbalance exist in spot? If it does, is the imbalance in spot forex in the opposite direction, nulifying the futures profile. We don’t know.

What I think we can know is that there will be fire works. The liquidation of the current positons will be facinating to watch.

I am sure you can count as well as I can, but the commercials are out a TON of money in the EURUSD. There will be capitulation in this market — but I am not so certain the commercials will win, although I hate to bet against the them. I have seen markets in the past when the commercials have built up a massive position and have been wrong. I will try to look for some examples tomorrow if I have the time. When commercials are heavy in one direction and end up wrong, it is an ugly site.

Markets: $EURUSD, $G6E_F, $UUP



EURUSD and the January Effect – An update


Will the January Effect work in EURUSD in 2012? If so, what’s next?

I have written about the January Effect in the forex markets (see here) — the strong tendency for a season low or high to be made during January from which at least a six month advance or decline will occur.

Initially it looked like the Jan 3 might have been the January high. But that high was exceed yesterday and today. We now have a new January high (so far). The questions are:

  • Will the high today (or by next Tuesday) become the new January, marking the risk point for shorts?
  • Is the Jan 13 low the January low — and we go up from here?
  • Will the January Effect not work in 2012?

I do not have the answers to the questions above. But, the market today looked like an exhaustion day — trading higher and closing back at its opening price. I asked my Tweet community what this pattern is called — and I got back about 6 or so different names.

I normally trade patterns — big patterns (12 weeks or longer) but I also have a few specialty set ups I trade. The January Effect is one. If the cross closes today in the area of the open price I will bet 50 basis points (1/2 of 1% of capital, or $5,000 per $1 million) that the mid Dec high will hold. The worst thing that can happen is that I will be wrong.

Markets: $UUP, $EURUSD



Pigs getting ready for the slaughter house



The pigs are ready to roll over


The chart of the April Live Hogs could not be any more bearish. Following the breakdown from an 8-month rising wedge, the market has been forming a 7-week pennant. The decline today is strong evidence that the Jan 24 high was the final high of the correction. The market should now complete the pennant and decliine to the target of 81.05.

Markets: $HE_F


S&Ps diverge from Baltic Dry Index


Baltic Dry shipping rates are often a leading indicator of the global economy. The BD Index has fallen off the cliff. Is this a leading indicator or will the S&Ps diverge?


Markets: $BDIY $SPX



Crude Oil — A case study in morphology


Crude Oil setting up for a move in either direction

I know it drives some of you absolutely crazy when I am negative on the price of a commodity one week and positive the next week. If this describes you, this is probably a post you will want to skip.

I have no set opinion on most markets, most of the time (there are exceptions when I become unduly biased, and I try to admit this when it occurs).

I have often written about the tendency of charts to morph over time. One chart pattern appears, then fails, then morphs into a larger chart pattern, which, in turn, fails and morphs into an even larger chart pattern. On and on we go. As a general rule, patterns that occur within a range will most likely morph.

Of course, sooner or later we might identify the pattern that will finally work. Caveat: Major moves can occur without the benefit of an identifiable launching pattern.

We have some interesting morphology taking place in the Crude Oil market at the present time. The decline on Dec 15 arguably complete a small double-type top — advantage, a downward interpretation. The breaking of the late Nov low was just a blow-out of sell stops and ended up having no technical significance.


The rally to the early Jan high and the start of a pull back into the Jan 13 low set up the possibility of an inverted continuation H&S pattern. See the chart below. This pattern, if completed, would have had decidedly upward bias.


However, as the market drifts lower the most viable interpretation is that of a 2+ month H&S failure with the right shoulder appearing as a small H&S top. This development is what I call an “interlapping” H&S. This chart construction has a downward bias if the market can close below Monday’s low. This would also set up the possibility of a 3-month double top (pending a close below the Dec low).


Also shown, below, is the weekly chart of the North Sea Brent Crude Oil contract. This chart shows the appearance of a continuation rounding pattern, which has an upward bias. However, I have seen these patterns before slam through the low and result in a price cascade. A close below the Aug/Sep low would establish a top in the Brent Crude.


A question chart breakout traders must always ask themselves is this: “At what point does morphing end and the real move begin?” I have found that chart patterns in the 12 to 16 week zone are quite reliable, while patterns of lesser duration tend to fail much more frequently.

Markets: $IC_F, $CL_F





2011 Best Dressed List — Best examples of classical charting principles in 2011


Each year I publish the best examples of classical charting principles from the just-completed 12 months. This is the 2011 edition.

[scribd id=79208711 key=key-s9ldd1z6ipzbwxmlw43 mode=list]


Note: Approximately 5-6 hours of the scheduled Boot Camps in 2012 will be devoted to identifying and trading Best Dressed chart patterns. See the Boot Camp details below.

A more in depth look at the stock indexes — how bullish is bullish?


Stock indexes are potentially near-term, intermediate-term and long-term bullish, but some technical hurdles remain. 

If you do not see the PDF below, click here.

