FXTRENDS 2010

2010 FX Review

2010-12-31T05:49:00.000-08:00

The Japanese Yen was the star performer of 2010 among major currencies with the Swiss Franc and the Australian Dollar trailing just behind. The North American currencies (US & Canadian Dollar) were in the middle of the pack, while the British Pound and the euro were the two clear losers.

Japan's currency was up nearly 14% in 2010 against a trade-weighted basket. The dramatic fall in global interest rates allowed yield differentials among major economies to shrink vs. Japan. The reduced negative carry associated with the yen along with its safe-haven status, allowed the currency index to reach all-time highs. By the end of October, the USD/JPY was threatening the psychological 80Y level before the Ministry of Finance stepped in, intervening in the fx markets for the first time since 2003. The latest bout of strength is once again threatening the lifetime highs, leading to more speculation of intervention heading into the new year.

The euro was the worst performer of 2010, losing more than 7% vs. a trade-weighted basket of currencies. Early in 2010, fears of a sovereign debt crisis developed, concerning various European Union members. This caused bond yield spreads from Portugal, Italy, Ireland, Greece and Spain to widen out dramatically vs. the German Bund. The crisis of confidence of rising debt levels and government deficits climaxed in May, causing the ECB and IMF to step-in. The comprehensive trillion-dollar rescue package managed to calm nerves, allowing the single currency to bottom-out in June. However, recent headlines out of Ireland have put additional pressure on the euro, triggering fresh all-time lows vs. the Australian Dollar and Swiss Franc. The headline risk associated with the EU highlights the ongoing challenges for the currency going into 2011.

For 2011 posts, please visit http://fxtrends2011.blogspot.com/

CHART OF THE DAY

2010-12-31T03:49:00.000-08:00

Daily DXY Roundup - 12/30

2010-12-30T13:09:00.000-08:00

The US Dollar Index (DXY) finished modestly lower after paring losses on the back of firmer economic data. Price-action dipped below recent platform support at 79.58 before bullish diverging intra-day studies triggered a corrective recovery. The region between the December 14th swing low and the key 38.2% retracement (78.82/79.22) is the next downside target for dollar bears. Meanwhile, only a move above trendline resistance near 80.10 will shift focus back towards the resistant 130-day moving average.

The British Pound was the broad loser on the day following weak UK housing data. The Sterling exchange-rate index fell to a fresh 2-month low as the GBP/USD retreated back towards the lower end of its recent range and the GBP/CHF reached a new lifetime low. Oversold daily studies and thin trading conditions should allow for temporary consolidation as the immediate focus shifts to more UK housing data on Friday.

The Swiss Franc continues to be an outperformer, benefiting from its safe-haven status. The trade-weighted index finished up 0.66% following fresh all-time highs vs. the euro, dollar and pound. Further upside, however, should be hampered by thin holiday trade and oversold daily studies.

The USD/JPY managed to find a foothold at 81.36, the 76.4% retracement of the 80.23/84.51 advance on the back of bullish diverging hourly studies. Oversold daily conditions also contributed to the pairs bounce, forming a daily spinning top base. Dollar bulls will now need to reclaim the former swing low at 82.34 to avoid a re-test of November’s cyclical low at 80.23.

CHART OF THE DAY

2010-12-30T04:02:00.000-08:00

Daily DXY Roundup - 12/29

2010-12-29T13:16:00.000-08:00

The US Dollar Index (DXY) continues to struggle to clear the 130-day moving average, losing nearly one percent after rejecting near this key resistance overnight. As a result, dollar bears were redirected towards newly formed platform support at 79.58, leaving a downside breach of daily (9-period) RSI trendline support. Further weakness will expose 78.82/79.22, between the December 14th swing low and the key 38.2% retracement. Overcoming downward sloping trendline resistance near 80.20 is now necessary to regain the medium-term bullish tone.

The Japanese Yen was the broad winner on the day, increasing 0.70% vs. a trade-weighted basket of currencies. The GBP/JPY marked a fresh 2-year low, but managed to recover following a weak test of Tuesday's fresh low. The USD/JPY failed to regain the 50-day moving average and saw follow-through selling pressure following a bid in the treasury market. Oversold daily studies and possible bullish hourly diverging studies hint of possible consolidation going into thin end-of-year trade. Meanwhile, the yen exchange-rated index (Bloomberg: CEERJN:IND) continues to ascend towards the late October all-time high.

The AUD/USD re-tested the November peak, marking a fresh year-to-date high. Due to the recent outperformance, the Aussie now looks overvalued at current levels according to daily overbought readings vs. a variety of currencies. The Australian currency, however, is expected to outperform in the new year given robust risk appetite in global equity markets and should be accumulated on any oversold dips.

CHART OF THE DAY

2010-12-29T03:52:00.000-08:00

Daily DXY Roundup - 12/28

2010-12-28T13:19:00.000-08:00

The US Dollar Index (DXY) managed to recover earlier losses in overall thin trading conditions. Bullish hourly diverging studies (MACD & RSI) triggered a rebound just above the December 17th low in the mid-79 region. Not only does this potentially mark platform support, but it also represents a failure to break daily (9-period) RSI trendline support. A daily close above the resistant 130-day moving average at 80.48 is now required to confirm an upside break-out towards the 200-day moving average. Meanwhile, only a daily close below the 30-day exponential moving average will shift focus back to the Fibonacci retracement at 79.223.

The EUR/USD was the underperformer on the day after rejecting at the 25-day exponential moving average. Bearish hourly diverging studies also triggered a failure to clear the daily (9-period) downward sloping trendline. Moreover, price-action has confirmed a bearish daily spinning top formation that now refocuses euro bears back to the key 1.3080 region. A break below this important 50% retracement level would then suggest a re-test of the 1.2970 swing low. In the meantime, only above RSI trendline resistance and the 25-day exponential moving average (now at 1.3264) will shift expectations higher.

The Swiss Franc continues to be an outperformer, trading up nearly a percent against a trade-weighted basket of currencies. The Swiss currency reached fresh all-time highs vs. the US Dollar and British Pound, while continuing to hover above last week’s all-time high vs. the euro. Further upside, however, could be hampered by thin holiday trade and possible daily bearish diverging studies. As such, overbought hourly technical indications seem to be a more appropriate strategy to short the EUR/CHF, GBP/CHF and USD/CHF.

The British Pound finished the day relatively unchanged. In addition to marking a fresh all-time low vs. the Swiss Franc, a new cycle low was reached vs. the Australian Dollar. The GBP/USD failed to clear the 1.5484 former swing low, triggering a sharp relapse to last week’s swing low near 1.5350. Possible daily bullish diverging studies and the persistent probe of the 200-day moving average suggest that the Cable could consolidate until the bulk of traders return to the market next week.

The USD/JPY broke below the 50-day moving average and 50% retracement level at 82.45 following strong Japanese economic data and renewed selling pressure in Asian equity markets. The pair found support, however, near the 61.8% retracement at 81.86 to form a daily bullish hammer. Dollar bulls will now look to reclaim the formerly supportive 50-day moving average at 82.70 to avoid a re-test of the Fibonacci pivot at 81.86.

Daily DXY Roundup - 12/27

2010-12-27T13:21:00.000-08:00

The US Dollar Index (DXY) traded quietly with several major trading centers closed for the holiday. Trade remains range-bound between the 130-day moving average and the 30-day exponential moving-average (on a closing basis). The (9-period) RSI upward sloping trendline could provide a clue for future direction. Losing support there would dampen the short-term bullish tone and would expose Fibonacci support at 79.223. Meanwhile, a sustained clearance of 130-day resistance would favor a move towards the 200-day moving average.

The EUR/USD managed to recover off 1.3080 (the key 50% retracement level) as the 2-year yield differential (vs. the US) rebounded off 3-month lows. Euro bulls will now need to pay attention to the daily (9-period) RSI downward trendline for hints of future direction. A break above RSI resistance could trigger a re-test of the 25-day exponential moving average located at 1.3274. A rejection, however, re-opens 1.3080 and potentially the 1.2970 swing low.

The British Pound continues to underperform, losing nearly half a percent on the day vs. a trade-weighted basket of currencies. The GBP/USD remains near the 200-day moving average since failing to reclaim the 1.5484 pivot. The near-term outlook is bearish while price-action remains below this former swing low. The 1.5260/1.5350 region would be the next target for Sterling bears.

Meanwhile, the GBP continues to consolidate off recent cycle lows vs. the Aussie and the Swissy. Daily RSI levels reached such oversold conditions late last week that a corrective bounce was warranted. The limited short-term recovery, however, suggests that the GBP/AUD & GBP/CHF are both vulnerable to renewed selling pressure.

The USD/JPY managed to find support at the 50-day moving average once again. Dollar bulls will now need to reclaim the 83.15 region to avoid a re-test of the 50% retracement level at 82.45. Meanwhile, Japan’s exchange rated index is dangerously close to negating a possible head & shoulders top. Exceeding 172.50 will shift focus from neckline support back to the all-time high at 173.30.

STRATEGY UPDATE:

BUY USD/JPY at 82.52, targeting 83.62 1st, risking 81.97
SELL GBP/AUD at 1.5420, targeting 1.5280 1st , risking 1.5475
SELL GBP/CHF at 1.4915, targeting 1.4680 1st , risking 1.4970

CHART OF THE DAY

2010-12-27T03:58:00.000-08:00

Happy Holidays!

