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The difference between success and failure in Forex / CFD trading is highly likely to depend on which assets you choose to trade each week and in which direction, and not on the methods you might use to determine trade entries and exits.
When starting the week, it is a good idea to look at the big picture of what is developing in the market as a whole and how such developments are affected by macro fundamentals, technical factors, and market sentiment.
Read on to get my weekly analysis below.
Fundamental Analysis & Market Sentiment
I wrote in my previous piece on 17th December that the best trade opportunities for the week were likely to be:
- Long of the NASDAQ 100 Index. The Index rose by 1.02% over the week.
- Long of Cocoa futures. This rose by 1.32% over the week.
- Long of the EUR/USD currency pair following a daily close above $1.1008. The price closed Thursday at $1.1011 and ended Friday essentially unchanged.
This produced an overall win of 2.34% which averages to a win of 0.78% per asset.
Last week saw firmer risk-off sentiment in the market after US economic data showed a resilient US economy coupled with an indication of slowing inflation, with Final GDP confirmed at an annualized rate of growth of 5.2%, and Core PCE Price Index data coming in lower than expected with a month-on-month gain of only 0.1%. Sentiment was assisted in the same direction by the strongly lower than expected UK CPI data, which saw British inflation fall to the much lower annualized rate of 3.9% than the anticipated 4.3%. However, Canadian CPI data came in slightly higher than expected, but only by a very small amount, slightly bucking this lower inflation narrative. Additionally, US consumer confidence and sentiment data came in higher than expected.
These factors lifted major US stock market indices to an eight consecutive week of gain, and in the case of the tech-based NASDAQ 100 Index, an all-time high price.
There were a few other important central bank releases and major data points last week:
- Bank of Japan Monetary Policy Statement and Meeting Minutes: ultra-loose monetary policy was maintained, leading to a weaker Japanese Yen.
- Canadian GDP – this showed no monthly change but was expected to increase by 0.2%.
- Reserve Bank of Australia Monetary Policy Meeting Minutes – there were no surprises.
- US Unemployment Claims – this came in more or less as expected.
- UK Retail Sales – this came in much stronger than expected, showing a monthly increase of 1.3% when only 0.4% was expected.
The Week Ahead: 25th December – 29th December
The coming week in the markets is likely to see a considerably lower level of volatility, as there will NO important data releases, and it is the week of the Christmas holiday when many major markets have public holidays and widely empty workplaces.
Most major markets will be closed on Monday 25th December, and some such as the UK, Canada, Switzerland, Germany, Italy, Australia, and New Zealand will also be closed on 26th December.
Technical Analysis
US Dollar Index
The US Dollar Index printed a bearish candlestick last week, which closed not far from the low of its range. The weekly close was the lowest seen in almost 5 months and was down on the prices of 3 months and 6 months ago, again presenting a long-term bearish trend.
These are bearish factors, but they are topped by an even more bearish event – the weekly close was below the long-term key support level at 101.56. Therefore, the price has a long way it may fall before reaching significant support that might hold it up, and this could give a technical tailwind to Dollar bears.
Bears are also supported by lower-than-expected US inflation, and other dovish economic data signals suggesting that rate cuts will come sooner rather than later.
I will not take any trades long of the US Dollar now, and I am bearish on this currency.
USD/CHF
USD/CHFThe USD/CHF currency pair made a strong downward move last week, although the Swiss Franc gave up some of its gains against the greenback towards the end of the week.
Technically, this downwards move is very significant, as it reached low prices not seen here since the Swiss Franc flash crash in 2015.
This currency pair does not like to trend, and Switzerland does not want its currency to be overly strong, and as the price is in a zone which has not been reached for years, and which produced a strong bullish rebound the last time it was reached, it may be wise for brave long-term traders to looks for signs of a significant bullish reversal in this price area, all the way down to the multi-year low near $0.8300.
Another technical obstacle to further falls in price may be the big round number not far below at $0.8500, which has not been touched yet.
EUR/USD
The EUR/USD currency pair printed a firm bullish candlestick which made a 4-month high and produced a weekly close which was also a 4-month high, closing near the top of its range. However, what may be more bullishly significant is the bullish breakout it made above key a key resistance level which was very confluent with $1.1000. It is a bullish sign that after making the breakout, the price did not (yet) fall back below $1.1000 which may now be support.
This currency pair likes to trend, and will the bullish long-term trend well established, the price having made a breakout, and short-term moving averages moving above long-term ones, the signs are ripe for a long entry for trend traders here.
This is helped by relative strength in the Euro, which may be getting some traction as the ECB is seen as some way behind the rate cutting curve of the US Federal Reserve, with the ECB not talking about cutting until Q3 2024, while a rate cut by the Fed in March 2024 is widely expected.
USD/CAD
The USD/CAD currency pair made a firm downwards movement last week, ending with its lowest weekly close in almost five months. This bearish move got tailwind from weakness in the US Dollar, but also some strength in the Canadian Dollar due to the rise in the price of crude oil, which in turn may have been getting a tailwind from military dangers to shipping near the Red Sea.
Despite these bearish signs, a look at the price chart below shows the price arriving in an area which was strong support when it was last reached in the summer. The major bullish turn between about $1.3100 and $1.3200 took a few weeks to manifest, but it would not be surprising if we saw this area act as support again.
As it is also the case that this currency pair has historically not trended well, it might be wise for brave traders to look for a medium to long-term bullish reversal below $1.3200 if the price continues to move down.
NASDAQ 100 Index
The NASDAQ 100 Index printed an eighth successive bullish candlestick, rising modestly but making its highest ever weekly close, and breaking to a new long-term high. We have a strong bull market in US stocks, and the NASDAQ 100 Index has historically been a great investment during bull markets.
US stocks experienced a major tailwind two weeks from lower-than-expected US inflation data and a dovish tilt from the Fed resulting in the market expecting rate cuts to begin in March 2024. The market seems to still be benefiting from this.
I am very happy to be long of the NASDAQ 100 Index.
Cocoa Futures
Cocoa futures have been in a strong bullish trend for over a year and last week the price again advanced, modestly, to reach a new multi-year high price. The price chart below applies linear regression analysis to the past 65 weeks and shows graphically what a great opportunity this has been on the long side.
The weekly candlestick was again bullish.
It is always a bit dangerous to enter a new long trade on a high which is not a clear breakout, with the price action sitting above the upper band of the linear regression channel. However, it may be worth it, as this strong trend shows no sign of stopping the ever-increasing global demand for the superfood cocoa.
Trading commodities long on breakouts to new 6-month highs has been a very profitable strategy over recent years.
Bottom Line
I see the best trading opportunities this week as:
- Long of the NASDAQ 100 Index.
- Long of Cocoa futures.
- Long of the EUR/USD currency pair.
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