Forex Trading Alert originally published on May 22, 2014, 1:12 PM
Earlier today, the Melbourne Institute reported that inflation expectations for the next 12 months rose in April to 4.4% in April (from 4.2% in March), which supported the Aussie. Additionally, positive manufacturing data from Australia's biggest export partner - China pushed the Australian dollar higher against its U.S. counterpart. As a result, AUD/USD climbed above the medium-term support/resistance line. However, in the following hours the pair reversed and declined. What does this show of strength mean for the short-term picture?
In our opinion, the following forex trading positions are justified - summary:
EUR/USD: short (stop-loss order: 1.4040)
GBP/USD: none
USD/JPY: none
USD/CAD: none
USD/CHF: none
AUD/USD: short (stop-loss order: 0.9410)
EUR/USD
Yesterday, we wrote the following:
(...) EUR/USD reversed after an increase to the long-term declining resistance line. In our opinion, this upswing was nothing more than a verification of the breakdown below this line, which provides us with bearish implications and suggests that further deterioration is likely - especially when we factor in the fact that the pair dropped below the lower border of the consolidation.
As you see on the above chart, the situation in the medium term has deteriorated slightly as EUR/USD extended losses and hit a fresh May low. Taking this bearish fact into account, we are convinced that what we wrote on Friday is still up-to-date:
(...) as long as there is no invalidation of the breakdown under these lines, further deterioration is likely. If this is the case, and the exchange rate extends losses in the coming week (or weeks), the downside target will be around 1.3516 (where the 38.2% Fibonacci retracement based on the entire March 2013-May 2014 is) or even slightly lower - around 1.3480, where the bottom of the previous bigger correction (between Dec. and Feb.) is .
Having discussed the above, let's focus on the short-term perspective.
Quoting our previous Forex Trading Alert:
(...) if the pair extends losses and drops below the 200-day moving average, the next downside target will be the upper line of the declining trend channel
Looking at the above chart, we see that currency bears realized the above-mentioned scenario yesterday. Although this strong support line triggered a corrective upswing, the pair reversed and declined below the 200-day moving average once again. To us, this weakness signifies that the pair will likely re-test the strength of the upper border of the declining trend channel (currently around 1.3629). At this point, it's worth noting that this area is also supported by the 70.7% Fibonacci retracement (based on the entire Feb.-May rally) and the 128.2% Fibonacci extension (based on the Apr.-May rally). If this strong support holds, we will see a corrective upswing in the near future. However, if it is broken, EUR/USD will extend losses and the initial downside target will be around 1.3586-1.3598, where the 76.4% and 78.6% Fibonacci retracement levels are. Please note that the current position of the indicators supports the bearish case.
Before we summarize this currency pair, we would like to draw your attention to the quote from our Forex Trading Alert posted on Monday:
(...) In our opinion, the breakout in the USD Index above the medium-term resistance line can trigger a significant rally soon - even without the above-mentioned correction. Therefore, we remain bearish on EUR/USD.
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
Trading position (short-term): Short. Stop-loss order: 1.4040. The short position (the area where it was opened we marked with a red ellipse) featured on May 8th when EUR/USD was still above the 50-day moving average (blue line in the chart) remains profitable. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
USD/CHF
Looking at the weekly chart, we see that the overall situation in the madium term hasn't changed much as USD/CHF is still trading near the recent high. Therefore, our previous commentary on this currency pair is up-to-date:
(...) On one hand, if USD/CHF breaks above the April high (which is currently reinforced by the 23.6% Fiboncci retracement based on the entire May-March deline), we may see further improvement and an increase to around 0.9131, where the 38.2% Fibonacci retracement is. On the other hand, if this area encourage forex traders to push the sell button, we will see a pullback to around last week's high of 0.8872, which seves as the nearest support. At this point, we would like to draw your attention to the fact that traders who had bet on higher values may lock in their profits in this area, which will likely raise the selling pressure and push the exchange rate lower.
What is the short-term picture? Let's check.
From this perspective, we see that the situation has improved as USD/CHF confirmed the breakout above the medium-term declining blue line and the lower border of the rising trend channel. Although this is a strong bullish signal, the chart above clearly illustrates that there are negative divergences between the CCI, Stochastic Oscillator and the exchange rate. Additionally, the RSI climbed above the level of 70, which suggests that a pause or correction is just around the corner. This bearish scenario is also reinforced by the resistance zone (marked with orange) created by the April and May highs and the 23.6% Fibonacci retracement based on the entire May-March decline. Taking all the above into account, we think that as long as there is no breakout above this area, another attempt to move lower can't be ruled out.
Very short-term outlook: bearish
Short-term outlook: mixed
MT outlook: mixed with bullish bias
LT outlook: bearish
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
AUD/USD
As you see on the weekly chart, the situation in medium term has deteriorated as AUD/USD extended declines below the lower border of the consolidation range. Taking this fact into account, we remain convinced that what we wrote on Tuesday is up-to-date:
(...) If the exchange range extends declines and drops below this line (at 0.9253), we will see further deterioration and the downside target will be the medium-term bold green line (currently around 0.9036). In our opinion, this scenario is more likely than not as sell signals generated by the indicators remain in place, supporting the bearish case.
Let's check the short-term picture.
On Tuesday, we wrote the following:
(...) if the exchange rate breaks below the May 5 low of 0.9251, we'll see a test of the strength of the rising green support line based on the Jan. lows (currently around 0.9234). If it is broken, we think that the next downside target will be the May low of 0.9200.
Yesterday, currency bears almost realized the above-mentioned scenario. As you see on the daily chart, the support level encouraged forex traders to push the buy button, which triggered a corrective upswing above the previously-broken medium-term rising resistance line. Despite his improvement, AUD/USD didn't hold gained levels and reversed, declining below the green line once again. This show of weakness provides us with bearish implications and suggests that today's upswing was nothing more than a verification of the breakdown. If this is the case, we'll see another attempt to move lower and the initial downside target will be the May low. If this support level doesn't stop the current correction, we will likely see a drop to the 38.2% Fibonacci retracement based on the entire Jan.-Apr. rally (around 0.9154).
Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish
Trading position (short-term): Short (the area where it was opened we marked with a red ellipse). Stop-loss order: 0.9410.
Thank you.