2010-12-25T10:28:00.001-08:00

A breakout of the latest range requires a higher low above 80.80 or a lower top below 80.30. The downside target includes the 79.20/79.50 range, while a bullish breakout suggests a move towards the 200-day moving average.

STRATEGY UPDATE:
BUY USD/JPY at 82.52, targeting 83.62 1st, risking 81.97
LOOK TO RE-SELL EUR/CHF & GBP/CHF

Happy Holidays!

Daily DXY Roundup - 12/23

2010-12-23T10:31:00.000-08:00

The US Dollar Index (DXY) continues to consolidate within a tight range. Over the past few days price-action has idled between 80.30 & 80.80. A breakout of this range will require an hourly or short-term higher low above 80.80 or a lower top below 80.30. Meanwhile, the Proshares Dollar Index ETF (UUP) is favored to appreciate to the 24 level while price-action remains above 23.
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The Swiss Franc was the broad loser on the day following profit-taking. The USD/CHF failed at the psychological .95 figure then the GBP/CHF carved out a small double bottom base, triggering a 1% correction in the trade-weighted Swissy. While oversold studies hint of further consolidation, the current correction should only last temporarily. As such, short EUR/CHF and GBP/CHF opportunities should become available early next week.

CHART OF THE DAY

2010-12-23T03:39:00.000-08:00

Daily DXY Roundup - 12/22

2010-12-22T13:04:00.000-08:00

The US Dollar Index (DXY) was roughly unchanged in holiday-driven flow. The 130-day moving average continues to provide resistance, but the outlook continues to be bullish while hourly price-action remains above 80.30 on a closing basis.

The commodity currencies (Aussie and Loonie) outperformed as risk appetite continues to flourish. The USD/CAD has shied away from 100-day moving average resistance, while the AUD/USD remains poised to re-test 1.0031 (the 76.4% retracement).

The British Pound was the weakest currency following downwardly revised GDP data and a larger than expected current account balance. As a result, the GBP reached new cycle lows against the Swissy and Aussie. Each of these pairs, however, are expected to consolidate due to extreme oversold conditions before resuming further weakness.

STRATEGY UPDATE:

SELL GBP/CHF at 1.4680, targeting 1.4625 1st, risking 1.4735

SELL EUR/CHF at 1.2500, targeting 1.2440 1st, risking 1.2555

Daily DXY Roundup - 12/21

2010-12-21T12:53:00.000-08:00

The US Dollar Index (DXY) was modestly higher in thin trading conditions. Bearish hourly diverging studies limited a sustained move above 130-day moving average resistance. Meanwhile, only an hourly close below intraday support at 80.33 will question the short-term bullish tone.

The Australian Dollar was the outperformer despite the slightly dovish RBA minutes. The Aussie continues to extend to multi-decade highs against the Pound and Euro. The AUD/USD looks to re-test a key Fibonacci retracement at 1.0031 (76.4% of the November relapse).

The Euro was the weakest currency as debt concerns continue to linger despite supportive words by the Chinese government. The EUR/USD managed to rebound after re-testing 1.3085, the 50% retracement level of the June/November upmove. Bullish diverging hourly studies have provided support, but the pair will need to clear the 1.3190/1.3205 formerly supportive region to hint of a possible base.

[STRATEGY UPDATE] LONG GBP/USD at 1.5449, targeting 1.5555 1st, stop-loss at 1.5394

Daily DXY Roundup - 12/20

2010-12-20T13:05:00.000-08:00

The US Dollar Index (DXY) is probing the same moving average that capped strength earlier in the month. The double bottom neckline at 80.40 has been broken and clearing 130-day moving average resistance would expose the November high. Meanwhile, only a daily close below the 20 & 100-day moving averages would compromise the bullish structure.

The Canadian Dollar was the weakest performer following weaker than expected wholesale sales data. The trade-wighted index was down over 1% on the day. The USD/CAD now looks to re-test the 100-day moving average since finding a foothold near parity. The CAD/JPY broke out of a one month rising wedge and will attempt to carve out a higher low by the 50-day moving average and 50% retracement near 81.50.

Daily DXY Roundup - 12/16

2010-12-16T13:02:00.000-08:00

The US Dollar Index (DXY) ended the session slightly down after rejecting at key resistance. The bullish hammer recovery paused at last week's highs at 80.40, failing to confirm a double bottom base. Bearish hourly diverging studies contributed to the bearish rejection, which now seeks a higher low to maintain the bullish structure. A sustained move below the 20 & 100-day moving averages will shift the immediate focus to the 38.2% retracement at 79.20.

The British Pound was the outperformer following an upbeat retail sales report. The GBP/USD recovered back above long-term trendline support and managed to retrace a quarter of this week's sharp decline. The pair, however, remains bearish while below the 38.% retracement at 1.5676.

The EUR/USD retested the 1.3180 region, but managed to rebound on the back of bullish diverging hourly studies. Clearing the 30-day moving average is now required to redirect bulls back towards 1.3470, a key Fibonacci retracement level.

STRATEGY UPDATE:

2010-12-15T17:12:00.000-08:00

Daily DXY Roundup - 12/15

2010-12-15T13:30:00.000-08:00

The US Dollar Index (DXY) rallied on the back of rising treasury yields, confirming Tuesday's bullish hammer pattern. The next obstacle for dollar bulls is last week's highs at 80.40, above which confirms a higher double bottom base. A swing low could form near the 79.87 region, where the 20-day moving average and 100-day moving average overlap. A sustained loss of this pivot would suggest a third test of the 38.2% retracement level at the 79.20 level.

The British Pound was the weakest performer of the major currencies following a surprisingly weak employment report. The GBP/USD collapsed through its upward tilting channel then rejected near formation support. The 2-day retreat has wiped out nearly all of the gains from the previous two weeks. This bearish development suggests an imminent re-test of the November low at 1.5480. The Sterling also reached new lifetime lows against the Aussie and Swissy, as focus shifts to tomorrow's UK retail sales report.

The USD/JPY broke above the recent 84.40 ceiling to signal further strength towards 84.82/85.40 (between the 2009 former low & the September 24th spike high). Only a daily close below the formerly resistant 110-day moving average delays dollar bulls.

CHART OF THE DAY

2010-12-15T03:39:00.000-08:00

Daily DXY Roundup - 12/14

2010-12-14T13:08:00.000-08:00

The US Dollar Index (DXY) ended the day mixed against a trade-weighted basket of foreign currencies. Price-action managed to rebound off the lows on the back of bullish diverging hourly studies, forming a daily hammer formation. While follow-through is needed to confirm this candlestick base formation, only back above the 20-day moving average delays weakness. Dollar bears will look to test the mid-78 region, where the 50% retracement and 50-day moving average lie.

The Swiss Franc was the strongest currency on the day following the government's upgrade for future growth. The Swissy was up nearly one percent against a trade-weighted basket of currencies. More importantly, both the GBP/CHF and EUR/CHF are approaching their all-time lows. These pairs are worth watching in the upcoming sessions especially with the Swiss National Bank due to meet later this week.

The British Pound, meanwhile, was among the weakest performers. The GBP/USD rejected at 50-day moving average resistance and the 50% retracement level for the second consecutive day. The pair continues to trade in a one-week upward tilting channel. Losing formation support would violate the current choppy recovery and exposes the 1.57 handle.

Daily DXY Roundup - 12/13

2010-12-13T13:09:00.000-08:00

The US Dollar Index (DXY) broke out of consolidation, collapsing through triangular support. Price-action was decisively bearish, wiping out nearly all of last week's gains. The subsequent retreat probed the 38.2% retracement at 79.20 for third time. A clean loss of this key Fibonacci level exposes 78.52, the 50% retracement. Meanwhile, only a move back above the formerly supportive 20-day moving average alters the bearish outlook. The UUP (Proshares Dollar Index ETF) failed to clear key resistance to suggest a re-test of critical support at 22.

The EUR/USD reversed the recent weak downmove by breaking out of a short-term consolidation triangle. The rebound retraced nearly the entire move off the non-farm payrolls high. A higher low is now sought by the 20-day moving average for an extension towards 1.3462/1.3614 (the 38.2% & 50% retracement levels).

CHART OF THE DAY

2010-12-13T03:34:00.000-08:00

Daily DXY Roundup - 12/10

2010-12-10T12:43:00.000-08:00

The US Dollar Index (DXY) continues to consolidate, forming a 3-day ascending triangle pattern. Since completing a zig-zag correction off the November low, the recent pullback has been limited to the 38.2% retracement level. While the uptrend remains intact, lackluster follow-through hints of the possibility of a bearish shift.

The greenback's rebound has stalled near the mid-way point of the previous week's relapse. More importantly, this recovery has taken nearly twice the amount of time it took to decline from the recent high. This potentially suggests the formation of a secondary high or lower top. A loss of triangular consolidation support near the 80 handle could trigger the third test of 79.22 (the 38.2% retracement). In the event of a confirmed lower high, a relapse to the 50% retracement level at 78.39 would then be favored .

An uptrend is considered to be intact while price-action remains above the 38.% retracement of the overall upmove. Thus, a move above triangular resistance at 80.40 would reinforce the bullish structure. A short-term swing low above the 80.40 pivot could then expose the important 200-day moving average.

