There are no magic bullets, but we can improve our trading edge by starting our selection process with two proven concepts: trend and momentum. These are perhaps the two most powerful forces in the market. The idea is relatively simple: stay on the right side of the trend and focus on the leaders. This is basically dual-momentum. Starting our process with these two steps will increase the odds of success. We will first choose the timeframe and then select two indicators.

When it comes to trend-momentum strategies, my research suggests that longer timeframes work better than shorter timeframes. This means 200 days works better than 50 days. Short timeframes, such as 20 and 50 days, are better suited for mean-reversion strategies, which trade pullbacks within uptrends. 200 days covers around nine months. This is long enough to absorb a 2-3 month correction and short enough to allow for extended trends.

Next, we need a trend-following indicator. While there are dozens of options out there, a simple 200-day SMA works quite well for long-term trend identification. The idea is to filter out stocks that are in downtrends and only focus on stocks in uptrends (above their 200-day SMAs). Negative outcomes are more likely when below the 200-day SMA and positive outcomes are more likely when above. It is as simple, and effective, as that. 

The chart above shows META with the 50 and 200 day SMAs. In the indicator windows, we can see the Percent above MA indicators, which show the distance between the close and the moving average. META broke the 50-day SMA several times, but none of these breaks resulted in a trend reversal. These breaks simply marked tradable pullbacks within the bigger uptrend. It would have been more profitable to accumulate on breaks of the 50-day as the stock held the 200-day and extended higher.  

After filtering for stocks in uptrends, we then need a momentum indicator to quantify performance. Here again we have dozens of choices. Rate-of-Change is the purest momentum measure and also works quite well. As with the SMA, I will use the 200-day Rate-of-Change to capture long-term performance. We can then rank stocks and focus on those with the strongest momentum.

The CandleGlance charts above show the top performing S&P 500 stocks. I created a ChartList with S&P 500 stocks, viewed the list as CandleGlance and sorted by the ROC(200). This puts the top performing stocks at the top and I can then scroll through this list to create a short-list for further analysis.

This coming week at TrendInvestorPro we are introducing two new rotation strategies using variations of these concepts. These strategies are fully systematic and trade once per week. They are aimed at investors because they trade less frequently than our rotation trader strategies. Note that our S&P 500 rotation trader strategy is up over 40% in 2024. The image below shows the equity curve for this strategy (green line) and buy-and-hold for the S&P 500 (black line). This strategy is up more than 3 times buy-and-hold and the drawdowns are much lower because of the market regime filter. Click here to learn more.

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The over-deviated markets continued to extend their losses for the fourth week in a row. The Nifty remained largely under sustained selling pressure over the past five days, barring a few feeble attempts to stage a technical rebound. The markets extended their downsides while giving up key supports on the daily charts. The trading range widened again; the Nifty oscillated in a wider 904-point range before ending with a decent cut. The volatility also spiked; the India Vix surged by another 12.23% to 14.63 on a weekly basis. Following a largely bearish setup throughout the week, the headline index closed with a net weekly loss of 673.25 points (-2.71%).

The coming week is a truncated one; Friday is not a trading holiday but it will just have a very short, one-hour ceremonial Mahurut Session. Overall, the volumes are expected to remain low given the festive season.  The Nifty has violated the 100-DMA on the daily chart which stands at 24591. It has already given up the 20-week MA which is placed at 24702. Given these adverse technical developments, the Nifty has dragged its resistance levels much lower to 24500-24700 zones. Any technical rebounds will find resistance here. In other words, so long as the markets trade below this zone, all rebounds are more likely to get sold into.

The coming week may see a tepid start; the levels of 24450 and 24650 are likely to act as resistance levels. The supports are expected to come in at 23950 and 23700. The trading range is likely to stay wider than usual.

The weekly RSI stands at 49.95. It has formed a fresh 14-period low; however, it stays neutral and does not show any divergence against the price. The weekly MACD is bearish and trades below the signal line.

The pattern analysis shows the high point of 26277, which is confirmed as an intermediate top for the markets. The decline has also seen Nifty breaching pattern support at 24750 levels. This pattern support is in the form of a rising trend line which begins at 22124 and extends itself. The 20-week MA and the 100-day MA also stand violated meaningfully on a closing basis. The resistance levels have been dragged lower; all technical rebounds will find resistance in the 24500-24700 zone from a short to medium-term perspective.

