Foreign exchange market unfazed by ‘window dressing’

Euro leaning forward as 2013 nears

As investors and fund managers move to dress up their respective portfolios, the end of the year offers little insight into near-term expectations.

The prevailing theory claims that stock sales in December, whether for tax reasons or to make year-end stock holdings look stellar in upcoming annual reports, will lead to bargain prices in the following month and produce what has been euphemistically called the “January Effect”.

According to this theory, if the S&P 500 rises for the first five trading days of the year, then there is an 87 per cent probability that the entire year will show a positive gain. This scenario has repeated itself 33 out of the last 38 times.

Failures were primarily during war-related years, but the average annual gain recorded was 14 per cent.

This impressive track record has subsided in recent periods due to recessionary downturns and more tax-sheltered investment vehicles being employed in the marketplace.

Will 2013 be another banner year for the January Effect? Most financial markets are busy with year-end cleanups but the one very liquid market that refuses to buckle under to ‘window dressing’ machinations is the foreign exchange market. Volume may be down, as in other markets, but the technical signals tend to more dependable, free from the yearend ‘noise’ witnessed in most others. What is the Euro telling us about the month to come?

Let’s begin with an annotated chart. The diagram may appear overly complex with an abundance of technical notations displayed, but the process entails looking for a number of correlations that either confirm or deny your overall hypothesis.

In this example, we are looking at the past four months of daily pricing behaviour for the “EUR/USD” currency pair, the most heavily traded major forex pairing.

Fundamentals may move markets, but technical data reveals the current state-of-mind of the trading community, whether it pertains to large banks, major hedge funds or the individual retail forex trader.

Here are a few insights from the above information:

The Euro successfully broke through a downward channel of resistance back at the end of August, when European finance ministers eased pressure on Spanish and Italian bond markets.

 This “euphoria” ended when $1.315 was reached, a formidable resistance level. The “Lumps of Coal” downturn followed, but a new “Santa Rally” ensued, once US presidential elections were completed and another Greek bailout programme was finalised.

 The general trend of the market has been up for the period depicted. The “Ascending Triangle” formation also lends credence to the speculation that more upward pressure exists, portending a potential January rally.

Technical indicators presented on the bottom of the chart, however, are signalling an “overbought” condition. The 200-Day EMA also acts like a magnet that must be reckoned with in the near term.

The conclusion is that the market is poised for another rally. The odds may be roughly stated as “60/40” at this point. Some analysts are suggesting that the market has factored in a successful conclusion to “fiscal cliff” negotiations in the United States, the reason for the rising action. If no deal is forthcoming, a severe drop may be in order for stocks. The dollar would strengthen, and the Euro would fall, as a result.

What is the opposite of the “January Effect”? A bad January has traditionally been a bad omen for stocks. A down January has led to a new “bear” market or a flat ranging period in some cases. An average decline of 13 per cent for the remainder of the year follows January under these conditions.

Time will tell which scenario is imminent, but the Euro is leaning forward at the moment.


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