Peter Wadkins and Brian Twomey MAY 2013

The cycle gurus refers to big John Taylor from Fx Concepts, the largest FX hedge fund in the world, now gone. Head trader was Jonathan Clark. Again I was a perfect trader dating back 8 and 10 years ago.


The cycle gurus weekly missive came out on the day that EUR/USD blasted through their 1.3215 “red flag” level and we waited with baited breath to see what their response would be – “Take ‘Em” – surely not. Well surprisingly enough they were not being contrite in fact they were almost salivating at the chance to sell higher up “Our target for this upmove is only the 1.3350 area and if seen this should be a good place to begin selling.” Yesterday’s peak was 1.3243 and that naturally threw them off, after all it was a clean break above their red flag – but as the cycle gurus have frequently cautioned, you don’t chart the extremes to confirm a break, you work off daily closing levels, EUR/USD closed at 1.3185.
So, from that yardstick the cycle gurus prognostications remain intact, until we close above 1.3215 there’s nothing to worry about – right? Well not quite so, given the fact we’ve been as high as 1.3243 there’s possibly something awry with the cycles – they’ve raised their red flag level … “Only a close above this level (1.3350) means the uptrend will become stretched and it will rally to the 1.3480 area before peaking, but this is less likely. By the week of May 20 and probably sooner the euro should turn lower and decline for several months.”
Now that we’ve had such a shocking reversal today, the cat’s among the pigeons, in fact their first red flag close above 1.3215 may well be correct. We tend to blame the “slings and arrows of outrageous fortune” after all their missive came out as usual ahead of the ECB but more importantly after the May Day holiday – in the midst of Japan’s “Golden Week” – in all probability 1.3243 would not have printed if not for yesterday’s liquidity starved conditions on the back of month-end squaring the day before. We noted last week that extreme volatility is typically a sign that a trend is coming to an end or a violent continuation, after today’s ECB outcome it seems to be the former.
The cycle gurus have some advice as to how to identify this fresh downtrend is upon us … “By the week of May 20 and probably sooner the Euro should turn lower and decline for several months. A close below the support at the 1.3020 to 1.3035 area is needed to immediately turn the outlook negative. It is then headed directly lower into the middle of June. Our initial target for this downtrend would become the 1.2550 area. The longer-term cycles argue this overall weakness can persist into August and the euro can fall to as low as the 1.2100 area before bottoming. A widening of the Bund/Bonos spread is a likely to be an early warning that the downtrend is resuming.”
Our view is that yesterday was exactly as we penned above – a bully boy liquidity squeeze that caught the market wrong-footed. Today’s ECB doves, some who wanted a 50bp rate cut, tell us monetary policy will be accommodative going forward but not so loose that growth will pick up dramatically because the committee remains at odds with itself. German elections and Germany’s role as Europe’s paymaster dictate that there will continue to be bickering over when to loosen the purse strings through the summer and not to expect a contrite ECB proclaiming mea culpa – we need to embrace QE. So no equity market rally there unless global markets are rallying elsewhere. Banks are talking about the “Draghi put” offsetting the “Bernanke put” which should allow USD to rise if growth remains positive (relatively)
Our black box friend Brian who just scalped a nice long trade, booked his profit at his target 1.3111 and waited for the dust to settle. Here’s what he has to say now … “EUR/USD. Market is locked between shorter term 1.3128 — 1.3020 and longer term 1.3224 — 1.2924. Longer term targets: 1.3263 and 1.3298 from longer term averages yet overbought at 1.3203 and a good sell point…
Longer term average has forecast 1.3260’s since just before March 5 but has yet to achieve that potential. Forecasts of 1.3300 and above will not be an easy road and doesn’t yet appear in longer range forecasts neither do 1.2800’s. Trend Intensity is at the highest readings and warns of imminent decline. That indicator has risen steadily since March 5 when EUR/JPY embarked on its advance from 119.00 to 131. It appears EUR/USD rises was all EUR/JPY buying related as the trend has warned of decline since March 5. My long trade today has a target of 1.3124 from current 1.3040 lows.”
Our rudimentary moving average model was -5 units EUR/USD last time we updated it April 25; spot was 1.3015 and we highlighted the fact that the model would turn long by 1.3038 and that is indeed what happened. By yesterday’s close it would have been long 15 units EUR/USD and at maximum vulnerability. We have seen what’s happened since and that’s why you cannot run a rudimentary M/A system, you need some bells and whistles to book profits and keep you out of harms way (like extended Bollinger Bands, stretched average true ranges, oscillators, RSIs etc.)
Updating the rudimentary model this afternoon (m-to-m 1.3058) the model is now 7 units EUR/USD short; some of the longer models with hefty losses having only recently being triggered long. Others surprisingly not too bad, that’s why we skew the model to incorporate more shorter term components than we used to. The blended  model say spot trades most comfortably 1.2890/1.3210 and gets stretched outside that area. Short term models say 1.2945/75 is oversold, ultra-short term say 1.2995/1.3045 is oversold. 1.3185/1.3300 is overbought from 24-hr M/A thru 55-days.
So from looking at Brian’s long term models (1.3263/98) ours (1.3185/1.3300) and the cycle gurus 1.3350 (only close above allows higher) we seem to be at a similar consensus as last week, 1.3200/40 is overdone, if you get another bite of the cherry, fade it.
       Brian Twomey

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