CHART OF THE DAY

2010-12-10T03:54:00.001-08:00

Daily DXY Roundup - 12/08

2010-12-08T12:47:00.000-08:00

The US Dollar Index (DXY) consolidated while the treasury and commodity markets continued to trade violently. The greenback's recovery off the 20-day moving average spent most of the day locked in tight range between the 38.2% and 50% retracement levels. Future direction will now require the formation of a swing low above the 50% retracement or a swing high below the noted range. A bearish breakout will reopen the key Fibonacci retracement at 79.22, which has been tested twice so far. In the event of an upside breakout, the 61.8% retracement is targeted ahead of the 200-day moving average.

CHART OF THE DAY

2010-12-08T03:58:00.000-08:00

Daily DXY Roundup - 12/07

2010-12-07T13:34:00.000-08:00

The US Dollar Index (DXY) maintained support at the 38.2% retracement for the third straight day. This bullish development along with the sell-off in commodities should redirect dollar bulls back above the key 80 handle. The dramatic rise in treasury yields should also narrow yield differentials in favor of the US. This would also set the table for further gains through the pyschological 80 level towards 80.25/80.53. Clearing this would greatly increase the prospects for a move to the important 81.85/82.00 area. Meanwhile, only a loss of 79.22 (the 38.2% retracement) alters the bullish scenario.
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The EUR/USD failed to overcome 20-day moving average resistance once again. The pair retreated late in the North American session to retest the key 38.2% retracement (of recent gains). Losing 1.3260 immediately shifts focus to the 1.3150/1.3210 region, while only a clean break above the 20-day moving average offers relief.
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The USD/JPY has benefited from a rising yield environment. The pair tested 50-day moving average support before retracing 61.8% of recent losses. Dollar bulls should anticipate a retest of the 110-day moving average above the 84 handle. Clearing this key resistance immediately exposes the 84.88/85.00 region.
...

STRATEGY BUY USD/JPY at 83.40, targeting 84.88, stop at 82.85
..............SELL EUR/USD at 1.3286, targeting 1.3150, stop at 1.3341

CHART OF THE DAY

2010-12-07T03:55:00.001-08:00

Daily DXY Roundup - 12/06

2010-12-06T13:07:00.000-08:00

The US Dollar Index (DXY) ended a 3-day skid by rebounding off the 20-day moving average. The 38.2% retracement provided support, allowing the greenback to maintain its near-term bullish structure. However, the ensuing rally rejected near the key 80 threshold to potentially shift the focus back towards the 20-day moving average and key 38.2% retracement. Reclaiming 80 would reinforce the original outlook for a move towards the 200-day moving average.

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The EUR/USD rejected at the 20-day moving average, failing to test the 38.2% retracement at 1.3460. Failing to reclaim the November 16th swing low has maintained the bearish structure. Fortunately for euro bulls the subsequent relapse was contained by a key Fibonacci retracement at 1.3260. While this pivot remains supportive, a retest of the 20-day moving average is favored. Losing 1.3260, however, will expose the 1.3150/1.3210 region.

CHART OF THE DAY

2010-12-06T03:55:00.000-08:00

Daily DXY Roundup: 12/03

2010-12-03T12:56:00.000-08:00

The US Dollar Index (DXY) fell across the board as a result of the worse than expected employment report. The disappointing data put a bid back into the treasury market, helping to drive down US yields. The shrinking yield differential hurt the greenback, allowing the DXY to close near the key 38.2% retracement. Although, the recent relapse has produced a normal sized correction in terms of size, the rapid pace suggests further weakness in the near-term. While price-action remains capped by the important psychological 80 level, the 50% retracement at 78.55 is next targeted. Meanwhile, the Proshares Dollar Index (UUP) has broken below the pivotal 23 region to potentially refocus key support at the 22 handle.

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The EUR/USD extended recent gains, closing the day near 20-day moving average resistance and the key 38.2% retracement level. The current rebound has exceeded the size of the previous corrective rally in mid November. This along with the formation of a weekly hammer, suggests strength towards the 50% retracement near the 1.36 handle. Meanwhile, the Euro Index (EXY) has regained the key 50% retracement at the 107 level to refocus the important former swing low at 108.

12/03: CHART OF THE DAY

2010-12-03T04:47:00.001-08:00

Daily DXY Roundup: 12/2

2010-12-02T13:21:00.000-08:00

The US Dollar Index (DXY) has retraced a quarter of recent gains. A daily close below 100-day moving average support exposes the 38.2% retracement at 79.240. While the presence of three hourly lower tops suggests further corrective weakness, reclaiming the latest intraday high at 81.020 could stabilize selling pressure. Focus now shifts to tomorrow's employment reports out of Canada and the United States. A better than expected non-farm payrolls number could trigger further narrowing of yield differentials, which could stand to benefit the greenback.

The EUR/USD continues to benefit from reduced risk aversion. An hourly inverse Head & Shoulders formation has been completed, projecting strength to the 38.2% retracement near the 1.33 handle. Only a loss of former neckline resistance at 1.3150 softens the outlook.

12/02: CHART OF THE DAY

2010-12-02T03:42:00.000-08:00

Daily DXY Roundup - 12/1

2010-12-01T13:25:00.000-08:00

The US Dollar Index (DXY) pared recent gains on the back of overbought daily conditions. Wednesday's price-action carved out the right shoulder of an hourly Head & Shoulders pattern. A sustained loss of neckline support at 80.70 projects a relapse back to the psychological 80 threshold. Meanwhile, the dollar remains structurally bullish while price-action remains above the 79.461 swing high. Reclaiming 25-hour moving average resistance negates the aforementioned bearish pattern and could trigger an extension to the targeted 82 region.

The EUR/USD broke out of an hourly consolidation pattern overnight and has retraced a quarter of losses off last week's peak. Wednesday's move has solidified a tweezer bottom formation. The clearance of 1.3150 would confirm an hourly inverse Head & Shoulders pattern. This would project further corrective strength towards the 1.33 handle, where a key Fibonacci retracement lies. Back below 1.3050 will refocus the 1.2940 region, where an equality target lies.

The AUD/USD rebounded off the 100-day moving average, triggering a falling wedge breakout. A sustained clearance of key resistance at .9700 would suggest further strength towards 20-day moving average resistance.

CHART OF THE DAY

2010-12-01T03:56:00.001-08:00

Daily DXY Roundup - 11/30

2010-11-30T13:10:00.000-08:00

The US Dollar Index (DXY) has officially reached overbought conditions according to the daily Relative Strength Indicator (RSI). The 80 threshold was cleared for only the second time this year. While there is a lack of daily bearish divergence, the greenback may be vulnerable for a pullback. An hourly rising wedge formation and bearish hourly diverging studies also hint of a period of consolidation before reaching the targeted 82 region.

The EUR/USD broke below the key 50% retracement at 1.3075 to shift focus towards an equality target at 1.2940. Bullish diverging hourly studies hint of a possible retest of 1.3075 before eventually targeting the 61.8% retracement level near the 1.28 handle. Meanwhile, this pair remains structurally bearish while price-action remains capped by last week's low at 1.32.

Daily DXY Roundup: 11/29

2010-11-29T10:16:00.000-08:00

Continued risk aversion has benefited the greenback, triggering a 2-month high for the DXY (US Dollar Index). The October/November double bottom measured move has been exceeded to suggest a possible extension to the 82 region. This key level coincides with the 200-day moving average, the 78.6% retracement and an equality target. Meanwhile, only a move below 79.461 (the November 16th swing high) would alter the short-term bullish wave count.

The EUR/USD is at a key inflection point. A sustained loss of the key 50% retracement level at 1.3075 would shift the medium-term outlook much lower. While former trendline support near the 1.33 handle continues to cap, a move towards the equality target at 1.2940 is favored.

The Cable's (GBP/USD) intra-day bearish rejection at 1.5652 (the October low) has maintained the immediate bearish structure. The 200-day moving average is next targeted while price-action remains capped by the key 1.5652 pivot.

11/29: CHART OF THE DAY

2010-11-29T05:27:00.000-08:00

Daily DXY Roundup: 11/26

2010-11-26T08:05:00.000-08:00

The US Dollar Index (DXY) cleared the psychological 80 level on the third attempt in as many days. The key 61.8% retracement was reached before consolidation took hold. The 200-day moving average is now targeted while price-action remains supported by last week's swing high of 79.461. Meanwhile, the Powershares Bullish US Dollar Index ETF (UUP) has cleared 23 resistance to bring the 24 level into focus.

The EUR/USD failed to reclaim the 1.3446 former support region, leading to a probe below 5-month trendline support. While the 20-day moving average continues to cap, a move is favored towards the 50% retracement and 200-day moving average just below the 1.31 handle.

11/26: CHART OF THE DAY

2010-11-26T05:07:00.000-08:00

STRATEGY UPDATE:

2010-11-23T18:41:00.000-08:00

While the UUP has probed above key resistance, a marginal break has left room for a false-break reversal. The dollar is overbought at the moment and is exhibiting negative divergence with daily studies. Thus, at this point the UUP may need to consolidate gains before attempting to clear the important 23 level. Also, some of the majors have paused at key levels to suggest a possible short-covering reversal. The EUR/USD has stalled losses near the 100-day moving average and the key 38.2% retracement. The AUD/USD has found platform support near the .97 handle. As such, I am looking to establish a long position at current levels.