The markets have entered a technical setup that is likely to create a challenging environment. The risk-off setup is evident; it would be imperative to stay invested in stocks that have strong relative strength against the broader markets. Such investments shall offer greater resilience if the weakness in the markets persists for a longer time. While staying highly selective, a cautious approach is advised for the coming week.

Sector Analysis for the coming week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

Relative Rotation Graphs (RRG) continue to show a few pockets of resilience building up in the markets. The Nifty Services Sector, Pharma, Consumption, and IT indices are inside the leading quadrant. They may continue relatively outperforming the broader markets.

The Nifty FMCG index has rolled inside the weakening quadrant. Besides this, the Midcap 100 index is also indie the weakening quadrant.

The Nifty Auto and Media Indices have rolled inside the lagging quadrant. This group is likely to relatively underperform along with the Energy, PSE, and Energy. The Infrastructure,  Commodities, PSU Bank, and Realty Indices are also inside the weakening quadrant. However, they are seen improving their relative momentum against the broader markets.

The Nifty Bank, Metal, and Financial Services indices are inside the improving quadrant; they are likely to improve their relative performance against the broader markets.

Important Note: RRG™ charts show the relative strength and momentum of a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.  

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst

www.EquityResearch.asia | www.ChartWizard.ae

In this StockCharts TV video, Mary Ellen shares how the markets trade right before the elections, and also reviews the move in Tesla (TSLA) after reporting earnings. She shares examples of what to watch for if your stock is due to report earnings – and what to do if it gaps down.

This video originally premiered October 25, 2024. You can watch it on our dedicated page for Mary Ellen on StockCharts TV.

New videos from Mary Ellen premiere weekly on Fridays. You can view all previously recorded episodes at this link.

If you’re looking for stocks to invest in, be sure to check out the MEM Edge Report! This report gives you detailed information on the top sectors, industries and stocks so you can make informed investment decisions.

Although earnings season is in full swing, trading volume has been relatively light this week. Perhaps investors are waiting for the stock market to show some direction. It could happen next week, one that’s jampacked with earnings and market-moving economic data, or the following week after the US election and Fed meeting.

A Bird’s-Eye View Of the Stock Market

Tesla’s upbeat Q3 earnings on Thursday juiced up the Nasdaq Composite ($COMPQ), the laggard of the three US broad market indexes. This price action continued into Friday, with the Nasdaq reaching a record high. Sadly, it couldn’t hold on to it, but still managed to close higher by 0.56%. The S&P 500 ($SPX) and Dow Jones ($INDU) snapped their six-week winning streak, but the Nasdaq retained its seven-week winning streak.

Technology was the top-performing sector on Friday, followed by Consumer Discretionary and Communication Services (see the StockCharts MarketCarpets screenshot below). It looked like the stock market had regained its mojo for a little while, but the week ended without giving investors much of a sense of direction. Next week could be a different story, since most mega-cap Tech stocks will report quarterly earnings.

FIGURE 1. STOCKCHARTS MARKETCARPET, OCTOBER 25, 2024. Technology regained its top spot in sector performance on Friday. Next week is a big earnings week for technology companies. Will they impress or disappoint?Image source: StockCharts.com. For educational purposes.

The US dollar and precious metals traded higher this week. The 10-year US Treasury Yield Index ($TNX) bounced off its 200-day simple moving average and closed at 4.23% (see daily chart of $TNX below).

FIGURE 2. DAILY CHART OF 10-YEAR US TREASURY YIELD INDEX ($TNX). $TNX bounced off the 200-day moving average and moved higher. The rise in yields suggests investors are uncertain about near-term market direction.Chart source: StockCharts.com. For educational purposes.

Seeing gold, the US dollar, and Treasury yields rally simultaneously is unusual and is an indication of investor uncertainty. So far, the three seem to be holding on to their uptrends. Whenever there’s a slight pullback, they recover quickly and move higher, suggesting that these assets have momentum behind them. The chart below displays the US dollar ($USD), SPDR Gold Shares ETF (GLD), and $TNX.

