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EUR/USD, AUD/USD Scalp Setups- Key Levels to Watch as Relief Rally Falters

By , Currency Strategist
29 November 2011 20:56 GMT

The start of trading this week has been marked by a rebound in risk appetite as European finance ministers meet in Brussels to devise a concrete plan to calm markets and stem the threat of contagion which has continued to challenge stability in the region. Stronger than expected Thanksgiving retail sales and hopes of an EU resolution have fueled this relief rally which is unlikely to last for an extended duration. Our medium to long-term bias on risk remains weighted to the downside as the fundamental outlook remains intact. This week we look to fade this rally, keeping in mind that European headlines could easily trigger further topside moves in the euro and the aussie. Here are the scalp setups I am currently trading.

EUR/USD Scalp Setup

EURUSD_AUDUSD_Scalp_Setups-_Key_Levels_to_Watch_as_Relief_Rally_Falters_body_Picture_2.png, EUR/USD, AUD/USD Scalp Setups- Key Levels to Watch as Relief Rally Falters

The euro briefly surged in pre-market trade after a better-than-expected Italian bond auction temporarily eased debt concerns which had peaked last week when a German auction saw alarmingly low demand for government paper. The euro broke above trendline resistance of a descending wedge formation dating back to late October before rebounding off the 50% Fibonacci extension taken from the October 27th and November 13th crests at 1.3425. The single currency promptly pared the gains with price action currently holding below the 61.8% extension at 1.3335. Our bias continues to be weighted to the downside with an RSI break of trendline support eyeing profit targets at 1.3285 followed by trendline support and our bottom limit at the 76.4% extension at 1.3225. A break here risks substantial losses for the single currency with extended break-targets seen at 1.3170 and the October low at1.3140.

A breech back above trendline resistance once again eyes targets at 1.3370, the 1.34-figure, and the 50% extension at 1.3425. A break above this level negates our medium-term bias with such a scenario eyeing topside resistance targets at 1.3470 and the 38.2% extension at 1.3515. An hourly average true range of 34.50 yields profit targets of 26-30 pips depending on entry. Should ATR pull back dramatically, adjust profit targets as needed to ensure more feasible scalps.

*Note that the scalp will not be active until a break below 1.3285 or a rebound off trendline resistance or subsequent resistance level with RSI conviction. We will remain flexible with our bias with a move passed the topside limit at 1.3425 eyeing topside targets.

Key Thresholds

Entry/Exit Targets

Timeframe

Level

Significance

Resistance 1 Target

30min

1.3370

Soft Resistance

Resistance 2 Target

30min

1.3400

Soft Resistance

Topside Limit

30min

1.3425

50% Fibonacci Ext

Topside Limit Break-Target

30min

1.3470

Soft Resistance

Topside Limit Extended Break-Target

30min

1.3515

38.2% Fibonacci Ext

Support 1 Target

30min

1.3285

Soft Support

Support 2 Target

30min

1.3255

Trendline Support

Bottom Limit

30min

1.3225

76.4%% Fibonacci Ext

Bottom Limit Break-Target

30min

1.3170

Basic Support

Bottom Limit Extended Break-Target

30min

1.3140

October Lows

Average True Range

1hour

34.50

Profit Target 26-30 pips

Upcoming Events

Event risk on the pair mounts overnight and is highlighted by EU and German unemployment data. Consensus estimates call for the unemployment rate to hold at 10.2% and 7.0% respectively, with German retail sales expected to post a gain of 2.0% y/y. Although the docket does contain some important data prints, investors will be eying developments out of the EU finance ministers meeting for a credible solution to deal with the debt crisis that continues to sweep over the region.

Date

GMT

Release

Expected

Previous

11/30

05:00

German Retail Sales (MoM)

0.10%

0.30%

11/30

07:00

German Retail Sales (YoY)

2.00%

0.30%

11/30

08:55

German Unemployment Change

-5K

10K

11/30

08:55

German Unemployment Rate s.a.