STRATEGY: BUY AUD/USD at .9780, risking .9725, targeting .9825 1st

Daily DXY Roundup: 11/23

2010-11-23T14:15:00.000-08:00

The US Dollar Index (DXY) exploded higher Tuesday amid tensions in Korea and ongoing European sovereign debt concerns. The latest strength has now erased more than half the losses from the August highs. More importantly, the Powershares US Dollar Index ETF (UUP) has crossed above key resistance. Further dollar strength is favored towards the UUP's 24 region, while price-action remains near or above the important 23 handle.

The EUR/USD collapsed on the back of heightened risk aversion, confirming a secondary top or lower high. The pair has retraced 38.2% of gains off the June trough. Further weakness targets a Fibonacci extension level at 1.3265, while the 1.3440 region caps.

The GBP/USD broke below key 50-day moving average support to shift focus lower. The 1.5730 pivot is immediately targeted ahead of the 1.5660 region, while price-action remains below the 1.5837 swing low.

Daily DXY Roundup: 11/22

2010-11-22T14:56:00.000-08:00

The US Dollar Index (DXY) initially retreated before finding support at a key 38.2% retracement near the 78 handle. Irish budget concerns fueled risk aversion, allowing the dollar to recover overnight losses. Bullish diverging hourly studies triggered a rebound that tested 78.88, near the 61.8% retracement of the November 16th/22nd dip. While the 50-day moving average continues to support on a closing basis, a move towards the key 50% retracement level at 79.587 is favored.

The Powershares US Dollar Index ETF (UUP) has inched closer to key resistance at 23. If this level is cleared, history suggests that the dollar should appreciate significantly. Follow-through strength would target the 24 region.

The EUR/USD briefly probed a key Fibonacci retracement at 1.3760 before Irish headlines hit the tape. The pair quickly gave back over half of last week's short-term double bottom recovery.

Price-action eventually found a foothold above 1.3570, maintaining the possibility of forming an inverse head & shoulders base. Meanwhile, losing 1.3570 could expose the 1.3440 pivot, which coincides with the 50% retracement of the move up from August.

The GBP/USD once again rejected near the 50% retracement at 1.6068. Subsequent weakness confirmed a secondary top or lower high. As such, losing 50-day moving average support could shift focus to the 1.5730 region.

Dollar Direction Dependent on UUP

2010-11-20T13:30:00.000-08:00

On Monday, the Powershares US Dollar Index ETF (UUP) celebrates its 4-year anniversary. Despite its short existence, the UUP has provided a clear-cut way to play the greenback. In both cases when the UUP clears the 23 level, the US Dollar Index tends to breakout to the upside.

Following the Bear Sterns collapse, the UUP was in the process of forming a base at the 22 level. In the ensuing months, price-action held within a tight range between 22 and 23 up until the Lehman bankruptcy. As a result of the panic selling in September 2008, the UUP managed to clear the key 23 level. This triggered a dramatic recovery that climaxed at all-time highs.

Just over a year later, the UUP was back down to the 22 handle. Once again this key level provided support. However, this time it was risk aversion inspired by the fallout of Dubai's debt problems that allowed the US Dollar to carve out a bottom. After briefly respecting the 23 level as resistance, the subsequent clearance led to a powerful 10% rebound.

The US Dollar Index eventually reached a peak back in June. This coincided with the finalization of a comprehensive rescue package that ensured financial stability across Europe. The introduction of additional quantitative easing by the Federal Reserve provided a further drag on the dollar, triggering the latest test of the 22 region.

Recent euro weakness, stemming from Irish sovereign debt concerns has allowed the UUP to recover from the 22 region. This has enabled the dollar to bump up against key resistance. While Tuesday's rejection at 23 maintains the ongoing bearish structure, history suggests that while 22 remains supportive, the UUP should be accumulated.

If the 23 level is sustainably broken, then the US Dollar should appreciate significantly. In the previous two occasions, initial strength reached the 24 level before eventually targeting the 26/27 area. If 23 continues to cap, however, then the dollar's recovery could be in jeopardy. A move below 22 support would translate into uncharted territory for the UUP.

Daily DXY Roundup: 11/19

2010-11-19T13:27:00.000-08:00

The US Dollar Index (DXY) continues to respect the 50-day moving average on a closing basis. Bullish diverging hourly studies triggered a rebound off the European lows that eventually rejected at 50-hour moving average resistance. This potentially jeopardizes the near-term bullish structure and could signal a test of the 38.2% retracement level at the 78 handle. Meanwhile, clearing the key 50-hour moving average would increase the probability of confirming a higher low. .

The USD/CHF has garnered attention with the latest back-to-back bearish rejections at the psychological parity threshold. This pair is now favored to test the 100-day moving average while price-action remains above .9900 on a (daily) closing basis.

The EUR/USD’s recovery fell short of the key Fibonacci retracement at 1.3760, capping gains at the 200-hour moving average. The short-term double bottom recovery remains relatively firm, given its distance above the 100-hour moving average. Clearing 200-hour moving average resistance should trigger a test of the targeted 1.3760 level.

The GBP/USD rejected near the 50% retracement at 1.6068 on the back of bearish diverging hourly studies. The subsequent retreat managed to maintain support just above the 61.8% retracement near the end of European trade. A decisive loss of this Fibonacci level could put 50-day moving average support in jeopardy.

The AUD/USD has formed an inverse Head & Shoulders base with the latest dip. A clean upside break of neckline resistance in the .9900 region would be an attractive (long entry point).

11/19: CHART OF THE DAY

2010-11-19T03:57:00.000-08:00

Daily DXY Roundup: 11/18

2010-11-18T10:55:00.000-08:00

The US Dollar Index (DXY) continues to consolidate within Tuesday’s wide-ranging day. The overnight loss of 50-hour moving average support triggered a retest of the 50-day moving average. The current retreat, however, is still in corrective territory, given only a quarter of recent gains have been reversed. While dollar bulls seek higher low confirmation for a test of 79.587 (50% retracement), a daily close below 50-day moving average support would shift focus to the 78 handle.

The EUR/USD extended Wednesday’s double bottom recovery before stalling at the 50-day moving average. Only a loss of the formerly resistant 100-hour moving average would shift focus away from 1.3760 (Fibonacci retracement).

The USD/JPY remains well-bid ahead of the 50-day moving average. While price-action stalled at 83.76 (the 61.8% retracement) continued strength towards the upper 84 region is favored.

The GBP/USD continues to respect 50-day moving average support. The latest rebound has recovered more than 38.2% of the recent weakness, suggesting further strength through 1.6068 (the 50% retracement).

The S&P 500 rebounded from the correction target of 1175/1180 on the back of oversold daily conditions. Reclaiming the 14-day moving average at 1203 is now required to shift the near-term focus higher.

11/18: CHART OF THE DAY

2010-11-18T03:56:00.000-08:00

Daily DXY Roundup: 11/17

2010-11-17T13:31:00.000-08:00

The US Dollar Index (DXY) consolidated recent gains in an otherwise non-eventful day. Overbought daily conditions along with bearish diverging hourly studies triggered a slight pullback that has marked a daily harami (inside day). While this suggests that dollar bulls have taken a breather, only a sustained loss of 50-hour moving average support would indicate that a deeper correction is in store. This would likely imply a retest of the double bottom neckline and the key 50-day moving average above the 78 region. Meanwhile, the next upside hurdle comes in the form of the 50% retracement at 79.587.

The EUR/USD found support near the 50% retracement zone off the August lows. Oversold conditions and bullish diverging hourly studies triggered a small 2-day double bottom base. This hints of a possible re-test of the 100-hour moving average, which has capped rallies over the past few days. Further strength would then target the mid 1.36 region, where several key retracement levels overlap. Meanwhile, the short-term structure is quite bearish while price-action remains capped below Friday’s swing low at 1.3575.

The USD/JPY backed off a bit, breaking (down) out of a 2-day consolidation triangle pattern in early North American trade. This has potentially left a daily tweezer top formation to hint of a near-term pullback or further consolidation. Meanwhile, while price-action remains above the previously resistant 50-day moving average, the outlook is for an upward move to the upper 84 region.

The S&P 500 has already met my correction target zone at 1175/1180 region. The current 4th wave correction is now a Fibonacci (61.8%) proportion of the previous 2nd wave correction. While oversold daily conditions could limit further weakness, reclaiming the 14-day moving average at 1200 is now required to shift the near-term focus higher.

GOLD finally lost 30-day moving average support to neutralize the medium-term outlook. Longer-term bulls should take notice of the daily (9-period) RSI. This key oscillator is now nearing oversold conditions near the 30 region, which is a level that has supported previous rebounds over the last year. Meanwhile, if the 50-day moving average fails to provide support, then focus shifts to the Fibonacci retracement at 1324

11/17: CHART OF THE DAY

2010-11-17T03:58:00.000-08:00

On vacation through Tuesday

2010-11-14T18:13:00.000-08:00

Daily DXY Roundup: 11/12

2010-11-12T13:24:00.000-08:00

The US Dollar Index (DXY) reached a fresh 5-week high before pulling back in the North American session. Heightened risk-aversion enabled the greenback to test the 50-day moving average for the first time in more than 2 months. Weekly studies have shifted higher and the weekly close has marked a bullish engulfment. A confirmed double bottom hints of further near-term gains, given daily MACD has broken above the midpoint threshold. The next hurdle for dollar bulls is the 38.2% Fibonacci retracement level at 78.650. While there is a high probability of forming another higher low within the next few days, a pullback to the 20-day moving average cannot be ruled out.

