With this fundamental trigger in the bullish direction signaling an end to profit taking, what methods could the trader have used to effect a technical trade in the bullish direction?  The following article provided to us from the www.investing.co.uk team provides some clues as to how this could have been done.

Example 1

We see from the chart below that a bullish pennant as well as a symmetrical triangle has formed on the USDJPY hourly chart. The symmetrical triangle has a bias which could at one time be bullish and at other times be bearish. In this case, it would have a bullish bias, giving a direction to the price according to the market sentiment which is decidedly bullish.

At the same time, a bullish pennant, which is a continuation pattern, formed on the chart. The two chart patterns were identified by the Autochartist MT plug-in.

We clearly see the pennant traced out in purple, and the symmetrical triangle traced in green. In this setup, it is preferable to use the pennant since it is a confirmed bullish continuation pattern, unlike the symmetrical triangle whose bias is determined by the market sentiment.

With these two chart pattern technical triggers, the trader could enter long around 92.01.

Example 2

In the second example, we have used a different technical analytical method, which is the Fibonacci retracement method. This method is based on the combination of the Fibonacci retracement tool with an oscillator and/or candlestick pattern, with the aim of the trade being to pin point at which Fibonacci level the profit-taking induced retracement would end and a bullish re-entry by market participants would occur. We see this at the 38.2 Fibo level where the Stochs cross occurred at 20 (oversold level) and a bullish harami formed at the same time. Combining these technical triggers would put our re-entry price at 91.98, which is only two pips below the entry price derived from the first example.

Look at the setup on the chart. This is the same USDJPY hourly chart, showing the application of the Fibo retracement tool from the swing low to the swing high, the retracement which was caused by profit taking (and which completed the pennant in the first example), as well as the bullish harami that formed on the 38.2 Fibonacci retracement level. The combination of at least three technical confirmations strengthened this signal to buy at 91.98. In practice, it is safer to buy above the physiological resistance of 92.00.

Conclusion

In the forex market, the key trading dictum is “trigger fundamentally, enter technically”. This trade on the USDJPY is a clear example of how this is done, using a fundamental trigger to assess market bias and finally nailing the trade with a variety of technical setups. 

Over the last two weeks, the United States dollar has risen 3.4 percent versus Japan’s currency. Much of the rise has been attributed to expectations that japan may embark on a new fiscal easing policy. On December 16, Japan will be holding snap elections. The Liberal Democratic Party is widely expected to win additional seats. The leader of the opposition party, Shinzo Abe, has made headlines in the last few weeks for his desire to adopt an unlimited monetary policy in Japan. The Liberal Democratic Party wants to set a two percent goal for inflation and have the Bank of Japan purchase bonds. These bonds would then be used to fund government projects. These objectives have hit world markets hard and caused many investors to sell of the yen. It has also caused a backlash in Japan and many citizens have advocated for more independence for the Bank of Japan.

The euro dropped by 0.2 percent versus the Japanese yen to a level of 105.92. On Thursday, it hit a seven month peak of 106.585. Europe’s common currency has risen slightly over the last week as expectations for the next bailout tranche in Greece have increased.  The Australian dollar also lost out against the euro during Friday’s early morning session.

Ukrainian Outstanding Debt

On November 20, the Ukrainian government managed to raise $1.25 billion in a bond sale. Despite the additional funds, the government is still running out of financing options for the $4.3 billion it owes in foreign-currency debt. To tide over the Ukrainian government, the International Monetary Fund has allowed Ukraine’s loan to be suspended until the end of this year. Ukraine wants the International Monetary Fund to extend the $15.4 billion suspension again to help the government fund operations.  

Ukraine’s economy was one of the hardest-hit in the world during the 2008-2009 global recession. Since recent debt crises in Europe have tamped down demand for exports, Ukraine’s steel production has suffered from a decline in buyers. Presently, Ukraine has the sixth highest risk of default among 93 countries. International reserves have dropped to their lowest levels since 2010 and are presently at $26.8 billion. Meanwhile, the Ukrainian Equities Index has fallen by 40 percent since the start of this year.

The Ukrainian economy has fallen by 14.8 percent since 2009 and dropped 1.3 percent since this time in 2011. Bonds in the nation are yielding 7.9 percent which is 6.187 higher than similar bonds in the United States. To garner investors, Ukrainian must pay this large amount.

To fix the lack of funds, some investors have advocated making a deal with Russia or the International Monetary Funds on gas prices. Ultimately, Ukraine will have to find an alternative to selling bonds. Currently, it sells off bonds each time it needs to fund its debt repayment to the International Monetary Fund. Ukraine will need to adopt IMF measures and budget cuts if it wants to get back into the black.

