Yes....It's been too long

We are into election day. The calendar has changed in the forex world and although, the election day will extend into November 9th (using a forex day clock and calendar i.e. 5 PM ET is November 9th), we have reached November 8th.

Are we ready for a move? I think we are ready. It is certainly time to move the EURUSD....Is there a trade? Trading this event requires taking more risk. More risk on the trade, implies using a much smaller position. Could there be even more risk than you would expect? YES! There could be gap risk - especially (I think) if Trump pulls an upset. The market is leaning more Clinton technically, but not as much as it was a few weeks ago. You can see that in the price action of the EURUSD and the tools applied to it.

Why should we anticipate a big move?

Some facts:

  • Over the last 21 months the price has been in at 1251 pip trading range (from 1.1712 to 1.0461
  • Over the last 14 months (311 trading days), the range has been in an even narrower 1116 pip trading range (from 1.0499 to 1.1615)
  • Over those 311 days, The price has traded mostly in a range defined by 1.0777 on the downside and 1.1472 on the upside (695 pips). There have only been 3 closing days above 1.1472 and 19 closing days below 1.0777 (7% of the days). So 93% of the days closed within a 695 pips trading range (14 months). That is not that big at all.
  • For the last 452 trading days, the price has closed above 1.0777 and below 1.1472 a total of 43 trading days or 9.5% of the days. A total of 409 days of the 452 days (90.5%) have closed within the 695 pip range.

The market is non trending. Non-trending eventually leads to trending. We have an event that has the potential to trend the market (to change other markets too like gold, stocks, bonds, etc). So there is good chance we make a pretty good move in the near term and that move takes the pair outside recent parameters (above and below the yellow area/the Red Box and perhaps ultimately outside the extremes of the extremes (red shaded areas in the chart above).

I refer to the Red Box in this post, so have an idea of what I speak to by looking at the extended daily chart above.

What is the technical bias going into the election.

Looking at the daily chart, more recently,

  • The price has a lower trend line with 6 separate points along that trend line (see red circles). The trend line cuts across on the 200 day MA at 1.1179 level. Staying below that trend line AND 200 day MA is more bearish.
  • As a result of the FBI email news over the weekend, the close above the 100 day MA on Friday (100 day MA was at 1.1132 and the day closed at 1.1135) failed on that break. That is more bearish.
  • Yesterday the price closed below the 50% midpoint of the move up from the December 2015 low (most recent low). That level comes in at 1.1057. That is more bearish.

If there is a Clinton victory, the EURUSD falls on the expectation that the:

  • Fed will tighten in December,
  • The world takes a relief breath from the uncertainty of Trump and buy the dollar.
  • Gold sells off,
  • Stock go higher
  • Bond yields rise.

If there is a Trump victory, the EURUSD rises on the expectation that the:

  • Fed might not tighten in December (dependent on the stock market reaction as a proxy for the expected economic slow down at least initially from uncertainty)
  • The world gasps as they adjust to what Trump might do to global trade
  • Gold rallies
  • Stocks go lower
  • Bond yields fall

Where does it go on a Clinton victory?

Prior to the late Trump latest surge, the dollar was bid/ the EURUSD was near the lower Red Box extreme. That move took the price down to 1.0850 - within 73 pips of the lower boundary. If indications are of a Clinton win today, we head back down that way at the minimum.

Looking at the 4-hour chart below, we see the price moving below:

  1. 1.0995/1.10000. That is the 50% of the move up from the "Clinton will win" sell off we saw a few weeks ago
  2. 1.0979. Not far from that is the 100 bar MA on the 4-hour chart at 1.0979
  3. 1.0907. We then start to probe for the recent lows. The underside of that broken trend line comes in at 1.0907
  4. 1.0882. That level is the recent swing low from October 27th.
  5. 1.0850-57. The recent lows in October.

A move to that low is about 200 pips from here. Sounds like a long way but certainly doable. Ultimately the expectations is to break below the 1.0777 level from the daily chart. The 1.0777-1.0821 area is a tough nut to crack (the yellow area from the daily chart above). There are a number of swing lows that stall in that area going back 21 months. However, I am looking for an extension ultimately.

What is the risk for the Clinton win trade? The 100 day MA at 1.11268 is the close risk. A larger risk would be on a move above the 200 day MA and the downward sloping trend line at 1.1189 area. Any move above those levels imply a Trump potential victory. Do not hold a short above those levels. In fact, a price break above, could imply a move to 1.1472 sometime soon (before year end).

Can we break out of the Red Box to the downside?...

As mentioned above....YES.

Given the quagmire we have been in, I would anticipate a move outside the RED BOX (below 1.0777) sometime soon (before year end). It has just been in the RED BOX for too long. It is time to make a move and extend the range.

Clinton is the favorite (according to polls), but an upset can occur.

The voting polls show Clinton ahead (I just heard 47% to 43%), but the visual poll from the crowds at rally events certainly show that Trump has more supporters (and certainly the loudest). Is it because Clinton supporters don't really get into that type of thing and Trump supporters do? Sure. The demographics of the typical supporter of each seem to suggest that dynamic. However, it may also imply that voters for Clinton are really not that strong and they may be sway-able. That may swing the swing states.

What is Trump wins?

The dollar goes down. The EURUSD heads higher.

Key steps along the way:

  • 100 day MA at 1.11267
  • 200 day MA at 1.1180. A move above the 200 day MA should not be ignored.
  • 1.1238. This area was swing highs and lows back at the end of July/into August (see red circles 1-4). At red circle 5 we stalled at the level too.
  • The recent highs up to 1.13658

As mentioned, I am looking for extensions outside the Red Box ultimately. Since Trump would be considered an upset, a surge higher may be easier (as shorts are forced to cover and things like stocks move lower, bond yields lower, gold higher, etc). Don't get in the way.

High RISK

This is a high risk event. With Brexit in the rear view mirror anything can happen when people go behind the curtain and swing the levers.

So if the trade is done, be sure to lower the position size to account for that event risk. Understand too that there is gap risk too. We are 135 pips from the 200 day MA and if Trump is starting to pull an upset (takes Florida or another of the east coast swing states), it can go there quickly.

So do your own internal review of your risk parameters. Do not expect a normal 80 pip range but much more (what? I really don't know but over time, we have the potential to move). If the risk is too great, there will be other opportunities as the dust starts to settle.

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For another look at the risks of another trade, see my post on the USDMXN by clicking here.