The EUR/USD found support at the 50-day moving average, likely completing the first leg of an A-B-C correction. A daily close below the 1.3622 region (Fibonacci retracement) will shift focus onto the 1.34 handle, where the corresponding 50% retracement lies. Meanwhile, the Euro Index (EXY) has given up nearly half of its gains from June’s yearly low.

The USD/JPY recovered from weakness in the overnight session to retest the key 50-day moving average once again. Above this resistance would mark the first back-to-back series of higher lows since late July. If confirmed, the critical 83 handle will be exposed. Meanwhile, another test of the 20-day moving average could materialize next week due to increased risk aversion.

The S&P 500 has finally closed below 14-day moving average support. This confirms the termination of the latest powerful 3rd wave, opening up the possibility of a complex 4th wave correction. The 1175/1180 region is where I anticipate this correction will likely end up. This would be roughly 61.8% the size of the 2nd wave, which is what supported the euro in its 4th wave correction last month.

11/12: CHART OF THE DAY

2010-11-12T03:50:00.001-08:00

11/11: CHART OF THE DAY

2010-11-11T07:40:00.000-08:00

Daily DXY Roundup: 11/10

2010-11-10T13:16:00.000-08:00

The DXY’s (US Dollar Index) recovery completed the initial correction target before reversing course. The late October highs were tested before bearish diverging hourly studies took hold. This triggered a reversal that wiped out most of the day’s gains, leaving a daily doji hammer formation. However, since it took only 4 days to match the previous 6-day decline, there is a high probability of forming a higher low within the next few days. While previous 20-day moving average resistance is the most likely candidate of support, a deeper retracement cannot be ruled out. In the process of completing a bear campaign of this magnitude, it is not uncommon to retrace a major portion of the corrective recovery. Thus, key proportions to watch are the 25%, 38.2%, 50%, 61.8% & 78.6% retracements of the latest 4-day range.

The USD/JPY rebounded to test the 50-day moving average. A higher low on top of previous range resistance near the 82 handle would be an encouraging development for dollar bulls. Meanwhile, a daily close below the formerly resistant 20-day moving average would be bearish.

Treasury market developments took center stage in late afternoon trade, as the 30-year bond auction fuelled a short-covering rally along the entire curve. This in turn dragged down yield differentials which added steam to the US Dollar's bearish reversal. While price-action for US yields was decisively bearish today, further consolidation is favored in the medium-term.

11/10: CHART OF THE DAY

2010-11-10T03:53:00.000-08:00

Daily DXY Roundup: 11/09

2010-11-09T13:31:00.000-08:00

The US Dollar Index (DXY) recovered from selling pressure earlier in the day to close above the 20-day moving average for the first time in nearly two weeks. Since completing impulsive weakness last week, dollar bulls look poised to retest the late October highs above the 78 handle. Additional strength would expose the 50-day moving average, given bullish diverging daily studies.

The Japanese Yen was the weakest component of the day. The USD/JPY broke-out in late trade once the 20-day moving average was cleared. This marks the first daily close above key resistance in more than 6 weeks. As such, continued strength towards the 50-day moving average is now favored.

The most interesting price-action was not in the fx market, but rather in the metals complex. Both Gold and Silver reached fresh cycle highs before pulling back quite substantially. Gold marked a key reversal day and Silver put in a daily spinning top. Follow-through weakness would trigger further support for the DXY.

11/09: CHART OF THE DAY

2010-11-09T03:53:00.001-08:00

Daily DXY Roundup: 11/08

2010-11-08T13:15:00.000-08:00

The US Dollar Index (DXY) continued its counter-trend recovery, extending Friday’s bullish engulfment pattern. Reclaiming 76.709 (October 25th swing low) hints of the completion of impulsive weakness originating from the June high. There is still a strong chance of developing a 5-wave ending diagonal, given the position of the (Elliot) wave count. Either way, a typical correction target projects a move to the vicinity of the previous wave’s peak, which in this case lies above the 78 handle. Bullish diverging daily studies also suggest further strength for the greenback. Meanwhile, Monday’s inability to clear the 20-day moving average is somewhat of a concern for dollar bulls. A rejection at this key resistance could trigger a temporary setback. Trading back below the 76 region would increase the probability of resuming weakness towards the 2009 low.

While the Swedish Kroner was the weakest performing component, widening credit default spreads have triggered headline risk for the EUR/USD. The second day of counter-trend price action suggests a possible move to 1.37, given bearish diverging daily studies.

The USD/JPY continues to flirt with the 20-day moving average. Only a daily close above this key resistance will suggest further strength towards the important 50-day moving average. Meanwhile, a bearish rejection could spell another shot at the psychological JPY80 level.

Spanish Fun Run Exposes Euro's Challenges

2010-11-07T07:13:00.000-08:00

Friday's rumor of a run on a Spanish bank proved to be false, but may have shed light on Europe's ongoing challenges.

Banco Bilbao Vizcaya Argentaria (BBVA) sponsored a fun run that drew a large crowd on Friday morning. The banks queues falsely spurred insolvency rumors that sent ripples throughout the financial world.

While the rumors were squashed hours later the damage was already done. The euro tumbled nearly 1% against the dollar as the scrutinized 2-year EU/US yield differential narrowed to a 2-week low.

More importantly, however, for the first time in sometime event risk was driven by news from outside the United States. The currency markets have been obsessed with the anticipation of the Federal Reserve's QE II. According to Ashraf Laidi of CMC Markets, the EUR/USD has risen 3.5% in a 2 week span while Irish/Greek/Spanish 10-year spreads widened 20-25% relative to German yields.

With memories still fresh of the European sovereign debt crisis, widening periphery spreads are causing many to refocus on the Eurozone's challenges. The Irish spread widened to a record high against the benchmark German Bund on Friday. This highlights Ireland's debt problem due to mounting cost of bailing out the problematic banking system.

Elections in Greece have highlighted anxieties of austerity measures, causing the Greek/German to widen to their highest levels since September. And in Spain, spreads have widened to 4-month highs as government's budget cuts continue to face widespread opposition.

Friday's positive non-farm payroll report may suggest that the US economy is not as bad as Ben Bernanke and company have expected. With QE II now fully discounted there is a high probability that market focus could shift back to Europe's stressed sovereign political outlook.

While it may be premature to call a bottom in the US Dollar, there is technical evidence that Friday's corrective recovery could continue into the middle of next week. Bullish diverging daily studies could direct dollar bulls towards the resistant 20-day moving average.

Daily DXY Roundup: 11/05

2010-11-05T13:31:00.000-07:00

The US Dollar Index (DXY) rebounded off Thursday’s fresh yearly low, marking a daily bullish engulfment pattern. Reclaiming wave III’s swing low of 76.144 hints of trend exhaustion and has soften the bearish wave count. While it may be premature to call the termination of impulsive weakness, the corrective recovery may extend through the middle of next week. Bullish diverging daily studies could direct dollar bulls back towards 20-day MA resistance near the 77 handle. Meanwhile, the probability of resuming weakness towards the 2009 low remains high while price-action is capped by the 38.2% retracement of the October 27th/November 4th relapse.

11/05: CHART OF THE DAY

2010-11-05T04:00:00.001-07:00

Daily DXY Roundup: 11/04

2010-11-04T13:25:00.000-07:00

The US Dollar Index (DXY) has reached a fresh yearly low as a result of Wednesday’s FOMC meeting. This week’s consolidation triangle breakdown has fueled dollar bears through key long-term trendline support. Once a trendline of this magnitude is broken, typically it is retested before resuming in the direction of the trend. A retest of the 76.100 region level cannot be ruled out, given possible diverging daily studies. Meanwhile, a capitulation-type move towards the 2009 low is possible while price-action remains capped by the October 15th swing low at 76.144.

The euro continues to be one of the main beneficiaries of dollar weakness. The Euro Index (EXY) has touched 112, reaching fresh 6-month highs. The EUR/USD is now firmly within the fifth wave of impulsive strength off the June lows. While bearish daily divergence hints of a pullback, the short-term uptrend remains intact while price-action remains above last week’s high at 1.4080.

The USD/JPY failed to clear the 20-day MA once again, but remains relatively steady above the psychological 80 level. If dollar weakness persists, this key level should be challenged. In the event of a marginal test, however, a false-break rebound similar to this week’s move is entirely possible. Meanwhile, the bearish campaign will remain intact until the 20-day MA is cleared.

The GBP/USD continues to extend gains and now seems destined to retest the 1.64 handle. This coincides with the 2010 high and a confluence of Fibonacci levels. While the sterling’s wave count is not as bullish as the euro, the uptrend is firmly intact while price-action remains above 1.61.

11/04: CHART OF THE DAY

2010-11-04T03:59:00.001-07:00

Daily DXY Roundup: 11/03

2010-11-03T13:19:00.000-07:00

The DXY’s (US Dollar Index) rally faded after the FOMC (Federal Open Market Committee). Closing price-action confirmed follow-through from Tuesday’s bearish engulfment pattern. The latest consolidation break-down has now directed dollar bears towards key trendline support near the 76 handle. A decisive close above the 20-day MA at 77.20 is required to stabilize the current bout of selling pressure.