The Greek Bailout Tranche

Versus the United States dollar, the euro managed to hold steady at a level of $1.2886 on Friday. On Thursday, it hit a three-week peak of $1.2899. Much of the recent rise in the euro was caused by statements made by German Chancellor Angela Merkel on Wednesday. Despite an uneventful meeting of the Eurozone finance ministers earlier in the week, Merkel announced that the Eurozone could still decide to release aid money on Monday.

In recent weeks, the Eurozone has delayed giving Greece its latest aid tranche. The IMF and European Central Bank want to ensure that Greece holds to new austerity measures and budget cuts.

On Friday, the euro could see a strong movement after Germany releases data about business morale. The IFO business climate index is used to determine the health of the German economy. In October, it was at 100.00, but many analysts believe that it will drop to 99.5 in November.

Asian Currencies Expected to Rise

Although the week is not quite over yet, it appears like many Asian currencies may post their first weekly gain in a month. The Philippine peso led the growth with a 0.6 rise to 41.073 versus the United States dollar. The South Korean won advanced by 0.5 percent over the past five days to a level of 1,086.25 while the Chinese yuan rose 0.13 percent to 6.2277.

Meanwhile, investors from overseas added an additional $625 million into the stock markets in the Philippines, South Korea and Thailand. Much of the new growth was attributed to the preliminary release of China’s manufacturing index. According to the data, China most likely experienced its first increase in output for more than 13 months. In Taiwan, data from November 20 shows a higher-than-expected advance. Malaysia also reported a gross domestic product of 5.2 percent for the third quarter. Previously, it was expected to have just a 4.8 percent increase.

Despite appreciating for the week, the South Korean won lost some of its advances over the last three days. Many analysts have expressed concerns that the Korean government will try to stop the won from appreciating. On Thursday, Deputy Finance Minister Choi Jong Ku of South Korea announced that many of the changes in the won’s value were due to herd behavior. If required, the government would take action to stop the value from fluctuating excessively. Over the last year, the won has advanced 6.1 percent versus the greenback.

In Thailand, the baht appreciated by 0.1 percent over the last week to reach 30.72 against the United States dollar. The Indonesian rupiah remained stable at 9.628 while Vietnam’s currency dropped by 0.1 percent to 20,845. In Taiwan, the Taiwanese dollar advanced by 0.5 percent to reach a level of NT$29.140.

On the London Metal Exchange, three-month copper dropped 0.5 percent to a level of $7,646 per ton. At the same time, gold advanced 0.27 percent to $1,724.51 an ounce. Gold is still lower than the three-week high it hit on Friday of $1,738.

Germany managed to sell 4.3 billion euros in two-year bonds this week. The bonds are offered with zero percent yields due to high demand for a stable investment. The triple-A rated nation has a highly liquid debt market and is viewed by many as a secure investment. In Italy, borrowing costs also dropped as the government sought to sell off 3.5 billion in three-year bonds. This sale is expected to complete the funding needed by the Italian government for the remainder of the year.

Stocks

Surprisingly, Abercrombie & Fitch reported a 50 percent increase in net income for the third quarter. This advance was unexpected by investors since the clothing retailer has struggled to gain ground in US markets over the last few years. Rising international sales fed the advance. Stock in Abercrombie & Fitch rose by $9.53 to $40.69 per share. Abercrombie & Fitch’s competitor, American Eagle, also saw its shares advance by 1.5 percent to $19.93. American Eagle has seen its stock rise by more than 30 percent for the year to date.

On Wednesday, lock-up stock owned by former Facebook employees officially expired. Stock in the company rose by $2.21 during the session to reach $22.06. A leading chipmaker, Advanced Micro Devices, saw its share prices fall by 5.3 percent or 11 cents. It reached a level of $1.98 after the company denied reports that it was debating a sale. In March, stock in Advanced Micro Devices hit a one-year high of $8.35. As consumers switch from PCs to new devices, the stock has lost roughly 76 percent of its value.

Cisco Systems shares rose by $0.96 to reach $17.85. At the end of the day on Tuesday, Cisco Systems announces that its earnings increased by 18 percent in the third quarter. Shares in Mosaic dropped by $1.31 to reach $49.95 following announcements of weakened international demand. Mosaic is a company that mines potash. This key ingredient for fertilizer is expected to have lowered sales for the fourth quarter.