FIGURE 3. THE US DOLLAR, GOLD, AND YIELDS. Gold has been trending higher in 2024, whereas the US dollar and yields still display a series of lower highs and lower lows.Chart source: StockChartsACP. for educational purposes.

Even though the US dollar and 10-year yields are rising, they haven’t yet established an uptrend. Gold, on the other hand, has been on an upward trend in 2024. 

If you hold a long position in gold, ride the momentum, but know that it could dry up. It’s a good idea to start thinking about managing your position. Gold prices are looking extended, and with Treasury yields and the US dollar as high as they are, I would watch them closely for a reversal, as it could cause gold prices to fall.

Looking Forward

Next week, we will have some key economic data that could influence the Fed’s interest rate decision at their November 7 meeting. According to the CME FedWatch Tool, a 25 basis point cut probability is 95.5%. This could change as economic data comes in next week. If the data supports a strengthening US economy, investors may think the Fed will not cut rates at the next meeting. This could give rise to fear, which in turn spikes volatility.

The Cboe Volatility Index ($VIX) closed higher, but is still relatively low at 20.33. Keep an eye on it, because even a little negative news could send it higher.

Next week is chock full of market-moving events. Earnings from mega-cap Tech and other large-cap companies, plus key economic data (see the End-of-Week Wrap-Up section below), are among them. If trading volatility remains anemic next week, then you know that investors are having the election jitters. You may have to wait another week for trading volume to pick up.

In the meantime, it’s best to exercise patience and focus more on managing your portfolio holdings. If you are going to add positions, keep your sizes small to minimize your risks. The stock market is vulnerable and could make large moves in either direction.

End-of-Week Wrap-Up

• S&P 500 closed down 0.96% for the week, at 5808.12, Dow Jones Industrial Average down 2.68% for the week at 42,114.40; Nasdaq Composite closed up 0.16% for the week at 18,690.01
• $VIX up 12.76% for the week, closing at 20.33
• Best performing sector for the week: Consumer Discretionary
• Worst performing sector for the week: Materials
• Top 5 Large Cap SCTR stocks: Applovin Corp. (APP); Carvana (CVNA); Insmed Inc. (INSM); Ubiquiti, Inc. (UI); MicroStrategy, Inc. (MSTR)

On the Radar Next Week

• September JOLTS Report
• Q3 GDP Growth Rate QoQ Adv
• September PCE Price Index
• October Jobs Report
• October ISM Manufacturing PMI
• Earnings from Alphabet (GOOGL), AMD, Microsoft (MSFT), Meta Platforms (META), Amazon, Inc. (AMZN), Apple Inc. (AAPL), McDonald’s Corp (MCD), Pfizer, Inc. (PFE), Chipotle Mexican Grill (CMG), D.R. Horton, Inc. (DHI), Microstrategy (MSTR), Carvana (CVNA), and many more.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

When I was growing up, I loved Choose Your Own Adventure books.  I see the world in shades of gray instead of black-and-white, so I was immediately drawn to the seemingly endless scenarios that the main characters could experience as I made different choices for them.

As investors, we often get so caught up in one particular market narrative that we are unable to think “outside the box” and consider other possible outcomes.  Successful investors I’ve worked with have been exceptionally good at looking at all the possibilities, challenging their own investment thesis by opening themselves up to other options.

Today, we’ll walk through four potential outcomes for the S&P 500 index over the next six to eight weeks.  As I share each of these four future paths, I’ll describe the market conditions that would likely be involved, and I’ll also share my estimated probability for each scenario.  

By the way, we ran through four scenarios for the S&P 500 back in July, and you may be surprised to see which scenario actually played out!

And remember, the point of this exercise is threefold:

1. Consider all four potential future paths for the index, think about what would cause each scenario to unfold in terms of the macro drivers, and review what signals/patterns/indicators would confirm the scenario.
2. Decide which scenario you feel is most likely, and why you think that’s the case. Don’t forget to drop a comment and let me know your vote and what you think will cause that scenario to play out.
3. Think about how each of the four scenarios would impact your current portfolio. How would you manage risk in each case? How and when would you take action to adapt to this new reality?

