Wednesday, September 4, 2013

The tendency to revert to so-called normal

Most things in nature like to exist in equilibrium. The question that is sometimes hard to answer is where that equilibrium is to be found. Defining this in advance is often not easy as there can be a myriad of reasons, many not at all obvious and most in conflict with one another, that can cause temperature to change, blood pressure to be too high or too low, or the exchange rate of a particular currency pair to move in a direction that either makes a profit or a loss.

Markets seem to have fastened on one particular definition of what constitutes something of an equilibrium in trading, and that is the 200 period Simple Moving Average, which is a continuous plot of the arithmetic mean of the last chosen 200 readings on any particular chart. Of all the charts available, the daily seems to have met with a degree of consensus as to its importance, but the 200 period SMA will be significant from time to time on all charts.

Consider the EURUSD pair, the daily chart of which is shown above. It amply demonstrates the reluctance of price to ignore the 200 day SMA, which is the blue line on the chart. The superimposed text shows the number of attempts that were made to go through on each occasion.

And now the so-called equilibrium position is being approached once more. This time there are more than enough countervailing pressures to affect the outcome. The most important are the employment reports in the USA on Thursday and Friday of this week, which will give direction to Fed QE tapering policy, but events in Syria and remarks made at the ECB press conference tomorrow could also have an impact, one way or the other.

1 comment:

  1. Find quiet good this article as got opportunity to learn something new.