The above relative rotation graph shows the rotation of G10 currencies against the US dollar, which is the basis (= benchmark) of this universe. Or rather, it shows nine of the G10 coins against the US dollar.
The general direction of this universe is quite clear. Most move within the backward quadrant and head down the JdK RS-Ratio scale. The small highest move on the RS-Momentum axes is the impact of price movements so far this week. But, as you know, the last observation of a weekly RRG is fluid until the close of Friday, so things can still change the remaining three days.
The general message this image sends is the overall strength of the USD.
The only atypical value appears to be the Japanese yen, which moves with a positive RRG heading within the improvement quadrant.
In today’s episode of Sector Spotlight, I talked about the (positive) rotation of the U.S. dollar in an asset class universe that shows an improvement in the U.S. dollar relative to other asset classes and VBINX, which I use as a reference for asset allocation.
Enough reasons to expand the price charts of EURUSD and also JPYUSD, or better USDJPY, as it is the international convention for the quotation of this pair.
EUR / USD
The above linked chart is the weekly EUR / USD chart as I follow it in Sector Spotlight. After reaching a peak around 1.2350 in early 2021, at first glance, not much happened over a period of many months. But very recently, things started to clear up and the chart “came to life,” as it looks like a fairly large Head & Shoulders lineup has formed and ended recently when the price dropped below of the slightly sloping neckline.
For a valid H&S pattern, which is an investment pattern, there must be a trend prior to the investment. Not all patterns that “look like” a Head & Shoulders lineup qualify as such. The above trend is clearly visible in this case, from a low of 1.06 in 2020 to a high of 1.2350 in 2021.
When the rising support line was broken and the post-1.17 low formed, the first outlines of a possible H&S investment began to take shape. These became stronger when the next high was set at 1.2270, below the peak of 1.2350. Thus, as we descend from this peak of 1.2270, we could begin to sketch an H&S formation and draw the neckline connecting the two “axles” to 1.1605 and 1.1703.
Last week the EUR / USD broke below this neckline which completed the H&S formation paving the way for a lower movement.
Because we are dealing with well-trained H&S training, we can calculate a price target based on that training. This is done by taking the height of the formation by measuring from the “head” at 1.2350 directly down to the neckline. See the red dotted line in the graph. That is 1.2350 – 1.1650 = 0.07. These 7 large figures can be projected from the break below the neckline.
This break occurred when the neckline was around 1.1750, meaning that the target of this move comes out at 1.1050. This is a serious play !!
As always, after an initial break, it is very possible that we will see a setback to the exhaust level before the descent occurs. It will be an important move, as it may deny or reinforce the validity of H&S training.
USD / JPY
The market convention for quoting the yen is to express USD in yen (USD / JPY). Therefore, in this chart, an uptrend means a stronger USD and a weaker JPY. This is the opposite of previous EUR / USD, where the convention is to quote the EURO in USD, and an ascending line means a stronger EURO and a weaker USD.
When we represent currencies on a relative rotation chart, they must all have the same denominator, so that all currencies are expressed in dollars, which in some cases goes against market conventions.
If you need to update the plot and read a relative rotation chart for coins, see this article.
How “currency rotation” is shown in a relative turnover chart.
If we look at the USD / JPY price chart above, we see a long downward trend in a series of lower highs and lows from the peak at 119 in 2017 to the low around 103 in early 2021. the resistance in the fall and the subsequent fall back with this previous resistance acting as a support (see green oval) IMHO marks the end of the long downward trend and the beginning of a longer period of strength for the north dollar American (JPY).
In the short term, USD / JPY seems to have some issues with the overall resistance between 111-112. However, once this barrier can be removed, a much larger rise is expected, which will align the JPY with other world currencies.
The global improvement of the US dollar against major world currencies is increasingly visible.
Julius de Kempenaer
Senior technical analyst, StockCharts.com
Creator, Graphs of relative rotation
Founder, RRG Research
Host of: Focus of the sector
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