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Candlesticks Point to Correction of Dollar Strength

Tuesday, 19 August 2008 03:52:16 GMT

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Written by Ilya Spivak, Currency Analyst
Our long-term short Euro position added another 282 pips to overall gains as the US Dollar remained strong last week. We now look for a correction of the greenback’s rally to offer favorable entry points to enter shorts against the other major currencies. Having identified the relevant support levels in last week’s report, we are now beginning to see the pullback begin to materialize with the New Zealand dollar pairing leading the way once again.

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EUR/USD
 
 
Has the Euro retracement finally arrived?
 
We sold EURUSD below a long-term trend line in place since August having identified a Long Black Candle that closed beyond support. Last week, we found the Euro below 1.49 and opted to continue holding as the trend develops, aiming for a “soft target” below 1.47. The week closed at 1.4673, bringing our total floating profit to 837 pips.
 
Current positioning sees EURUSD find a supporting trend line that has marked weekly lows since October 2006. The daily chart sees today’s candle close as a bullish Inverted Hammer (not shown), suggesting we may see a bounce higher from here. We see a move higher as corrective, with the broad trend firmly bearish in the medium term. Indeed, the US Dollar Index broke a downward-sloping trend line in place since 2005, pointing to continued greenback strength in the months to come. A pop-up to resistance at 1.4922 will be treated as a selling opportunity where we will look to add to our position.
 
 
EUR/USD Strategy

1.        Continue holding short EURUSD at 1.5510, looking to add near 1.4922.
 
2.        Keep stop-loss at break-even.
 
3.        Next “soft target” lies near 1.4370.
 
 
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For more resources on the EURUSD, please visit the DailyFX Euro Currency Room.




GBP/USD
 
Will Pound slow down enough to offer entry?
 
The speed of the Pound’s selloff has persistently failed to offer entry opportunities, skewing risk-reward with each successive leap downward. Last week, we indentified GBPUSD trading just above support at a trend line in place since January 2002. Price would go on to break below this juncture, closing the week at 1.8625.
 
Looking ahead, we see the daily chart showing a very similar Inverted Hammer to that indentified for EURUSD (not shown). We will look for a reversal higher to find resistance near 1.89 and enter short targeting a breach beyond the 1.82 level.
 
 
GBP/USD Strategy
 
Flat. Updates will be posted throughout the week at the Candlestick forum.
 
 
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For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room.
 

 

USD/JPY
 
 
Bearish correction gaining traction

Last week, we identified a Hanging Man candlestick on the USDJPY daily chart, suggesting the possibility that the rally was ready for a corrective decline. A pause in bullish momentum indeed materialized, but the pair failed to succumb to selling pressure. Indeed, current positioning finds prices largely in the same place they were last time around.
 
Looking ahead, we see price action take on a Rising Wedge formation since mid-March. Current positioning sees USDJPY just below resistance and showing a Harami reversal pattern. A reversal may be brewing following last week’s consolidation, though it must be kept in mind that the Harami pattern is considered a weak signal and requires confirmation. In any case, our bias remains bullish as the US dollar index has broken above a downward trend line in place since 2005. We will for a pullback as a buying opportunity,
 
 
USD/JPY Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum.
 
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For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room.




USD/CAD
 
 
Major resistance to prompt correction
 
Last week we focused on the long-term picture for USDCAD, pointing out that a weekly chart reveals the pair positioned ahead of a resistance trend line in play since May 2004. Price action attempted to extend upward momentum but only reached as high as 1.0726. Current positioning sees the pair within 15 pips of last week’s report.
 
Looking ahead, we see a corrective downturn increasingly likely. The daily chart shows an Evening Star below resistance (not shown), hinting a selloff lies ahead. Our ideal scenario is a reversal to resistance-turned-support at 1.0376. We will look to go long here expecting a break of resistance to yield a test of the 1.1000 level.
 
 
USD/CAD Strategy
 
Flat. Updates will be posted throughout the week at the Candlestick forum.


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For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room.




AUD/USD
 
 
Support found…for now
 
Last week, we suggested that the momentous AUDUSD selloff was to see support at 0.8590, a level marked by a trend line that has been in place since March 2006. We suggested looking for a retracement from this level to yield a short entry point targeting a continuation of bearish momentum to challenge multi-year lows.
 
Indeed, downward momentum appears to be stalling. In a similar fashion to the Euro and the Pound, the daily AUDUSD chart is now showing an Inverted Hammer (not shown). We will look for a reversal to reach the 0.8870-0.8900 area and monitor for signs that resistance is being hit. We expect the subsequent down swing to break trend line support to test the 0.83 mark.
 
 
AUD/USD Strategy
 
Flat. Updates will be posted throughout the week at the Candlestick forum.

 
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For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room.




NZD/USD
 
 
Leading other majors to retrace greenback rally
 
Last week we saw NZDUSD standing directly at the site of a supporting trend line stretching back to September of 2001. As with the other majors, we were looking for a bounce here to offer a favorable short entry point.
 
NZDUSD had led the other majors in showing aggressive US Dollar strength and now seems to be doing the same with the eventual corrective rally. The weekly chart is now showing a large Hammer right at trend line support, suggesting a sizable counter-trend rally may be soon to follow. We will monitor price action to indentify where the correction will meet resistance to enter short aiming for NZDUSD to eventually decline to 0.6450.
 
 
NZD/USD Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum.


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For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room.



To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com
 

 

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