7.00%

7.00%

11/30

10:00

Euro-Zone Consumer Price Index Estimate (YoY)

3.00%

3.00%

11/30

10:00

Euro-Zone Unemployment Rate

10.20%

10.20%

AUD/USD Scalp Setup

EURUSD_AUDUSD_Scalp_Setups-_Key_Levels_to_Watch_as_Relief_Rally_Falters_body_Picture_3.png, EUR/USD, AUD/USD Scalp Setups- Key Levels to Watch as Relief Rally Falters

The Australian dollar is the top performing currency against the greenback this week with an advance of more than 3.2% after gaping out of a descending channel formation dating back to November 13th. The pair is currently holding within the confines of an ascending channel with a break below triggering shorts to our profit targets. The aussie continues to track broader risk sentiment as markets take a reprieve from the heavy selling pressure seen last week. However with no change in the fundamentals prompting the move, the rally is likely to be short lived as debt concerns continue to weigh on risk appetite.

Our medium-term bias remains weighted to the downside with support profit targets held at the 50% Fibonacci extension taken from the October 27th and November 13th crests at 0.9990, 0.9950 and the 61.8% extension at 0.9910. A break below our bottom limit at 0.9865 risks substantial losses for the high-yielder with subsequent floors seen at 0.9810 and 0.9770.

Interim resistance stands at 1.0030 backed by the 38.2% extension at 1.0074 and 1.0120. A breach above this level negates our medium-term bias with such a scenario eyeing topside break-targets at the 23.6% extension at 1.0175 and 1.0215. An hourly average true range of 36.50 yields profit targets of 27-31 pips depending on entry. Should ATR pull back dramatically, adjust profit targets as needed to ensure more feasible scalps.

*Note that short-scalps will not be active until a break below the 50% extension at 0.9990 or a rebound off 1.0030 or subsequent resistance level with RSI conviction. We will remain flexible with our bias with a move above our topside limit at 1.0120 eyeing topside targets.

Key Thresholds

Entry/Exit Targets

Timeframe

Level

Significance

Resistance 1 Target

30min

1.0030

Soft Resistance

Resistance 2 Target

30min

1.0074

38.2% Fibonacci Ext

Topside Limit

30min

1.0120

Basic Resistance

Topside Limit Break-Target

30min

1.0175

23.6% Fibonacci Ext

Topside Limit Extended Break- Target

30min

1.0215

Soft Resistance

Support 1 Target

30min

0.9990

50% Fibonacci Ext

Support 2 Target

30min

0.9950

Soft Support

Support 3 Target

30min

0.9910

61.8% Fibonacci Ext

Bottom Limit

30min

0.9865

Soft Support

Bottom Limit Break-Target

30min

0.9810

76.4% Fibonacci Ext

Bottom Limit Extended Break- Target

30min

0.9770

Soft Support

Average True Range

30min

36.50

Profit Targets 27-31pips

Upcoming Events

Event risk for the aussie is limited overnight with new home sales and private sector credit on tap. The data is unlikely to spark much volatility with the aussie more likely to take cues off shifts in broader market sentiment. Look for equity markets to trade heavy and US Treasury yields to fall to signal a shift into risk aversion with such a scenario supporting our call for further aussie weakness. Note that trader remain fixated on developments out of the Euro zone as officials wrap up the finance ministers meeting tomorrow with any major headlines with respect to a concrete plan for the region’s indebted nations likely to prompt risk-on flows in favor of AUD/USD strength.

Date

GMT

Release

Expected

Previous

11/29

00:00

HIA New Home Sales (MoM)

-

-3.50%

11/29

00:30

Private Sector Credit (MoM)

0.40%

0.50%

11/29

00:30

Private Sector Credit (YoY)

3.60%

3.40%

11/29

00:30

Private Capital Expenditure

8.00%

4.90%

---Written by Michael Boutros, Currency Analyst with DailyFX.com

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex for updates on this scalp and other trades.

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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29 November 2011 20:56 GMT