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Dollar Weakness Overdone In Short Term

By , Sr. Technical Strategist
27 November 2006 13:05 GMT

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EURUSD – After spending 6 months trapped between 1.2976 and 1.2456, the EURUSD has broken out to the upside and hit 1.3161 today – which is a yearly high.  The break above 1.2976 satisfies the minimum requirements for completion of the 5 wave pattern from the 11/15/2005 low at 1.1640.  Wave 5 often equals wave 1 (or close to it).  Wave 1 from 1.1640 to 1.2323 is 683 pips and wave 5 from 1.2483 to today’s high at 1.3161 is 678 pips.  Still, major tops are rarely without oscillator divergence.  In other words, a top tick in price rarely occurs with the top tick in the oscillator.  Such is the case now.  Thus, a corrective move lower followed by a push through 1.3161 seems most probable.  Major support is at the former range high of 1.2976.          

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USDJPY – The USDJPY decline has stretched to the 115.37, just above the 8/21 high at 115.34.  Additionally, price broke below the 200 day SMA on Friday, which bolsters the longer term bearish picture.  Price is just below the longer term moving average right now (200 SMA at 116.17).  With a short term 5 wave decline from 118.46, a more pronounced upward correction seems likely.  Fibo resistance begins at 116.55 (38.2% of 118.46-115.37) and stretches to 117.28 (61.8%).    

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GBPUSD – Cable’s rally extended above 1.9400 on this week’s gap open.  A large wedge (diagonal triangle) has formed since the middle of May.  These patterns often end in a thrust through the upper end of resistance before a reversal to the downside.  It is not clear whether or not 1.9411 is a major top.  A decline through 1.9144 would instill confidence that a top is in place.  Unlike the EURUSD, the GBPUSD daily chart is accompanied by bearish divergence with RSI.  The proximity of the 2004 high at 1.9548 limits upside risk (this would be the next bullish target).         

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USDCHF – The USDCHF broke below the 6 month supporting trendline last week.  Similar to other majors, daily RSI is extreme (oversold).  Strength above 1.2118 targets the 38.2% of 1.2537-1.2026 at 1.2221 in what may be a 4th wave.  What would then follow would be a 5th wave decline to below 1.2026.    

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USDCAD – The USDCAD has retraced recent strength but held above the 1.1300 figure.  The larger uptrend remains in place above the support line drawn off of the 9/1, 9/28 and 10/30 lows.  The 200 day SMA is also support at 1.1282.  Former support is now resistance at the 11/22 low at 1.1380.  

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AUDUSD – The AUDUSD has rallied just above the 5/11/2005 high at .7791.  Divergence with daily oscillators does not favor an immediate aggressive bullish stance.  However, the larger triangle structure (nearly 3 years) favors a rally to eventually challenge the upper end of the triangle above .7900.  Two trendlines, with the steeper one at .7700 today, act as support. 

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NZDUSD – The NZDUSD is the only dollar cross that failed to move in a vertical fashion last week.  Price is stuck in a .6673-.6738 range.  A break lower opens the door for a test of the 11/15 low at .6574.  The confluence of the 10 and 20 day SMAs at .6669/75 is support though just below current price.  The choppy trading since the end of September has led to the formation of a slightly upward sloping wedge – which is a bearish pattern.   

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27 November 2006 13:05 GMT