Look For A Retest Of The Recent Highs

In our mid-day update to our subscribers on Friday we said :

“Part of me would feel safer seeing a retest of recent highs for a mini double top (little red line at 1120 or even the 1131 level before a drop as that would mark a double top at a retest of 1120 and/or a 5th and final wave higher.”

So that’s what we want to be on the look out for next week. It’s our what to watch for on the long side and where our long side watch list is going to be the focus early next week.

When one looks at the market from the July lows we can clearly see waves 1234 with 5 yet to rear its head. What we want you to key in on are the little pink lines, those are Pullback Off Highs (POH) patterns. They also show up as waves 2 and 4 – where we are now.

This tells us we are not done to the upside yet. Of course this assumes we are going to put in a 5th wave mind you or even a “Back To The Scene Of The Crime” retest of 1120 or 1131. Odds favor that though because of Friday’s action at the green uptrend line held and we got an upside reaction off of it. Besides see any topping pattern we can work with right now? We see no double top or back to the scene of the crime retest of 1120 or 1131.

In the what to watch out for department next week:

We’ve talked about the 1131 level numerous time over the last week or two as well as the 1120 level too. They are our what to watch out for levels as that is where we’d expect to see some stalling as they are resistance levels or retest levels. A retest of those red lines with failure? Then we salivate and get real serious on the short side. Same goes for a break of the green uptrend line off the July lows.

In Summary:
We go into the beginning of the month with four waves up ABCD with E yet to rear its head.

So that means to expect more in-flight turbulence on the short side. We’re ok with that but we’ll also want to enter new positions on the long side via names featured in the long side watch list this weekend.

Also understand that we are in the late innings of this upswing with 4 out of 5 showing. Which means a final push for the 5th wave which probably won’t last long. But we’ll want to capitalize on it via some short term long side trades.

Remember it’s what comes after a 5 waves up sequence. Here’s a hint — Wave 3 wonder to behold to the downside. We’ll cross that bridge when we get there though and save that for another conversation.

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Forex intervention – how much money is needed?

Recently, the Swiss National Bank has revealed it had lost more than CHF 14 billion when in intervened in currency markets earlier this year. Their objective was to keep down the value of the Swiss Franc. Nothing really new about this fact, the figure was disclosed about two weeks ago. But knowing the extent of losses, we can extrapolate the approximate size of the SNB intervention and shed some light on the question of just how much money is needed to turn direction in a major currency.

By all accounts, the rate of EUR-CHF was the major concern to Swiss central bank. The interventions started at about 1.50 level and lasted to roughly 1.3300 or so, while the rate dipped even lower, to about 1.3070, before rebounding. This means that during the intervention campaign the CHF appreciated over 12%. Since selling of the CHF by the SNB took place at different levels during this time, we can say that their losses were about 10%. Knowing that this corresponds roughly to 14 billion, the total commitment of the Swiss National Bank can be estimated at CHF 140-150 billion range.

In spite of this enormous sum, many claim that the interventions were not successful. After all, the Swiss Franc kept advancing, so an argument can be made that the CHF 150 billion, or so, was not enough and even more money is needed for interventions to work. Perhaps, but we don’t know how low the EUR-CHF would have fallen, had the interventions not happened at all. It could be at 1.25 or maybe 1.20. This is speculative. However, it is clear that vast sums are needed and the outcome is far from guaranteed.

Japan is another country that could intervene against its currency. Exporters and other businesses are unhappy with the Yen’s strength and the Bank of Japan made preparations for a possible intervention. Earlier in the year the BoJ augmented the account for this purpose, bringing it to about $300 billion. Would that be enough? Given the big difference in size between Swiss and Japanese economies, and respectively larger amount of money in circulation, the BoJ might need perhaps as much as $500 billion or more. Is it even worth to commit resources of this scale to something that, at best, has an uncertain outcome? This could be the reason why the Japanese authorities are only watching Forex developments.

Following less than impressive trade in AUD-JPY on Friday, I’m taking another look at this pair. Zooming out to 4H chart, a sell order is placed at 77.17, with 150 pips objective. In the meantime, should the price keep advancing, I’ll be searching for shorting opportunities all the way to 79.40, the last high. If that resistance is broken, views might have to be changed to bullish. But the opening is first, so gaps are always a possibility. I want to get more active this week, starting today with gaps, if they happen.

Mike K.
http://www.fxmadness.com/

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