Forex Trading Alert originally published on Aug 21, 2014, 4:32 PM
Earlier today, the U.S. dollar moved lower against the Swiss franc as investors jumped out to the sidelines and sold the greenback for profits waiting for the Federal Reserve Chair Janet Yellen's speech before the annual Jackson Hole economic symposium on Friday. As a result USD/CHF reversed and invalidated small breakouts above important levels. Does it mean that correction is just around the corner?
In our opinion, the following forex trading positions are justified - summary:
EUR/USD: none
GBP/USD: none
USD/JPY: none
USD/CAD: none
USD/CHF: none
AUD/USD: none
EUR/USD
On Tuesday, we wrote the following:
(...) if currency bears show their claws (...), EUR/USD will test the strength of the strong support zone created by the 38.2% Fibonacci retracement based on the entire 2012-2014 rally and 61.8% the next Fibonacci retracement (based on the March 2013-May 2014 increase) around 1.3222-1.3250.
Looking at the weekly chart, we see that the situation developed in line with the above-mentioned bearish scenario. As you see, this strong support zone withstood the selling pressure (so far) and the exchange rate rebounded slightly. What's next? If this area encourages currency bulls to act, we'll see further improvement and an increase to (at least) the August high of 1.3432. Please note that this scenario is currently reinforced by the position of the indicators (the RSI dropped to its lowest level since July 2012, while the Stochastic Oscillator generated a buy signal and the CCI is close to doing the same), which suggests that a pause (or corrective upswing) is just around the corner.
Will the daily chart give us more clues about future moves? Let's check.
Quoting our previous Forex Trading Alert:
(...) EUR/USD moved lower and broke not only below the 76.4% and 78.6% Fibonacci price projections and the November low, but also under the lower border of the declining wedge. This is a bearish signal, which suggests that the exchange rate will extend losses and (more likely than not) drop to around 1.3254, where the size of the downswing will correspond to the height of the consolidation (marked with blue). At this point, it's worth noting that this area is reinforced by the green support zone marked on the weekly chart, which may pause or even stop further deterioration.
On the daily chart, we see that the exchange rate reached our downside target earlier today. Such price action in combination with the green support zone (marked on the weekly chart) reduced the selling pressure and triggered a corrective upswing. Despite this move, we think that it's too early to say that anything has really changed as the pair still remains below the previously-broken lower border of the declining wedge. In our opinion, as long as there is no invalidation of the breakdown below this support/resistance line, another test of the strength of the support zone can't be ruled out. So, when will the very short-term outlook improve? From today's point of view, it seems that the situation will turn to bullish if EUR/USD breaks above the upper line of the declining wedge and the recent highs (around 1.3420-1.3444). At this point, it's worth noting that this scenario will be more likely if the indicators generate buy signals.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective at the moment.
GBP/USD
On Tuesday, we wrote:
(...) the pair reached the 23.6% Fibonacci retracement level based on the entire 2013-2014 rally. (...) if the exchange rate breaks below it, we'll further deterioration and a drop to around 1.6408, were the size of the correction will correspond to the height of the rising wedge.
From this perspective, we see that GBP/USD extended declines, which suggests that currency bears will try to realize the above-mentioned scenario in the coming week (or weeks) - especially when we take into account the fact that there are no buy signals or positive divergences between the indicators and the exchange rate, which could bode well and precede a pause or an upswing in the nearest future.
Can we infer something more from the daily chart? Let's check.
Quoting our last commentary on this currency pair:
(...) the recent downswing took the pair to the 23.6% Fibonacci retracement, (...) if this important support level is broken, the next downside target will be the support zone created by the April low and the 127.2% Fibonacci extension (based on the May-July rally)
From this perspective, we see that the very short-term situation has deteriorated once again as GBP/USD broke below the 23.6% Fibonacci retracement and the pair reached our downside target. If this area holds, we'll see a rebound from here and an increase to (at least) the Monday high of 1.6736. Nevertheless, if the exchange rate moves lower, the next target for currency bears will be around the March low, which is reinforced by the 141.4% Fibonacci extension. Please note that although the indicators are oversold, there are no buy signals at the moment, which supports the bearish case.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: bearish
LT outlook: mixed
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective at the moment.
USD/CHF
The medium term picture has improved as USD/CHF broke above the long-term declining resistance line and reached the 38.2% Fibonacci retracement based on the entire May 2013-March 2014 decline. Despite this move, the exchange rate gave up some gains and is trading slightly below the orange resistance zone. If it holds, we may see a pullback from here and a comeback to the long-term red line. Nevertheless, if currency bulls do not give up and USD/CHF moves higher, the next upside target will be the 2014 high of 0.9155 or even the 50% Fibonacci retracement.
Having say that, let's focus on the very short-term changes.
In our Forex Trading Alert posted on Tuesday, we wrote:
(...) In our opinion, even if the pair moves higher, the upper line of the medium-term rising trend channel (marked in purple) will likely stop further improvement - similarly to what we saw at the beginning of the month.
Looking at the above chart, we see that although USD/CHF broke above the upper line of the declining trend channel and the recent highs, the combination of the 161.8% Fibonacci extension and the upper border of the purple rising trend channel encouraged currency bears to act. As a result, the exchange rate reversed and pulled back to the support level based on the recent highs. If it withstands the selling pressure, the pair will likely test the strength of the key resistance line. However, if it is broken, we'll see further deterioration and a drop to (at least) the previously-broken upper blue line or even to the Aug 15 low of 0.9022. Please note that the current position of the indicators suggests that the bearish scenario is more likely in the coming days - especially if they generate sell signals.
Very short-term outlook: mixed with bearish bias
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 at the moment.
Thank you.