This news arrived at the same time that unemployment numbers were released in Greece. Currently, Greece has an overall unemployment rate of 25.1 percent.  For youth in the nation, the unemployment rate is at 54.2 percent. Partially due to the ongoing unemployment rate and budgetary issues, the German Economy Ministry lowered their growth expectations for the nation to just one percent for 2013 instead of the previous forecast of two percent.
Despite the ongoing crisis in Europe, the euro gained against the United States dollar and the Japanese yen on Friday. It is still within normal ranges as investors wait for a bailout decision from Spain. On Friday, the economy minister in Spain stated that a bond-buying plan was in place and there was not political opposition to Spain placing a request.
Euro Down for the Week

On Thursday, Europe’s currency was trading at a ten-day low of $1.2824. Investors see support for the euro at $1.2823. By Friday, the euro was up 0.2 percent to $1.2952. It was still down 0.6 percent for the entire week and has stayed within a range of $1.28 to $1.3170.  A total of US$4.7 billion euros were exchanged on Friday which is lower than the US$5.7 billion traded on Thursday. Many analysts believe that the euro should return to a range of $1.3170 to $1.34 by the end of 2012.

Versus the yen, the euro gained 0.3 percent to reach 101.55 yen. At the same time, the greenback reached a high of 78.53 yen for the day. By the end of Friday, the United States dollar had gained 0.1 percent for the day and was at a level of 78.40 yen. Overall, the greenback ended the week 0.3 percent lower versus the yen.

In the next week, the currency markets could be used to finance a deal in Japan. Softbank Corporation is expected to buy a majority stake in the company Sprint Nextel. This deal is expected to cost more than one trillion yen. After its completion, the purchase should help to advance the greenback versus the yen.

Iranian Government Says Currency in Good Position

After a month of rapid inflation, the Iranian government says the currency is stabilizing. The Economic Affairs and Finance Minister, Shamseddin Hosseini, stated that the government was attempting to curb speculation on the currency. Over the last two weeks, the rial’s exchange rate with the greenback has declined drastically.

Western nations placed economic sanctions on Iran in an attempt to stop their nuclear program. After the sanctions, oil earnings in Iran dropped and the rial has become devalued. As citizens found out about the sanctions, they rushed to place their funds in foreign banks accounts. The move proved to the smart one as the rial lost one third of its value in just ten days. Over 15 months, the rial has lost two-thirds of its value. At the start of last week, the rial was being exchanged at a rate of 37,500 per United States dollar.

Inflation has risen to 25 percent and the price of imports has drastically risen. The ongoing currency issues have caused riots in Tehran and political protests.

U.S. Treasury Delays Reports

On Friday, the United States Treasury announced that it would wait to release its semi-annual report on major trade partners and their currency policies. The Treasury has come under increasing pressure to label China a serial currency manipulator. According to the Treasury, it wanted to delay the semi-annual report so it could wait for the meeting of the G-20 finance ministers that occurs next month.

In the United States Congress, critics have accused China of manipulating its currency. By making the renminbi artificially low, it props up Chinese exports and makes products produced in China unfairly lower priced. Some Congressional critics want to apply sanctions against China. Currently, the Obama administration has refrained from officially labeling the nation a currency manipulator although they have raised pressure on China.

In May, the report concluded that China did not meet all of the standards for being a currency manipulator. Although the Treasury believed the currency to be undervalued, they did not state that the China had met the standards for manipulation. Speculation around the decision to delay the report centers on the upcoming United States presidential election. The Republican challenger, Mitt Romney, has announced his decision to increase pressure on Beijing if he becomes president. Last month, Romney announced that China’s currency manipulation was pushing American manufacturers out of business.

Malaysian Bond Market Contracts

For the month of August, industrial production in Malaysia dropped by 0.7 percent. This number is revised from a level of 2.9 percent in July. Manufacturing activities slowed in the nation overall and bond prices for three-year, five-year and ten-year bonds dropped 1 to 3 basis points. Ten-year bonds ended the day Friday at 3.52 percent while three-year bonds were yielding 2.12 percent.

At the same time, the Malaysian ringgit was traded at lower rates amid concern over extended losses in global equity markets. Concern also existed for economies in the area, although future rate cuts are not expected. MYR IRS rates for Malaysia finished out the week 3 to 4 basis points lower.

In Australia, the Aussie dropped from Thursday’s one-week high. By the end of Friday’s trading session, the Australian dollar was at $1.0232. This marks a 0.3 percent drop from Thursday.

On Friday, the greenback reached a two-week high against the Japanese yen. It rose to 78.87 against the Japanese currency before falling back to 78.65. This was a 0.24 percent gain for the day. The United States Labor Department released their data for the month of September. With unemployment at four-year lows, the Forex and stock markets rose for a brief period of time.

