The element of surprise: Can technical analysis help?

This week the euro rallied five US cents in 65 hours, despite on-going Greek drama, and all too many financial analysts were stumped, slaughtered, and lost for words. I have been wondering whether technical analysis can help in predicting surprise, or should we all just throw up our hands and, as consensus economists do, say it was unexpected and an outlier?

EUR
‘The dollar rally will regain momentum from next month, a Reuters poll of foreign exchange strategists showed on Wednesday, although its strength will depend on economic data and the timing of a Federal Reserve interest rate hike’ 41 of 55 analysts polled by Reuters this week believed, thinking the dollar was ‘just pausing for breath and that it will rally again soon’. “The onus on economic data to surprise sharply to the upside over the next few weeks is fairly high, else the Fed may be unable to prepare the market at the June FOMC for hikes commencing in Q3,” analysts at Barclays wrote in a note.
In the latest poll (published 3rd June), forecasters have moderately upgraded their expectations of the euro, although they expect the common-currency to trade lower in the coming twelve months. The euro is expected to fall to $1.05 in six months and further to $1.04 in a year. But the number of analysts who forecast the euro to trade at or below parity against the dollar has fallen — from 22 in April, 19 in May to 15 in the current poll.

EUR3
Now you know what they’re thinking, what can we do? Traditional volume and open interest charts can help, as always, with decreasing volumes and declining open interest suggesting complacency and lack of interest, as has been the case this year. Ta-rah! Hence the surprise.
The put/call ratio should be monitored when available, the chart here showing this year’s continued preference (known as skew) for EUR/USD puts over calls (10 delta, one-month, at-the-money charted here). Also note the difference between the observed volatility, also known as historical volatility (the black line on our graph) against the implied volatility used for options prices. The bigger the difference, the greater the perceived need for insurance via options; and the more likely the surprise when it all goes pear-shaped.

EUR4
Back to polling: it may not be so good at UK elections because of ‘the silent Tory’, but it is one of the best gauges we have of how people are thinking.
Please see our charts and go to
http://twitter.com/ReutersPolls
for other opinion polls you might be interested in.

Share Share Share Share Share
Posted in Finance, General, Markets, STA news, Technical Analysis, Trading, Trending
Tags: , , , , ,
2 comments on “The element of surprise: Can technical analysis help?
  1. Michael Smyrk says:

    Latest COT figures on the Dollar Index show that Commercials reduced longs and added to shorts, while Large Specs added to longs but – this time – reduced shorts considerably. Small Specs reduced both long and short positions. Last week’s bearish/non-bullish view was comparatively simple, but this week’s decision is more difficult – should one follow the Commercials (who are distinctly short), or the Large Specs (who are comparatively long)? [Small Specs seem to reflect this dilemma – they have a very limited commitment at present]. My inclination, as always, is to take guidance from the Commercials in the medium term.

  2. Axel Rudolph says:

    Hello Michael…what do you mean by the medium term? Are you talking about the next few months to a year?

Leave a Reply

Your email address will not be published.

Disclaimer

The views and opinions expressed on the STA’s blog do not necessarily represent those of the Society of Technical Analysts (the “STA”), or of any officer, director or member of the STA.

The STA makes no representations as to the accuracy, completeness, or reliability of any information on the blog or found by following any link on blog, and none of the STA, STA Administrative Services or any current or past executive board members are liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.

None of the information on the STA’s blog constitutes investment advice.

About Nicole Elliott

Nicole Elliott

A graduate of the London School of Economics and Political Science (BSc Social Psychology) Nicole Elliott has worked in banks in the City of London for the last 30 years. Whether in sales, trading or forecasting technical analysis has always been the bedrock of her thinking. Key expertise lies within all areas of treasury: foreign exchange, money markets, fixed income and commodities.

She has also added to the body of knowledge of the industry writing the first western book on Ichimoku Cloud Charts. Strong media links and a cult following are due to her prescient calls on the markets and often entertaining format.

Nicole can be contacted at trending@sta-uk.org

Posts by Date

Sign up to the STA newsletter

Sign up to the STA newsletter

Our newsletter is designed to bring you the latest information on technical analysis, educational courses, conferences and events . Sign up now!

Previous Newsletter Archive

* required

Sign up to the STA newsletter

  html
  text