Loans and money issues

A layman might not be able to tell much apart from the fact that Euro–dollar has been in a downtrend. Sometimes, such basic observations, made either by a layman or by a practising technical analyst, are the most important ones. However, a “technician” should be armed with a skill set that at least allows for the possibility of a more complex and sophisticated analysis. Looking at the charts again, we can identify the following points accordingly:
Euro–dollar has traded within a long-term downward sloping trend-channel.
It has only broken that channel on a sustained basis to the downside up until July of 2001
when it broke through and held above channel resistance.
Before that, in December 2000, Euro–dollar briefly managed to exceed that trend-channel resistance and made a major high of 0.9595. Major highs and lows usually reflect theultimate extension of a trend reversal. Thus, 0.9595 needs to be exceeded for the medium- term downward trend to be negated.
The fact that a shorter-term moving average has broken up through the longer-term counterpart would appear to validate the view that Euro–dollar trades higher in the short term, whether or not it actually manages to breach that level of 0.9595.
More specifically, however, the fact that the 55-day moving average has broken up through the 200-day moving average is potentially very significant. Why? As we noted above, certain moving averages are seen as more equal than others. Notably, the break of a 200-day by a 55-day MA usually can potentially lead to impulsive moves and signal a short-term trend reversal. Here, the 55-day MA has broken up through the 200-day MA, which we call a “golden cross”, arguing for potentially dramatic gains. Conversely, if the 55-day MA were to break down through the 200-day MA, that would be termed a “death cross” and be correspondingly bearish as the name might suggest.
One could go on, but I hope from this that the reader gets a picture of charts being able to reflect substantial amounts of potentially important information, information that in the absence of major changes in fundamentals may be the primary reason for subsequent, future price action. Along with support, resistance and moving averages, there is another technical tool that is useful in determining short-term moves in exchange rates — the relative strength index (RSI). The aim of this indicator is to discover overbought or oversold levels, against which the index is measured. The time period for RSI is usually 14 days and overbought and oversold levels are usually taken as 70 and 30 for the index.
The two dotted lines indicate the 30 and 70 oversold and overbought levels for 14-day RSI. Hence, we can note from this that according to the charts the RSI reading is currently roughly in the middle of its range. Combining this with the underlying charts, we note that at the same time as the RSI reading is in the middle of its bands, Euro–dollar has broken to the upside of a trend channel and the 55-day moving average has broken up through the 200-day moving average. We can potentially conclude from this that the benign RSI indicator may suggest there is more upside to come. Note that the RSI reading usually exceeds its 70 or 30 overbought or oversold levels before the peak or trough in the spot exchange rate. RSI analysis can be particularly useful when comparing divergences between it and the spot price action. For instance, if a spot exchange rate is making new highs while the RSI reading has already peaked, it may suggest that the spot exchange rate is itself about to peak and subsequently head lower.
RSI is one type of technical indicator. More generally, technical indicators reflect a mathematical calculation that can be applied to either an exchange rate’s price or its volume. The result is of course a value, which is then used to try and predict future prices. By this definition, both RSI and moving averages are technical indicators. Another widely used technical indicator is the moving average convergence divergence (MACD) indicator. The MACD is usually calculated by subtracting a 26-day moving average of an exchange rate from its 12-day moving average. The result is an oscillator that reflects the convergence or divergence between these moving averages.
Here, we get a somewhat different picture than shown by the RSI comparison. While that appeared to suggest the Euro–dollar exchange rate may have been about to make further gains given the benign RSI reading relative to the move higher in price, this MACD comparison appears to be suggesting the opposite. For just at the time the Euro–dollar exchange rate ismaking gains, the MACD reading has clearly failed well ahead of its previous high and is heading lower. This suggests bearish divergence on MACD and a potentially bearish signal as well for the Euro–dollar exchange rate. MACD oscillates above and below a zero level. When it is above zero, it means the 12-day moving average is higher than the 26-day moving average, which is potentially bullish as it suggests that “current” expectations (as reflected by the 12-day moving average) are more bullish than those expectations made prior to the 12-day moving average. Equally, when the MACD falls below zero, it suggests a bearish divergence between the moving averages. In our example, the MACD reading is still above zero, but it is heading lower towards that level. Moving averages and MACD are examples of lagging technical indicators as they reflect previous price action and are particularly useful when an exchange rate trends over a long period of time. On the other hand, leading technical indicators give some indication of a price being overbought or oversold, thus RSI is an example of a leading indicator. Divergence occurs when the exchange rate trend does not agree with the trend of the technical indicator of that exchange rate.

In addition to the types of support and resistance that are identified by previous price action and thus previous lows and highs, there are also other sorts that focus instead on psychological factors or instead on flow dynamics specific to that particular exchange rate. In the first, market participants frequently focus on round numbers — such as 0.9400 for the Euro–dollar exchange rate — hence such levels are termed psychological support or resistance. They are important not because they represent of necessity a previous low or high, but instead because they reflect the expectation of a future move if they are breached. In the second, there can exist within specific exchange rates support or resistance levels reflecting anticipated flow dynamics. For instance, in the dollar–yen exchange rate, some Japanese exporters may prefer also to sell their receivables forward (selling dollars and buying yen) to achieve a round number. Thus, one anticipates this by adding the forward points. For instance, if the spot dollar–yen exchange rate is 120.45/55 and the three-month forward points are −73/−72.5, one might expect some exporter sales to occur at 120.73 (which would allow an outright level of 120.00 to be achieved). Consequently, one might see 120.73 as one type of resistance. Of course, the difficulty with this particular type of approach is that as the spot exchange rate and the interest rate differential move, so the forward resistance point moves.
A further complication within technical analysis is that there are various ways in which charts can be drawn. In the following section, we look at the three main types:
Line
Candlestick
Bar
The basic chart, which is a simple line chart, is as the title suggests formed from a single line. Of necessity that line must be formed by a series of highs, lows, open or closing levels. Thus, it is an approximation of the price action over a given time, reflecting
more the overall trend rather than the intraday price action. Yet, highs and lows can be just as important as that trend, hence the bar chart is also useful. Sometimes, for the same instrument, security or exchange rate, the line and bar charts can show quite different support and resistance levels. Yet, it can also be important when precisely those highs and lows occurred. For instance, the implication of price action on any given day may be quite different if the high in price action occurs at the start or at the end of a move. For this reason, analysis using a candlestick chart can be useful.
These are the three most basic types of chart. For all three, we can use a number of technical tools and schools of thought to try and develop predictive knowledge from past price patterns. Before we go on to some of the more complex tools, it is probably worth having another look at support and resistance, accompanied by another building block — the moving average. As the name suggests, this is the average of the exchange rate values over a set time period. Because that exchange rate is constantly moving, so is the average rate of necessity. Moving averages can be studied according to periods of any length, but the most widely used and thus most important are the 20-, 55- and 200-day and the 55- and 200-week moving averages. Thus armed with the initial building blocks of support, resistance and moving averages, let’s try to do some technical analysis.
Here, we have our Euro–dollar exchange rate with the following technical tools:
A trend-line
A trend-channel (two parallel trend-lines)
55-day moving average
200-day moving average