The Yen was the clear loser of the day, prompting intervention rumors by the MOF (Ministry of Finance). The USD/JPY accelerated through stops after confirming a higher low above Tuesday’s high. Clearing the 20-day MA is the next obstacle and doing so would expose the key JPY82 region. Only above this key pivot suggests a more meaningful rally is in store.

The EUR/USD continues to extend gains since breaking out of a triangular consolidation pattern. From an Elliot wave perspective, the completion of the corrective fourth wave has now triggered the terminal fifth wave. While EUR1.4186 is a significant technical level, it is too early to determine whether the fifth wave extension will be a mere throw-over.

In the meantime, the currency markets will have to keep an eye on the S&P 500. The index is nearing a confluence of Fibonacci levels in the 1202/1203 region. A rejection at this pivot could set the stage for the DXY to complete impulsive weakness.

11/03: CHART OF THE DAY

2010-11-03T03:51:00.000-07:00

Both the US Dollar Index (DXY) and EUR/USD have broken-out of their respective triangle patterns. This suggests further dollar weakness towards key long-term trendline support near the DXY76 handle. This should correlate with a test of EUR1.4186, which also carries technical significance. Meanwhile, the S&P 500's uptrend remains intact until 14-day MA support is broken. Due to the tight inverse correlation, dollar weakness could trigger the S&P to test the key 1202/1203 level.

11/02: CHART OF THE DAY

2010-11-02T03:50:00.001-07:00

11/01: CHART OF THE DAY

2010-11-01T05:57:00.000-07:00

Subwave e now underway since hourly divergence halted subwave d earlier. The estimated range to complete the 5-wave triangular pattern lies in the 1.3780/1.3830 range. The borders of this symmetrical formation now serve as clear breakout barriers. Meanwhile, the USD/JPY remains dangerously close to the psychological 80 level.

STRATEGY: LONG EUR/USD from 1.3780 MET TARGET (1.3962/1.4023)

10/29: CHART OF THE DAY

2010-10-29T09:06:00.001-07:00

The DXY's (US Dollar Index) subwave d has stalled just above Thursday's low at 77.167. This may suggest that the current subwave has not terminated and has more to go before entering the final stages of the latest complex correction. While the EUR/USD is in a similar position, the USD/JPY should be carefully watched as it continues to hover near 15-year lows. Typically in bear markets of this magnitude, markets tend to accelerate once key lows are breached. Thus, a marginal test of JPY80.41 could result in a false-break rebound, given the move down from 82.00 has been weak (from a time standpoint). Once again, it depends on whether the MOF decides to intervene and defend the psychological JPY80 threshold. Meanwhile, the S&P 500 continues to test 14-day MA support. If this key support is lost on a closing basis, then the DXY has a chance to recover back towards the 78 handle.

STRATEGY: LONG EUR/USD from 1.3780, trailed stop-loss at 1.3780, targeting 1.3962/1.4023

10/28: CHART OF THE DAY

2010-10-28T05:28:00.000-07:00

Bullish hourly diverging studies helped complete subwave c within the corrective wave IV. Subwave d is now underway and could extend to 1.3970/1.4030 before starting the terminating subwave.

STRATEGY: LONG EUR/USD 1/2 took profit (55 pips), 1/2 targeting 1.4023, stop-loss trailed to cost (1.3780).

10/27: CHART OF THE DAY

2010-10-27T10:02:00.000-07:00

Watch the S&P 500 closing price. A close below the key 14-day MA at 1176 could potentially signal a medium-term trend shift. In the above chart, I have highlighted the size and proportions of the previous wave II correction made in August . The 61.8% proportion above 1140 should be watched, especially since the EUR/USD initially paused at this level last week (the euro tends to be a leading indicator). Alternation signals the formation of a complex correction that could get choppy in the next few days depending on the extent of the dollar's corrective strength. A normal correction would target the 1136/1157 region, where bulls are likely to reemerge.

STRATEGY UPDATE: LONG EUR/USD position took 1/2 off for 55 pip profit, stop-loss remains at 1.3725 for remainder of the position.

EUR/USD and Euro Index Diverge Once Again

2010-10-26T10:04:00.000-07:00

Price-action in FX markets continues to be largely driven by positioning rather than fundamental factors.

The latest CFTC IMM report highlighted a 10% reversal of the largest net short position seen since late 2007. This has occurred while 2-year yield differentials between the Eurozone and US continue to widen to fresh yearly highs.

Speculators have lightened up on short dollar positions primarily due to the event risk spurred by last weekend's G-20 meeting and technical factors. The perception that QE II may have been fully discounted by markets may have played a role as well.

In the Eurozone, meanwhile, expectations of a possible Q1 ECB rate hike have boosted the trade-weighted Euro Index to fresh 5-month highs. This has created a divergence of sorts, as the EUR/USD failed to reclaim recent highs above 1.41.

The last time this type of divergence occurred was in July. Back then, the Euro Index had just reached a fresh yearly low while the EUR/USD carved out an eventual higher low. The divergence between the two metrics correctly hinted of a short-term (bullish) reversal for the single currency.

While this may portend further EUR/USD weakness, Elliot wave analysis suggests that this is merely a correction within the broader uptrend. The most likely outcome is an eventual upside breakout once the ongoing triangular consolidation terminates.

STRATEGY: BUY EUR/USD at 1.3780, risking 1.3725, targeting 1.4023

10/25: CHART OF THE DAY

2010-10-25T09:11:00.000-07:00

EUR/USD has stalled at the 78.6% retracement of the October 15th/19th correction. This suggests the completion of wave b within the ongoing wave 4 correction. Wave c is anticipated to test the 1.3773/1.3824 region before giving way to the formation of wave d. Watch for bullish hourly diverging studies to hint of the completion of wave c. Meanwhile, the DXY (US Dollar Index) remains shielded from key long-term trendline support near the 76 handle while trading above shoulder support of a possible inverse head & shoulders pattern.

10/22: CHART OF THE DAY

2010-10-22T11:27:00.000-07:00

Since the completion of wave III, the EUR/USD has corrected within wave IV. Since wave II was a simple correction, a 5-wave triangle pattern is favored to form. Bullish hourly diverging studies completed wave a on Wednesday. This produced the latest wave b rally, which may or may not have been completed on Thursday. Depending on Monday's price-action, wave c is anticipated to extend corrective weakness to EUR1.3650. Wave d could potentially arrive towards the end of next week to possibly set-up the terminating wave e. This could potentially take the EUR/USD to the key 1.3560 level in which I have highlighted over the last few posts. If, however, the current rebound reclaims the 1.4155 high, then the complex triangle scenario is compromised.

10/21: CHART OF THE DAY

2010-10-21T12:46:00.000-07:00

The Eurozone-US 2 year differential reached a fresh 2010 high on Thursday. This suggests further strength for the euro once the current correction runs it course. Any dips that near the key Fibonacci retracement at 1.3560 should be accumulated for an extension towards 1.4186.

10/20: CHART OF THE DAY

2010-10-20T12:59:00.000-07:00

The S&P 500 continues to extend impulsive 3rd wave strength while the key 14-day MA remains supportive on a closing basis. There is a cluster of Fibonacci measurements that signal significant resistance near the 1200 level. This pivot is likely to terminate the current 3rd wave (if it gets there in the short-term) given bearish diverging daily studies. The eventual 4th wave is likely to be of the complex variety, possibly a triangle formation. The 5th wave should test the 2010 highs, possibly reaching another Fibonacci cluster in the 1230 region. Meanwhile, only a loss of the 1129 region (first wave's peak) alters the wave count.

STRATEGY: SELL at 1201, risking 1231, targeting 1169

Dollar Forms Key Reversal Pattern

2010-10-19T14:37:00.000-07:00

The dollar's recent correction was long overdue, and there are signs it could continue into next week.

The greenback has suffered mightily due to expectations about a second round of quantitative easing, or QE2, from the Federal Reserve. The dollar briefly touched on new 2010 lows after the release of Fed Chairman Ben Bernanke's speech on Friday, but the ensuing false-break recovery suggests that the currency market may have priced in QE2 fully, something the bond market also appears to have done.

Although the dollar's correction was overdue, speculators continue to ignore the fundamentals. In fact, dollar bears began the week accumulating fresh short positions on the back of renewed risk appetite.

Not only was Monday's dollar selloff short-lived, but China's decision to raise interest rates caught many traders off guard. Although the dollar index's (DXY) recovery technically is still considered corrective (so long as the index remains below the 79 handle), there is sufficient evidence that the correction can continue.

The dollar's rebound has already retraced a quarter of its losses since late August. Although this is considered a typical correction within a bear market move, the follow-through move early in Tuesday's North American session has confirmed the formation of a secondary swing pivot within the euro/dollar (EUR/USD), Australian dollar/dollar (AUD/USD), dollar/yen (USD/JPY) and gold.

A secondary swing pivot is characterized as a lower high within an uptrend or a higher low within a downtrend. Most turning points require the formation of a secondary swing to complete or consolidate the trend. Although it often takes a series of swing pivots to confirm a trend reversal, the latest price action is a promising sign for dollar bulls.

According to Elliot Wave analysis, the DXY has completed the third wave and has now entered the corrective fourth wave. The second wave was a simple three-wave correction. Thus, due to alternation, there is a high probability that the current correction could be complex. Meanwhile, the wave count will be altered only if the index moves higher than the 80 threshold. That would indicate a more meaningful rally would be in store.