Let’s start with the most bullish scenario, where the S&P 500 keeps going with a consistent pace and breaks above 6000 by early December.

Option 1: The Super Bullish Scenario

The S&P 500 has experienced a remarkably strong run off the low in early August.  This first scenario would mean a continuation of the pace of the current trend, suggesting the SPX would remain above a trendline drawn from the August and September lows.  This scenario would include the S&P breaking above 6000 for the first time, and by early December, we’d be wondering how we made it through an entire calendar year with the biggest drawdown sitting at just less than 10%.

Dave’s Vote: 5%

Option 2: The Mildly Bullish Scenario

Let’s say that Trump wins a second term, and investors see that as a fairly pro-business and pro-market outcome?  But at the same time, new economic data and the November Fed meeting leave investors a little skeptical of the Fed’s ability to navigate the soft landing scenario into early 2025?

The second scenario would mean we drift a bit higher, but breadth conditions break down as investors gravitate to Magnificent 7 stocks and other safe havens as the VIX pushes above 20.  We don’t see a major correction into early December, but it still feels like one is just around the corner and everyone’s talking about overvaluations and a potential Q1 pullback.

Dave’s vote: 25%

Option 3: The Mildly Bearish Scenario

A Harris victory could certainly weigh on the markets as we progress through Q4, as we realize how much investors had been pricing in a Republican White House.  Skepticism of the Fed reaches a fever pitch as we’re no longer talking about a potential soft landing, but rather when the next major correction will play out.  Volume and breadth divergences that have been growing in October continue to play out, and a 2018-style Q4 drop becomes our reality in 2024.

Dave’s vote: 50%

Option 4: The Very Bearish Scenario

You always need a “doomsday” scenario, where things get bad and stay bad.  What if the S&P 500 starts selling off as a frustrating earnings season leads into a contentious election and a November Fed meeting raises more questions than answers?  Paul Tudor Jones famously remarked, “Nothing good happens below the 200-day moving average.”  And in this scenario, that’s exactly what we’re facing in December as we wonder where how and why the normal Q4 rally is nowhere to be seen.

Dave’s vote: 20%

What probabilities would you assign to each of these four scenarios?  Check out the video below, and then drop a comment with which scenario you select and why!

RR#6,

Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.  

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

The global stock market is a big place and it extends far beyond the borders of the United States.

While the US market is undeniably the largest and often sets the pace for others, it’s revealing to step back and consider the global scene occasionally. This broader perspective can alert investors to significant shifts in stock market rotations worldwide, particularly when the US market has marched off on its own.

Current International Rotations

The Relative Rotation Graph (RRG) for international markets above plots several international stock market indices and benchmarks them against the Dow Jones Global Index ($DJW).

The S&P 500 (dollar SPX) is positioned very close to the center of the chart, hugging the benchmark. This proximity is expected, given that the US constitutes a hefty portion of the Dow Jones Global Index.

However, the S&P 500 is also depicted with a short tail within the weakening quadrant, indicating a renewed up-move within the already rising relative trend.

Asian Markets Are Strong

Shifting our focus from the US, we observe several well-defined and robust relative trends in other markets. The Hang Seng Index ($HSI) in Hong Kong stands out with its tail moving from the lagging quadrant through improving and into the leading quadrant over the last five weeks.

This is the longest tail on the RRG, suggesting a powerful move with a positive RRG heading and the highest RS momentum and ratio readings.

Other markets showing positive trends include China ($SSEC) and Japan ($NIKK), both of which have transitioned from the lagging to the improving quadrant. This shift indicates a relative strength and momentum pickup, hinting at likely outperformance in the coming weeks.

Conversely, the Russian ($MOEX) and Korean ($KOSPI) stock market indices are picking up relative momentum but remain within the lagging quadrant, continuing to underperform.

Where is the Money Flowing?

If we assume that global stock market money migrates to the most promising locations, we will notice outflows from certain markets.

For instance, India’s CNX 500 has seen its tail move from the leading quadrant through weakening. It is rapidly approaching the lagging quadrant, signaling a shift to underperformance, particularly against the Asian markets and the S&P 500.