The unemployment level in the United States is currently at 7.8 percent. In September, the economy added 114,000 non-farm jobs. After a summer of bailout fears in Europe, the news was welcomed by investors and is a sign that the world’s top economy is gradually recovering. Despite the growth in employment, most analysts believe that the United States Federal Reserve will continue their fiscal easing measures. Wary about losing any gains, the Fed is going to be cautious about ending fiscal easing measures that currently seem to be working.

Employment growth in the United States was tempered by the proportion of part-time jobs to full-time jobs. Many of the new jobs available only offer part-time hours. When calculated into the employment report, part-time workers are considered employed even though they are underemployed. Factory jobs also lost traction according to the unemployment report. In September, factories in the United States lost 16,000 jobs. Over the course of three months, factories have lost a total of 21,000 jobs.

European Gains

Right after the report was released, the euro reached a two-week high of $1.3071. By the end of Friday’s trading session, it fell back to $1.3017. Overall, the euro has gained 1.33 percent for the week. Resistance is seen at $1.31. Some analysts believe that this level will be a temporary barrier. When the Eurozone’s currency approaches $1.31, many investors have sold off their stores of the currency for respectable profits. If the currency can breach $1.31, it will take the euro back to its 2011 highs.

Continued progress with the euro will be hindered by continuing concerns over impending Spanish bailout. Despite rumors to the contrary, Spain has yet to request bailout money through official channels. Earlier this week, reports indicated that the Spanish government may ask for help as early as this weekend. As the weekend draws to a close, it becomes more apparent that a bailout deal is not going to be happening yet. The longer Spain waits to request the aid package, the more likely the deal will cost more.

Versus the yen, the Eurozone’s currency reached a two week high of 102.80 during the trading session. By the end of the day, it dropped off to 102.46 yen or a gain of 0.30 percent. The fluctuations in the yen are attributed to impending measures by the Bank of Japan. Investors are worried that Japanese officials may choose to intervene in the marketplace. This week, the Bank of Japan chose to stay on the same course with their fiscal easing policies.

The Dollar Index Falls

For the first time in three weeks, the Dollar Index fell. After payroll data was released, the United States dollar rose against a basket of 16 other currencies. It briefly toughed 79.103 on Friday before it returned to 79.336 for a 0.8 percent gain for the week.

The Federal Reserve Bank is also expected to issue it Beige Book next week. This book is a survey of regional business and is handed out as the Fed prepares for their next policy meeting on October 23rd and 24th. Prior to this meeting, the Beige Book will be released on October 10 to give policy makers in the United States anecdotal evidence about the performance of the economy.

Versus the euro, the dollar fell 1.4 percent to $1.3045. Last week, it gained 1.2 percent. The Japanese yen also fell against the greenback to 78.67 or 0.9 percent. Futures traders are currently betting that the euro will fall against the United States dollar net shorts were at 50.265 on October 2. The previous week saw net shorts at 50.238. The record number for these wagers was 214,418 on June 8.

South African Rand Underperforms

Friday’s trading session saw the rand fall to 8.8465 versus the dollar. This marks a loss of 5.3 percent for the week. During the session, South Africa’s currency managed to reach its weakest level since April of 2009. Strikes in the mining and transportation industries have fueled speculation that the economy in South Africa may be preparing to take a tumble.

Meanwhile, the Australian dollar managed to decline versus the majority of its peers. It fell 1.8 percent to $1.0187 against the greenback. At one point, it was at a low of $1.0152. This marks the weakest level for the Australian dollar since July 13. At the same time, it also dropped 0.9 percent to reach 80.14 yen. Australia’s falling currency has taken a hit since the Reserve Bank of Australia dropped the interest rate to 3.25 percent. The island nation is also plagued by its largest trading deficit since 2008.

The New Zealand dollar fell against the United States dollar for its first week since August. China released data from non-manufacturing industries recently that showed weaker than expected growth. The global superpower posted its slowest growth pace since March 2011. Since the nation is New Zealand’s second biggest trade partner, slowed growth prospects have a large impact on investor confidence in the New Zealand kiwi. Overall, the kiwi fell 1.5 percent versus the United States dollar. After briefly touching 81.53 cents, it bounced back to 81.80 cents versus the greenback. This is the lowest level for New Zealand’s currency since September 11.
Asian Currencies Rise

In India, the rupee posted its fifth weekly gain. This is the currency’s longest winning streak since February of this year. At the same time, the won in South Korea rose to an 11-month high. The Philippine peso rose 0.7 percent to 41.427 while the baht in Thailand rose 0.8 percent to reach 30.56. In Malaysia, the ringgit advanced 0.3 percent to 3.0530 versus the greenback.