Due to the lack of countermoves or corrective price action within the recent move, it's extremely important to watch key retracement levels. Oversold dips that exhibit bullish hourly divergence near the 38.2% retracement at 1.3560 in the EUR/USD will likely offer support

STRATEGY: BUY EUR/USD at 1.3560, risking 1.3505, targeting 1.4186

10/19: CHART OF THE DAY

2010-10-19T08:06:00.000-07:00

Yesterday, I highlighted the risk of forming a secondary or lower high for the EUR/USD, AUD/USD and Gold. Each metric stalled at a noteable retracement level in the Asian session. Once again, diverging hourly studies hinted of an impending reversal that was confirmed early in the North American session. As a result, I have exited my long Gold position and initiated a long USD/JPY position. The dollar/yen is finally showing signs of a base with today's confirmation of a short-term double bottom.

STRATEGY: LONG USD/JPY at 81.45, risking 81.05, targeting 82.11 1st

10/18: CHART OF THE DAY

2010-10-18T07:58:00.000-07:00

The DXY's false-break rebound that began on Friday stalled earlier in the North American session due to a few technical developments. The EUR/USD, AUD/USD and Gold all stalled near key moving averages while hourly studies began to bullishly diverge. This has led to a 50% reversal so far. While there is risk of forming secondary highs if price-action stalls here or near key Fibonacci levels (61.8%/78.6%), the uptrends remain firmly intact.

STRATEGY: LONG GOLD at 1364.60, risking 1348.40, targeting 1436.50

10/16: CHART OF THE DAY

2010-10-16T08:08:00.000-07:00

10/15: CHART OF THE DAY

2010-10-15T07:42:00.000-07:00

The Aussie has formed a small double top and highlights a bearish rejection at the psychological 1.0000 level. The formation of a rising wedge accompanied by diverging hourly studies hinted at a possible reversal before the "risk on" trade rolled over in the North American session. Averaging the 3 largest corrections within the latest leg up projects a pullback to the .9762 swing low. As such, I am looking just above that region to reinitiate a AUD/USD long position.

STRATEGY: BUY at .9782, risking .9727, targeting 1.0022

10/14: CHART OF THE DAY

2010-10-14T10:32:00.000-07:00

In this quarterly chart, the EUR/USD's previous midpoint has consistently influenced price-action. The 50% retracement of the 2008 range is 1.4186 and should play a role in the last quarter of 2010.

Key technical developments to keep an eye on are the USD/JPY's 4-hour bullish hammer formed earlier today and whether the Dow Jones Industrial Average and S&P 500 will close below yesterday's opening levels and mark daily bearish engulfment patterns. In the meantime, I'm focused on buying GOLD at the 1364 region, where a former swing high intersects a 38.2% retracement level.

Bond Market Bubble?

2010-10-13T15:24:00.000-07:00

The FOMC minutes published on Tuesday continued to remind investors of the Federal Reserve’s commitment to ultra-low interest rates. Since then, however, the long-end of the curve has sold-off quite dramatically. The 10-year yield is up nearly 10 basis points and the 30-year is nearly 20 basis points off recent lows. This is partly due to the recent surge in risk appetite as equity markets worldwide continue to ascend to multi-month highs. But more importantly, the temporary correction in bond yields could suggest that the Fed’s so called “QE 2” may be fully priced in.

In a recent survey by Reuters earlier in the month, 14 out of 15 primary dealers anticipated additional quantitative easing at the next FOMC. As such, the market has had ample time to price in the Fed action’s, which by most estimates is seen between $500 billion to $1.5 trillion.

While the Fed would prefer to have higher inflation expectations, there is some evidence that the recent rise in commodity prices and precious metals are beginning to feed through. Just today, the break-even rate for 5 and 10-year Treasuries (the difference between cash yields and inflation-linked bonds) reached their highest levels since June.

According to a JP Morgan survey, this is occurring while bond optimism amongst investors is at yearly high. Extreme levels of sentiment are often viewed as a contrarian indicator and could also suggest why bond prices could be in store for a period of consolidation.

Globalization has synchronized worldwide asset price movement like never seen before and bond markets are no exception. The Eurozone’s 2-year yield is up 20 basis points over the past month and Euribor rates have reached fresh yearly highs as the ECB now seems committed to an exit strategy from easy monetary policy.

If Treasury yields continue to lag behind, then yield differentials will continue to widen out against the U.S. This will inevitably further damage the Greenback and cause asset prices to continue to reflate. At some point, however, the treasury markets will have to respond by pricing in the inflationary affects of the Fed’s actions and cause the bond market bubble to burst.

10/13: CHART OF THE DAY

2010-10-13T06:56:00.000-07:00

The EUR/USD and the 2-year yield spread between the EU and US have traded in lock-step. The 2-year spread, which has continued to widen in the EU's favor has cleared a 61.8% retracement while the EUR/USD continues to hover around it's key Fibonacci level. Due to the strong correlation, this portends further strength for the EUR/USD. In the meantime, a 4-hour engulfment pattern was negated for the DXY & EUR/USD earlier. Now a potential 6-hour bullish engulfment pattern is developing. Confirmation requires a 1800GMT close above DXY77.097 and follow-through into today's close.

10/12: CHART OF THE DAY

2010-10-12T11:05:00.000-07:00

The Dow Jones Industrial Average rebounded off 9936 on 27 Aug 2010, completing a zig-zag correction off 10719 (09 August 2010 high). The subsequent rebound has extended to 11032 (08 October 2010 high) so far, matching an equality target (1.0 X 9614/10719 from 9936). This form of symmetry along with daily bearish RSI divergence (comparing the 21 September and 08 October peaks) suggests corrective consolidation is likely to take hold before resuming the underlying trend upwards. While bulls seek a higher low by 10719, short-term strength towards the YTD high at 11250 (26 April 2010) is viable while the 9-day MA supports. Clearing the yearly peak would risk an extension towards 11454 (1.382 X 9614/10719 from 9936). Meanwhile, a move below 10608 (20 September low/near 38.2% of 9936/11032) would suggest further weakness towards 10480 (15 September 2010 low/near 50% of 9936/11032).

STRATEGY: BUY at 10722, risking 10572, targeting 11250

10/07: CHART OF THE DAY

2010-10-07T10:29:00.000-07:00

As I mentioned in yesterday’s post, Dollar weakness was overdue for a correction. Unfortunately, my short USD/JPY position was stopped, as I underestimated post-intervention yen strength. The DXY’s oversold condition has marked a daily bullish hammer reversal that stemmed from EUR/USD’s rejection at the 1.4027 pivot. Gold pulled back and has now potentially confirmed a daily bearish engulfment reversal. The Swissy also pulled back from all-time lows due to a deeply oversold condition and potentially risks a sizeable false-break rebound. The Aussie once again served as a leading indicator after spiking to a 26-year high early in Asian trade before reversing.

While overwhelming evidence suggests a dollar comeback, notice in the above chart that most turning points require the formation of a secondary high or low to complete the trend. As mentioned yesterday, I anticipate a 1-4 day counter-move before resuming trend. Beyond 4 days suggests an intermediate swing is possibly in place and could set up the secondary high or low scenario.

10/06: CHART OF THE DAY

2010-10-06T08:32:00.000-07:00

TOP 5 Trending Markets:

1. Gold: Yesterday's wide-ranging move suggests the yellow metal is going into a vertical-type exhaustion. Requires a sizeable pullback then a false-break or secondary high before even considering the termination of the uptrend.

2. AUD/USD: Testing the previous high's resistance range. Last correction was the largest in size since bottoming in August. Often a leading indicator of risk, could retest the previous correction base before taking out the .9790/.9840 region.

3. EUR/USD: Breached key Fib retrace, next major pivot is above 1.40. DXY is approaching key 78.6% retracement, which could provide temporary support.

4. USD/CHF: All-time lows reached today, oversold conditions could produce a false-break rebound.

5. Bond Yields: Bearish tone supported by central bank QE. 2-year yields still in falling wedge scenario, while long-end could be supported by possible diverging daily studies could hint of a false-break.

STRATEGY: Nearing short-term correction possibilities for all of the above, which should support the DXY. Look for a 1-4 day counter move to reinitiate US Dollar short positions.

BOJ Sends Wrong Message

2010-10-05T13:53:00.001-07:00

The Bank of Japan cut interest rates overnight producing a short-lived rally for the USD/JPY. The announcement of a temporary fund to mop up Japanese government bonds and other short-term securities not only disappointed markets, but also sent bond yields lower worldwide.

The diminishing yield differential once again caused speculators to dump the US Dollar, which has been under constant pressure stemming from the Fed’s QE 2 talk. The Greenback’s strong inverse correlation with risk appetite has provided certainty in uncertain markets, leading investors to buy equities and commodities with confidence.

Japan is sending the wrong message. While the yen has been somewhat of an exception to the recent bout of dollar weakness, the Ministry of Finance’s intervention and the BOJ’s announcement are not viewed as a strong enough commitment. As a result, speculators have continued to buy the yen on any dip.

The Japanese should take a page out of Hank Paulson’s playbook, when he got the approval to set up an emergency fund to save Fannie & Freddie. He assured Congress that setting up a sizeable fund was like a bazooka and as long as the market knew one had it, one wouldn’t need to take it out and use it. Paulson’s ploy worked and market nerves were calmed.

