Monday
May172010
Dollar Overbought/Euro Oversold
Monday, May 17, 2010 at 03:34PM Below are our trading range charts for UUP (tracks the US Dollar index) and FXE (tracks the Euro). When a security is trading above the red zone, it is more than two standard deviations above its 50-day moving average. When it's below the green zone, it is more than two standard deviations below its 50-day. As shown in the two charts, UUP is about as overbought as it gets, while FXE is about as oversold as it gets.
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Reader Comments (11)
Even thought i am still bearish about theeruo, i am also thinking about a retracement soon (EUR/USD bottomed near 1.22 recently) i am hoping a retracement to the longer daily resistance (currently around 1.3000)
- Dupont from http://forex-divagations.blogspot.com/
Yes it is time to light up on UUP longs. Tim
They're calling for an overbought situation using standard deviation with an 8 month chart?? using standard deviations is a measure of volatility. periods of volatility (periods of high volatility versus periods of low volatility) can last for years, if not decades. an eight month chart is nowhere near sufficient to call for a reversal of a strong trend that's continuing to break out on a daily basis. And considering the fact that two other readers are also looking for the trend to reverse, I'm just about ready go short the euro as soon as i'm done with this post. the trend is your friend. stay with the trend until you actually WITNESS a reversal, and failed retest. in the meantime, stay long the dollar, and short the euro and look for divergences on oscillators (RSI, MACD, etc.). start to lighten up when you see divergences, but don't trade against existing trend until after a confirmed reversal, and failed retest of the highs/lows. you really should actually wait for a definitive break in the prevailing trendline before betting against the trend. Otherwise, you will get CRUSHED... S&P futures are down 11 points right now in overnight trading (after today's horrible trading during the day session). This market's getting ready to crash in a major way.. S&P never retested the march lows from 2009 (at 666), and i would guess it will probably retest those lows at the very least... my associate is calling for the euro to reach parity to the dollar before the year is out. i thought that might be a bit of a long shot, but after reading comments like ones above, i'm having second thoughts...
Jae -- very interesting analysis and comments.
"don't trade against existing trend until after a confirmed reversal, and failed retest of the highs/lows"
Can you elaborate as to how to notice a confirmed reversal? What kind of indicators should one look for?
Thanks for such information.
Jae, oh my god, it sounds like you know exactly what everything is going to do from now until infinity. can i invest with you???
baba: one of the most important premise of investing is that much of what we portend to know is unknowable. to give you an example, it is possible to UNDERSTAND weather patterns, but to PREDICT it with a great deal of accuracy over an extended period of time is not possible. (I would recommend the origin of wealth by eric beinhocker if you want to learn more about it) I would never put myself as someone who has all the answers, and I will be the first to admit that I've been wrong on MANY occasions. but once you accept the fact that you can and will be wrong at times, you learn to hedge your bets, and limit your risks. One such way of limiting risk is not trading against a prevailing trend. there's a saying that says trying to catch a falling knife can be hazardous to your wealth. what the article suggests is just such an action, and I would not advise anyone to try such an investment strategy if they value their wealth. i admit i may have come off a bit strongly, but i was a bit incensed that they would make such a recommendation. i apologize to the two posts prior to mine, and anyone else i may have offended.
ahorn: investopedia offers a brief explanation: http://www.investopedia.com/terms/r/reversal.asp
there are a number of reversal patterns as far as technical analysis is concerned. Technical Analysis of the Financial Markets by John Murphy is an absolute must-read if you want to learn more about it. it's basically the bible of technical analysis (not just because it looks like one, but it's a very good resource). the book may appear a bit daunting when you first look at it, but its not that difficult of a read, and everything is explained in very simple terms. I would also look for a high volume trading day/week/month if you're looking at candlestick patterns, and strong sentiments by the media (either bearish/bullish) and take a contrarian position.
If you just look at statistics without causality you can be lead down the wrong path. In general the 50-day moving average standard is "normally" a useful tool, but the Euro is in a extraordinary situation that is causing this divergence. Being 2 sigma overbought on UUP or 2 sigma oversold on FXE does not mean that this trend is going to end. I expect some retracements, but in the end the euro will end up close to parity with USD.
Like the general markets Euro may stay oversold for weeks. But i would not be supriced to see a bounce, which would be an ideal place to short more. etf-gold-stocks.com
okay i accept that response. thanks.
jae - excellent comments, and your humility is comforting.
i have been shorting the euro (using the proshares ultrashort stock EUO <-----where you don't have to know how to actually short something to make a short trade, just buy the stock and it goes up 2x relative to a euro decline).
and i have been doing so well with the trade (not really knowing what I'm doing) that this article got me scared enough to think about unwinding the position.
your comments have given me the confidence to stay the course.
i'm not relying on you.....but i feel relatively confident that we don't know how far down is yet for the euro.
again, thanks....
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