Several markets, including the Australian All Ordinaries Index ($AORD), the DJ Europe index ($E1DOW), the Brazilian Bovespa index ($BVSP), and the Mexican Bolsa Index ($MXX) exhibit negative headings closer to the benchmark. The Brazilian market, in particular, shows a long tail crossing into the lagging quadrant. At the same time, the Mexican Bolsa completed a rotation of lagging-improving-lagging at very low RS-ratio levels. This makes it one of the weaker and more dangerous markets from a relative perspective.

Hang Seng Index vs. Indian CNX 500

The Hang Seng Index and the Indian CNX 500 present contrasting trends.

After a prolonged decline, the $HSI has formed a broad trading range and is currently testing a significant resistance level. A break above this resistance could signal substantial upside potential, with relative strength indicators suggesting a bottoming out and a potential shift in trend.

In contrast, the Nifty 500 index in India has completed a topish formation, with relative strength trending downward. This points to further underperformance and a negative price trajectory for the Indian market.

Zooming in on the daily chart of the Nifty 500 shows that an H&S top formation has just completed, signalling weakness not only from a relative perspective but also in terms of price.

S&P 500 vs. European Markets

The S&P 500 and European markets are also moving in opposite directions.

The Dow Jones Europe index has encountered resistance and shows a breakdown in relative strength versus the global benchmark, confirming a relative downtrend.

Meanwhile, the S&P 500 has broken to new highs in relative strength, affirming its relative uptrend.

Key Takeaways

From an international perspective, the Hang Seng index and the S&P 500 exhibit positive rotations, while the Nifty 500 and European markets are on a negative trajectory.

It’s important to note that the strength of the S&P 500 does not guarantee its continued rise; it simply indicates that, at present, it is outperforming many other markets.

By analyzing relative strengths and rotations using Relative Rotation Graphs, investors can gain insights into where the markets may be heading vis-a-vis each other and make more informed decisions.

#StayAlert and have a great weekend, –Julius

In today’s article and video we discuss the weakness that pervades nearly all index charts. Over the past few days many of the indexes have lost their PMO BUY Signals. Nearly all have crossed beneath their signal lines with the exception of the Nasdaq which is still holding above its signal line.

The SPY below shows the PMO Crossover SELL Signal but we also see participation of stocks above their key moving averages are trending lower. The Silver Cross Index is below its signal line giving us a BEARISH IT Bias.

The Nasdaq is the only index that still has the PMO holding above its signal line. This is due to the current rally, but that could fail based on the shooting star candlestick being formed on Friday morning. This could fail given we are seeing a bleed off from participation indicators. Admittedly, the Silver Cross Index looks bullish right now but given lower percentages of stocks above their 20/50-day EMAs, it should turn down shortly.

Let’s look at the mega-cap heavy indexes. All of these show the same PMO Crossover SELL Signals and bleeding participation. Most of the Silver Cross Indexes are in decline with some beneath the signal line.

Dow:

Nasdaq 100:

SP100:

Smaller-caps are being hit the hardest right now. They aren’t seeing upside reversals on Friday as some of the larger-cap indexes. If there is a place to hedge, small- and mid-cap indexes seem the best place given their weakness hasn’t subsided. The Silver Cross Indexes are all in decline and beneath their signal lines so all of the small- and mid-cap indexes and broader NYSE.

NYSE:

SP400:

SP600:

Conclusion: While many large-cap indexes are trying to reverse on Friday, internals are very weak especially given the PMO SELL Signals. While we could still see an upside reversal, momentum suggests it will take some time to reignite. In the meantime, participation needs to start seeing improvement rather than bleeding off as it is on all of the indexes. Small- and mid-caps are showing significant weakness and could be an opportunity to hedge your buy and hold positions. Below is a five minute video that details more of the weakness we see in these indexes.

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Technical Analysis is a windsock, not a crystal ball. –Carl Swenlin

(c) Copyright 2024 DecisionPoint.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

DecisionPoint is not a registered investment advisor. Investment and trading decisions are solely your responsibility. DecisionPoint newsletters, blogs or website materials should NOT be interpreted as a recommendation or solicitation to buy or sell any security or to take any specific action.