The BOJ would also need to adopt a more powerful message in order to weaken their currency. A pledge to provide more QE than any other central bank would provide a well-needed psychological ceiling for the yen. Meanwhile, speculators will continue to nibble at the yen until the Fed hints of reversing its multi-trillion dollar portfolio. This suggests it will take a much more costly intervention until the current Japanese regime learns how to communicate properly with the market.

From a technical perspective, the USD/JPY remains firmly entrenched within a bear market. While the DXY & USD/JPY remain highly correlated since the intervention peak, the yen has not appreciated to the same extent as other foreign currencies vs. the Greenback. While there is a possibility that a marginal test of the pre-intervention low could eventually mark a USD/JPY double bottom, only back above the 86 handle will suggest that a material low is in place.

POSITION: LONG USD/JPY at 83.50, risking 82.70, targeting 85.17

10/04: CHART OF THE DAY

2010-10-04T13:27:00.001-07:00

Carry Trade Comeback?

2010-10-01T13:06:00.000-07:00

It was nearly 25 years ago in which the United States pleaded with the Japanese to strengthen their currency by intervening in the currency markets. The Plaza Accord was seen then as a measure to help the U.S economy to emerge from a serious recession that began in the early 80’s and alleviate the trade deficit with Japan. It failed miserably because the trade deficit was due to structural issues rather than monetary conditions. While this marked Japan’s emergence as a real player in managing the international monetary system, the recessionary effects of the strengthened yen created an incentive for expansionary monetary policies that led to the Japanese asset price bubble of the late 80’s.

As a result, since the mid-90's, the Bank of Japan has set interest rates at very low levels to fight deflationary affects of an ongoing multi-decade long recession. Due to Japan's export-dependent economy, in order to maintain a weaker currency, the Ministry of Finance intervened selling 35 trillion yen over a 15-month period up to March 2004. This birthed the infamous carry trade, in which investors borrowed at low interest rates in yen and used the proceeds to buy higher yielding assets. Conservative estimates valued the carry trade between $80 billion and $160 billion, but a better estimate of the size of the carry trade was the record of net short positions in yen futures on the Chicago Mercantile Exchange. This put the total size of the carry trade as high as $1 trillion before the so called “trade of the decade” began to unwind.

All good things must come to an end and in the early days of the financial crisis, the carry trade which had flourished is less volatile times began to unravel. As risk aversion increased in 2007, market volatility prompted traders to deleverage and sell their most profitable trades. Another factor that caused the unwinding of the carry trade was the shrinking interest rate differential between Japan and other economies. With most global economies in jeopardy due to the strain of the financial crisis, central banks were forced to cut interest rates. Although, the Bank of Japan had also lowered interest rates, the shrinking differential became too small for the carry trade to compensate against increasing losses as high-yielding assets began to weaken.
Even on the most conservative estimates, the yen's steep rally probably left carry-trading hedge funds with losses of $3.1 billion to $6.2 billion. While the trade-weighted yen remains near all-time highs, risk appetite seems to be making a comeback of sorts. In fact, this past month was the best September for equity markets in the last 70 years. The strong correlation between the S&P 500 and the USD/JPY, which began to decouple towards the end of 2009, looks to have been resolved according to a weekly correlation study (see chart above). This suggests that if equity markets continue to advance, the yen should revert to weakness.

While there are overwhelming expectations for global interest rates to remain low, as long as market volatility remains low there is some evidence that the yen carry trade could soon make a comeback. With Japan’s recent commitment to weaken the yen, the USD/JPY is expected to remain well-bid ahead of the 83 handle. Since intervening two weeks ago, the trade-weighted yen has slowly grinded higher, doubling the amount of time it took to fall from recent highs. As such, a higher low for the USD/JPY is sought near current levels. Meanwhile, the long-term downtrend remains firmly intact while below the 85.87 level, the 25% retracement of the entire move off the 2010 high.

STRATEGY: BUY USD/JPY at current levels, risking 82.70, targeting 85.15

09/30: CHART OF THE DAY

2010-09-30T10:55:00.000-07:00

The S&P 500 nearly marked a key reversal day on the back of the false-break of 1150. Bearish divergence also hints of a reversal that will confirm with a daily close below the 14-day moving average. As mentioned in prior posts, the index has been trending in approximate 30-day intervals. It took roughly 30 days from the July base to the August peak, then 30 days back down to the 1040 triple bottom. The current 30-day cycle is near expiration, suggesting a pullback to the 1112/1127 region, a typical sized retracement. A deeper retreat suggests today's high could be an intermediate top and shifts the Elliot wave count lower. Meanwhile, the US Dollar looks to have temporarily bottomed and due to its strong inverse relationship, lends further credibility to the S&P's potential reversal. Keep in mind, that the DXY & EUR/USD would need to break 79.25 & 1.35 to break their current strong 5-week trends.

09/29: CHART OF THE DAY

2010-09-29T07:06:00.000-07:00

Various equity indices are bumping up against key resistance. The S&P Small-Cap Index falsely broke important support earlier in the month and was a leading indicator. As such, a marginal or failed test of 360 (June/July highs) could set the stage for the broader market to reverse once again. The DXY is probing key support at 78.678 and the S&P 500 has probed key resistance at 1150, but more importantly, both are nearing cycle expirations, which often represents a significant resistance in time.

POSITION UPDATE: LONG USD/JPY at 83.50, risking 82.70, targeting 85.15

USD/JPY: Nears key support

2010-09-28T13:10:00.000-07:00

The US Dollar Index continues to feel the pain, but relief may soon be in sight. According to the Daily Sentiment Index, the Dollar is at an extreme with only 5% of participants bullish. The Greenback’s oversold condition is evident against its major counterparts when looking at most daily indicators and is now approaching a net $20 billion short position among large speculators (CFTC). More importantly, risk aversion looks like it may be rearing its ugly head again, as seen in recent activity in credit-default swaps, the VIX and bond price-action. While this may not bode well for most traders, the “risk-off” trade tends to benefit the DXY. And with Japan’s recent commitment to weaken the Yen, the USD/JPY is expected to remain well-bid ahead of the 83 handle. Since intervening, the trade-weighted Yen has slowly grinded higher, doubling the amount of time it took to fall from recent highs. As such, a higher low for the USD/JPY is sought near the intersection of a key Fibonacci retracement and a former trendline at 83.50. Meanwhile, the big picture downtrend remains firmly intact while trading below 85.87, the 25% retracement of the entire move off the 2010 high.

STRATEGY: BUY USD/JPY at 83.50, risking 82.70, targeting 85.15

09/27: CHART OF THE DAY

2010-09-27T12:50:00.001-07:00

09/24: CHART OF THE DAY

2010-09-24T13:01:00.000-07:00

09/23: CHART OF THE DAY

2010-09-23T13:23:00.001-07:00

The EUR/USD has pulled back from overbought conditions, highlighting a clear 5-wave structure off the September low. It is too early to determine whether a large zig-zag correction has been completed or if this is merely the termination of the first wave of a powerful 3rd wave extension. Either way, the anticipated correction is in play and while the EUR/USD consolidates above previous resistance at 1.3157, an extension to 1.35 is favored. This key level is not only the 50% retracement of the November to June decline, but its also a Fibonacci expansion of the June to August advance. If the current pullback exceeds the normal counter-trend length of 3-4 days, then Wednesday's high could represent an intermediate top and the base of the previous 4th wave at 1.3020 could be tested. Keep in mind that the first week of October marks the 4-month anniversary of the 2010 low and could represent significant resistance in time. Finally, since short-term technical studies are not oversold at the moment, I am looking for further weakness to buy into.

STRATEGY: BUY EUR/USD at 1.3181, risking 1.3126, targeting 1.3500

GOLD: Continues to ascend to fresh all-time highs

2010-09-22T13:20:00.000-07:00

Gold continues to ascend to new heights. While the latest strength has accelerated and risks an exhaustive spike, the advance remains rather orderly. Since bottoming in July, the yellow metal has rallied in roughly 50 point increments then corrected 26 points before resuming the uptrend. Although, there is no clear wave structure, overbought daily RSI suggests a pullback at current levels. The measured correction would take Gold back to the 1270-1275 region before once again resuming strength. A swing low above the previous all-time high set in June would secure the chance of further upside towards the 1316-1320 area, where a cluster of Fibonacci extensions reside.

STRATEGY: BUY GOLD at 1275, risking 1258, targeting 1316

VIDEO OF THE DAY

2010-09-21T14:36:00.000-07:00

http://www.youtube.com/watch?v=SjclxCa05Jk

I produced this video a little late and since then the S&P 500 has broken above 1131 (the fourth time was the charm!). I'll stick with my breakout target at 1150 to cap gains temporarily. The next important cycle is at month's end. Meanwhile, the DXY broke down further after the FOMC and is nearing the important 80 region. Look for this key pivot to temporarily support. I am looking for a pullback to BUY the S&P 500 and SELL the DXY. Also, I am looking for a deep retracement, possibly 61.8 to 78.6% of the intervention spike to BUY into the USD/JPY. I'll continue to update my trade recomendations once I see technical evidence emerge.

09/20: CHART OF THE DAY

2010-09-20T12:54:00.000-07:00

Indices extend to fresh 6-week highs, but some key individual names continue to lag. I am watching the small-caps (SML) at the the key 360 level to judge whether the recovery can last.