[scribd id=78750736 key=key-2f4byc69psskbmmukv50 mode=list]

Markets: $QQQ $NQ_F $ES_F $SPY



Analog analysis points S&Ps to 1,500



The current stock market is an presently an analog to late 2010

All forms of technical analysis are variations of analog studies. Technical analysis, at its core, is based on the fact certain market behavior profiles repeat themselves.

It appears to this author that the current stock market (based on the S&P futures) has its analog in late 2010. The analogous components are as follows:

  • The market in late 2010 and now followed four major technical developments:
  1. A signficant market high (Apr 2010 and July 2011)
  2. A sharp break, leading to the conclusion by many market observers that the 2008 bear trend would resume (May – Jul 2010 and Aug 2011)
  3. A period of severe volatility leading to little price change (May -Sep 2010 and Aug – Dec 2011)
  4. A gradual turn up in prices — price behavior characteristic of “climbing a wall of worry” (Oct 2010 – Feb 2011 and Jan 2011 to ???)
  • On a daily basis, the markets in late 2010 and now display overbought readings using the traditional overbought/oversold indicators such as RSI, Stochastics, etc. In fact, the Stochastic readings of both time periods were/are at levels characteristic of a market top, as shown on the following two charts.


After reaching overbought readings, the market in 2010/2011 had a steady advance of 16% into the Feb 2011 high. If the analog behavior continues, a 16% advance from the current level of 1,300 in the S&P would produce a move to 1,500.

A weekly chart showing both analog years in perspective is shown below.

The current market is presently an amazing analog to the late 2010/early 2011 time period. If this analog continues the S&Ps should grind steadily to 1,500 over the next four to five months.

I must add the caveat that seemingly analog years can stop being analogous at any point in time. It is possible that the current overbought readings in the S&Ps could lead to a sizable market correction. Yet, I believe it is the market’s fear of just such a correction that will continue the analog.

As a final note, I find it facinating that the S&Ps are presently at almost the same level they were at when I became very negative on the market in July 2010. My initial short was at 1285, pyramided at 1255 and covered on Aug 8 and 9.

Markets: $SPY, $ES_F




GBPUSD — Four charts show Cable to be at critical point


Cable may be close to declaring itself after three full years of chop suey

The Cable (GBPUSD) has experienced extreme chop with little or no regard to chart patterns during the past three years, especially during the past 18 months. This has been an  market hostile to the signalling methods I use. The market been most intent upon running stops on both sides of its ever evolving trading range.

The Cable is fast approach a possible point when the charts once again become reliable with pattern completion and fulfillment. Time will tell if the Cable is ready to rock and roll or just thrown rocks.

Four charts are presented below.

Chart 1 shows a classic horn or sloping top pattern, signified by three highs and three lows with an increasing down slope in construction. The horn pattern was identified by Schabacker but not covered by Edwards and Magee. Technically, the market must close below the Dec. 29 low to complete this topping construction.

Chart 2 displays a candlestick pattern that I have used in the Cable for years — the Hikkake. It is one of the only candlestick patterns I can recognize (otherwise I am a candlestick idiot). I actually showed several examples of the Hikkake pattern on the charts of the Pound in my book.

This Hikkake sell signal consists of three events — first, an inside day (Jan. 9); second, a move above the high of the inside day (Jan. 10); and third, a move below the low of the inside day (Jan. 11). A close below the Jan. 11 low is required to confirm the Hikkake sell signal.

Chart 3 shows a complex H&S pattern that has been forming since July 2010. This pattern has two left shoulders and a double head — and it is not unreasonable (but not required) for a double right shoulder to form. A close below 1.52 is required to complete the H&S pattern.  Until then, this is just a possible pattern.

Chart 4 provides the 30,000 foot view of the Cable. The dominant chart pattern is a triangulation dating back to the early 2009 low. This triangle offers no clue to the near-term direction of the market other than to note the shorter-term charts are developing tops near the resistance boundary of the triangle.

Sizing and risk

I don’t trust the Pound, so I am layering into a short position. The maximum risk I am willing to take on my entire position (once established) is 7/10th of 1%, or $7,000 per $1 million of trading equity.

I am short the first layer as of today (Jan. 11) at 1.5384. My risk is to above the Jan. 10 high at 1.5512 (closing basis). Thus my risk is 118+ pips.

On the futures side, each contract is for 62,500 Pounds. A 118 pip adverse move equals ($737.50) per contract. Thus, if I were to establish my entire position here and not wait to layer, I would have shorted nine IMM contracts (9 x 118 pips = 1062 pips x 62,500 Pounds per contract = -$6,638). My actual short today was five contracts per $1 million of capital for a layer risk of just under 4/10th of 1% of capital.

My target is the May 2010 low, or about 1.4500.

I will put on the second layer if the cross closes below the Jan. 6 low. I am not sure if or where I will establish the third unit. By layering I am making the market prove itself before reaching my maximum risk point.

The Pound has totally ignored classical charting principles for several years. So my bet, in effect, is that the sequence of pattern failures and false moves will end with these current sell signals. Time will tell if I am right.

Markets: $GBPUSD, $G6B_F