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ITBM and ITVM

SCTR Ranking

Bear Market Rules

Tesla (TSLA) reported better-than-expected earnings after the close on Wednesday. This sent the stock price soaring, which was enough to put TSLA stock in the lead in the Large Cap Top Up StockCharts Technical Rank (SCTR) Report category. It was also the most actively traded S&P 500 ($SPX) stock.

FIGURE 1. SCTR REPORT FOR LARGE CAP TO UP CATEGORY ON OCTOBER 24. TSLA stock reached the top of the category after reporting better-than-expected earnings.Image source: StockCharts.com. For educational purposes.

Tesla Stock Analysis

TSLA’s stock price has struggled since November 2021. After hitting a low in January 2023, TSLA stock has been choppy—rising till July 2023, then pulling back, climbing, pulling back, climbing, and falling on the unimpressive Robotaxi day (see weekly chart of TSLA below).

FIGURE 2. WEEKLY CHART OF TSLA STOCK. The stock price is close to its previous weekly high. A move above that high would support an uptrend in the TSLA’s stock price.Chart source: StockCharts.com. For educational purposes.

After the strong Q3 earnings report, the stock is climbing again. Will it bust through its previous high to continue its uptrend?

TSLA’s stock price on the daily chart is much more erratic than the weekly chart, with many up-and-down price gaps.

FIGURE 3. DAILY CHART OF TSLA STOCK. The stock broke above the upper Keltner Channel, the SCTR score spiked, and the StochRSI indicator jumped from oversold to overbought territory. Could this be the beginning of an uptrend?Chart source: StockCharts.com. For educational purposes.

The recent earnings report shows a massive breakaway gap up in price. The SCTR score spiked from around 41 to over 90. TSLA’s stock price has also moved above its upper Keltner Channel, which has started to turn upward. This indicates significant strength in the stock and the beginning of an uptrend.

One day doesn’t make a trend, so using a momentum oscillator such as the StochRSI when using Keltner Channels can help determine whether the uptrend will continue. The spike in TSLA’s stock price caused the StochRSI to jump from oversold to overbought territory in one day—in this case, it went from 0 to 1, which is unusual.

Trading TSLA Stock

A significant jump in a popular stock such as TSLA will tempt investors to get in on the price action. But as a smart investor, do you follow the crowd or wait for a pullback before jumping in? I would watch the StochRSI or any other momentum indicator of your choice, wait for a pullback, and then look for momentum to kick in before jumping into the stock.

From the weekly chart, it’s clear there’s lots of upside momentum in TSLA stock. But the way the stock has been trading lately could mean a lot of choppiness ahead. If this is the beginning of a short-term uptrend, you could wait for a pullback to the upper Keltner channel before jumping in. The stock could do what it did in early July, or pull back to the middle line (20-day exponential moving average), similar to what it did in October.

The Bottom Line

I would add TSLA to my Watchlist ChartList, which I use to add charts I’m considering trading. If you haven’t done so already, you should be sure to install the StockCharts ChartList Framework to organize your ChartLists better.

Monitor TSLA’s chart regularly. I would have this one up on my screen throughout the trading day, because it could be a profitable short-term trade or one that is worth holding on to for a longer period. For a fast-moving stock like TSLA, it’s best to follow the momentum. Identify your entry and exit levels, apply strict money management rules, and follow your plan. Whether you choose to do a short-term trade or a longer-term one depends on your risk tolerance level.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

For stock investors, currency trading (a.k.a. Forex) can feel tricky—mostly because its structure and mechanics are not as straightforward as those of other financial instruments. And that’s okay.

If you’ happen to be new to this space, we will cover the essentials while focusing on the topic of this article, which is the EUR/USD.

First, a few basics.

As you notice, currencies are stated in pairs. The first currency is the Base currency, while the second is the Quote currency. So, when looking at the EUR/USD, the EUR is the base, while the USD is the quote.

But here’s an easier way to view it:

If the EUR/USD has a price of 1.0770, then 1 Euro = 1.0770 US dollars ($1.07). 

Forex doesn’t move in cents the way stocks do. Its moves, which are much smaller, are measured in “percentage in points,” aka “pips,” which are fractions of a currency unit. For many currencies, especially when the USD is the quote currency, pips are measured using four decimal points, so 1 pip = 0.0001, or ten-thousandths of a single currency unit.

