Market Timing PART II

August 2, 2008 at 9:41 am Leave a comment

By FX Insights

Market Timing PART II

THIS IS A CONTINUATION OF MARKET TIMING PART I

Seasonal Pattern Timing

At certain times of the year, the euro will naturally be stronger than the dollar and vice versa. For the past several years, the EUR/USD has followed certain seasonal patterns we’ve been able to recognize. This does not mean these seasonal patterns will always exist, as the market is ever changing with the fundamentals, but thus far, these patterns have held pretty consistent. 

January/February – typically this is a lower time in terms of volatility. It will be a give and take for the euro and dollar. Of course, strong retail and consumer data based on holiday sales would certainly be a factor that would help the dollar in January. 

Late winter/spring – now as we roll into later February, the euro will start to make its move against the dollar. During the spring the EUR/USD can move topside anywhere from 300-600 pips, sometimes even more, depending on market fundamentals of course. And this would present a good opportunity to long the euro on a swing basis to take a good haul of pips. 

Summer trading – with most of Europe taking a 7-week holiday, the market will tend to slow down as volatility drops. During the summer you’ll see a good deal of ranging. So if you track EUR/USD price action to help establish a range, you can do some excellent intraday trading during the summer season. 
During the months of June and July, the dollar has been known to strengthen against the euro. The market has been known to correct down several hundreds pips leading into the slower summer session. Likewise, late summer/early fall can be a time of strength for the dollar. 

Fall/Winter – as we roll into October and throughout the rest of the fourth quarter, the euro has shown pattern tendency to make big gains on the dollar, and will usually finish the year strong against the dollar. Now this year is a little different because the dollar has been fundamentally weak since the spring and the market has been selling dollars and buying euros for most of the year. 

That being said, patterns have show the EUR/USD will start making upward moves mid to late October. During the U.S. Thanksgiving holiday, the market “gives thanks” by pummeling the dollar and pushing the euro up. During the U.S. Christmas holiday, our typical “gift” is more dollar selling and strong upwards gains for the EUR/USD. 

So unless there are fundamental changes for the U.S., I expect the euro to finish out this year strong against the dollar and to start 2008 in a position of strength, as the housing market will continue to weigh on dollar gains, and of course the possibility of more Fed cuts and the ECB either holds or raises interest rates.

Fundamental Timing

Another reason why it’s important to have a good understanding of the market fundamentals is so that you know when to be in and when not to be in the market. Certain times of the year certain pieces of fundamental data will have more of an impact on the market. 

For example, in the first part of the year, we told you that the U.S. employment situation would not be so much of a market-moving factor. So if you remember, there were several NFP’s that saw little market movement because the market was not focused on the U.S. job situation. Then, in the beginning of summer we told you to start watching the U.S. jobs situation and that we’d see increased volatility for NFP. 

Sure enough, late this summer the employment situation came into focus and the market reacted with a great degree of volatility to the fundamentals of the jobs market. 

Another example… ISM is a very important report, but the market is reacting to it on a small-scale because overall the manufacturing sector in the U.S. is chugging along. But when we start seeing signs of manufacturing slow downs, you can be assured the market will react to ISM to the degree it does with NFP. 

Back in March of this year we alerted our FXI members that the subprime issue was about to surface and that our market would start killing the dollar as a result. But it wasn’t until later in the spring and summer that the market started its reaction to subprime/housing. Now the U.S. housing situation is still in play and will be in play for the months to come. I do not believe we’ve seen the worst of the housing debacle and it will surely get worse before it gets better. 

So based on the fact the market is heavily reacting to U.S. housing and jobs data, you’ll want to time your trades accordingly as you can be assured the market is going to move. 

In Conclusion

This pretty much covers the timing aspect of trading. The best way to learn how to time your trades is to watch and track EUR/USD price action as it relates to the day of the week, which fundamentals are in play, what season of the year we’re in, what the time of the day is, etc. I think the only way to really learn this stuff is to just watch the market, the price action and then tie that into the timing aspect. 

Again, this market is ever changing, ever moving, and the fundamentals that drive the market can certainly vary. Of course one thing that will never change is how the market reacts to interest rates and interest rate policy – that you can be assured of. 

Hopefully this will help paint a clearer picture of our market. If you have any questions, let me know.

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Market Timing PART I Weekly Update

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