Technical Analysis PCI 7 November 2014

by IFC Markets

Euro Index - ECB decision

Today we consider the currency index &EUR_Index composed on the basis of the Personal Composite Instrument - PCI technology. The index is designed to show the basic European currency fluctuations (EUR) against other segments of the Forex market. As a systematic market indicator we will use a portfolio of the most liquid currencies traded against the main European currency:

EUR/{USD(4.35%)+JPY(18.2%)+GBP(18.8%)+CHF(19.2%)
+AUD(19.8%)+CAD(19.65%)}. The price of each currency is expressed in USD. The weights are defined according to the currency liquidity relative to the volume of international bank circulation.

Note that &EUR_Index reaction on the fundamental economic events in Europe is the most obvious and sustainable: the index forms a stable trend channel, meanwhile it is less susceptible to the fundamental events of other currencies. Let us remind you that the ECB meeting took place on Thursday and the interest loan rate was announced to remain unchanged at 0.05% per year, deposit rates at -0.2%. This news was reported despite the promises of a prompt QE launching to boost the EU economy. The ECB statement caused a temporary euro weakening against the most liquid currencies. However, the result was predicted by the majority of the economists and the long-term bearish trend has not been formed. Currently, &EUR_Index is waiting for new fundamental signals, and it is still in a state of a long-term uncertainty despite the positive US data.

Here we consider the daily closing/opening price chart of the given instrument. It was composed in NetTradeX platform. (Sorry, but author forgot to attach chart) We can see the price is drifting in sideways, which is confirmed by fractal highs and lows. The RSI oscillator signal has also formed a channel between 40% and 61% based on graphic models "double top" and "double bottom" (marked in black ellipse). We will expect a sharp volatility spike after the breakout of any of the channel limits as the fundamental news come out. Therefore, we propose to open two pending orders: Buy and Sell. A pending buy order can be opened above 1.00644, Stop Loss is better to be placed below 0.99542, which is confirmed by 4 Bill Williams fractals. A sell order is recommended to be placed in the opposite way. Conservative traders are recommended to wait for the oscillator breakout confirmation: it must overcome the local overbought/oversold levels of 40% and 61%.

After opening a position, the opposite one can be deleted: we give an opportunity for the market to choose the direction. Stop Loss is to be moved after the ParabolicSAR values, near the next fractal high (sell position) or fractal low (buy position). Thus, we are changing the probable profit/loss ratio to the breakeven point.
Position Sell
Sell stop below 0.99542
Stop loss above 1.00644
Position Buy
Buy stop above 1.00644
Stop loss below 0.99542

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