So, if the EUR/USD is rising, it means the Euro is strengthening against the dollar; if EUR/USD is falling, it means the dollar is strengthening against the Euro.

However, strength or weakness is relative to the other currency in the pair but not to currencies outside the pair. This means you can’t always interpret a currency’s strength or weakness within a specific pair to indicate its standing in the global economy (you’d have to look at a given currency relative to a larger basket of currencies, such as the dollar index).

EUR/USD: Stuck in Neutral

The EUR/USD has been trading sideways for over two years, thanks to a balancing act between the US and European economies. Neither economy (or currency) is outperforming the other, and the weekly chart makes this pretty clear.

CHART 1. WEEKLY CHART OF THE EUR/USD ($EURUSD). The currency pair has been trading sideways for two years and it may stay that way for a while.Chart source: StockCharts.com. For educational purposes.

The red and green arrows illustrate how the EUR/USD has been bouncing off the Bollinger Bands in a volatile yet sideways manner since January 2023. The Relative Strength Index (RSI) below the chart shows what this looks like from a trend and momentum perspective (see green rectangle): there isn’t any, at least not enough to break out of the current trading range and hit a relatively overbought or oversold level.

Furthermore, analysts expect the pair to hover within this long-term range for some time. So, why bother, or rather, how do you trade this? And remember, when trading Forex, it’s always an active “trade,” not a set-and-forget investment. Let’s switch to the daily chart of the EUR/USD.

EUR/USD: An Opportunity for a Mean Reversion Swing Trade

In the daily chart of $EURUSD below, I used Quadrant Lines instead of drawing horizontal lines for each level of support and resistance.

CHART 2. DAILY CHART OF EUR/USD. Note the coordination between the Stochastic Oscillator and the peaks and troughs in the EUR/USD.Chart source: StockCharts.com. For educational purposes.

So, why Quadrant Lines? They’re cleaner and provide a general way to gauge potential overbought and oversold levels within a trading range (as long as price remains within that range).

When you’re facing a mean reversion scenario, here’s how to use Quadrant Lines:

• Buy near the 25% line if the price reverses upwards.
• Sell near the 75% line if the price pulls back from higher levels.
• Use the 50% line as a measure for direction. If the price crosses this line, it could signal a shift to the upper or lower quadrant.

In the chart of $EURUSD, the blue circles in the Stochastic Oscillator mark where overbought conditions occur at or relatively close to the 75% quadrant line. The red circles mark where oversold conditions occur at or near the 25% quadrant line.

Currently, the EUR/USD is making a bearish move toward the uptrend line (magenta trend line). It’s also approaching the 25% quadrant line while in oversold territory. If price reverses, either at the trend line or within the 25% quadrant, it may be an opportunity to go long EUR/USD until it fails toward the top of the range, in which case you can reverse the trade.

How Do You Trade EUR/USD Without a Forex Account?

To go long EUR/USD, you might consider the Invesco CurrencyShares Euro Trust ETF (FXE), but note that the trading volume tends to be thin. You can view this using StockCharts’ Symbol Summary (for FXE) page. However, if you’re not day trading FXE, the slippage shouldn’t be too bad.

What if the EUR/USD reaches the top of the range? How can you go long USD and short EUR? In this case, you might consider Invesco DB US Dollar Index Bullish Fund (UUP). The trading volume is much higher and you can view all of its stats in the Symbol Summary.

Why Follow the Forex Markets?

Currency trading isn’t for everyone, but when the stock market feels stuck (like there are too few opportunities out there) or too risky—especially in a bear market—Forex can offer fresh opportunities. You might not be able to trade most international stocks, but you can trade global currencies. Bottom line: it’s another way to keep your trading game active.

The Bottom Line

Navigating the EUR/USD can seem complex for Forex newcomers, but understanding its dynamics opens doors to new trading opportunities, especially when other markets stagnate. With the pair stuck in a sideways range, you can take a mean reversion approach using the above-mentioned tools. But if you’re willing to do the work, it presents another opportunity for you to diversify your portfolio.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.