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Top Currency Trading Ideas for the Week of February 11, 2008

Tuesday, 12 February 2008 13:12:39 GMT

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Written by Jamie Saettele, Technical Currency Strategist

EXPECTATIONS THIS WEEK:  Recent dollar strength is viewed as a correction within the longer term bear.  As the dollar downtrend continues for at least the next month, expect carry trade strength to return as the Yen and CHF also underperform.

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SENTIMENT ANALYSIS
 
COMMITMENTS OF TRADERS
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ELLIOTT WAVE VIEW

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A triangle as a 4th wave may be complete at the 2/7 low of 1.4438.  Expectations are for a bullish breakout that in the coming weeks that completes wave 5 within the 5 wave advance from 1.3261.  
 
Visit our recently updated Euro Currency Room for specific resources geared towards this currency.
 

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Wave E of the triangle has taken the form of a zigzag.  One could also make the argument that the decline from 1.4953 is a 5 wave decline and that the larger trend has turned.  Even under this scenario, price should rally to at least 1.4589-1.4670 before the next bearish leg.  As long as price is above 1.4438, maintain a bullish stance.  It looks as if the EURUSD could explode higher any moment now.
 
Visit our recently updated Euro Currency Room for specific resources geared towards this currency.
 
STRATEGY: Bullish, against 1.4364, target mid 1.50s
 

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Longer term, we maintain that a 12 year triangle ended at 124.13 in June 2007 and that the USDJPY is headed lower for a test of its 1995 low at 81.12. Since 124.13, the USDJPY has traced out a series of 1st and 2nd waves. The decline should accelerate in the next month or 2 in wave 3 of 3. This forecast remains intact as long as price is below 114.65. 
 
Visit our recently updated Yen Currency Room for specific resources geared towards this currency.
 

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After spending nearly a month in a tight range, the USDJPY is poised to break higher and test at least the mid 108s. A 61.8% Fibonacci is at 108.50 and a former congestion area is at 108.30. Although we remain long term bears due to the EW structure on the daily, COT data suggests that a more pronounced rally is possible if not probable.  
 
Visit our recently updated Yen Currency Room for specific resources geared towards this currency.
 
STRATEGY: Bullish, against 106.32, target TBD

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For the first time in months, the GBPUSD daily count is clear. The pair has declined in 5 waves from 2.1160, indicating that a significant top is in place. The 5 wave decline is viewed as either wave 1 in a 5 wave bear cycle or wave A in a 3 wave bear cycle. In other words, longer term bearish potential is great. The rally underway now is either wave 2 or B and we will look for a top in the 2.0033-2.0463 zone. This corrective rally probably lasts for weeks if not most of this month. 
 
Visit our recently updated British Pound Currency Room for specific resources geared towards this currency.

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We maintain that a larger B wave may be complete in the form of a double zigzag. Expectations are for price to exceed 1.9957 in the coming weeks in wave C within the A-B-C rally from 1.9337. Very short term, the advance from 1.9386 could be a series of 1st and 2nd waves, so an ‘explosion’ higher this week seems possible if not likely.
 
Visit our recently updated British Pound Currency Room for specific resources geared towards this currency.
 
STRATEGY: Bullish, against 1.9386, target above 1.9957
 

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A corrective 4th wave rally may be underway now within the 5 wave decline from the October 2006 high at 1.2768. The USDCHF will likely trade in a choppy manner for the next month or so, but with an upside bias before a decline in a 5th wave completes the entire decline from the October 2006 high and gives way to a multi-year low.

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We are unsure of the pattern unfolding in the USDCHF. “A triangle could be in its early stages right now in the USDCHF. The decline from the 1/22 high at 1.1122 is in 3 waves and the rally from the 2/1 low at 1.0728 is also in 3 waves (to this point).” Another possibility is that an expanded flat is underway, which would require a rally through 1.1122 before being considered complete.

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The pattern in the USDCAD since the November low at .9055 is either an A-B-C rally that will lead to a new low (under .9055) or a 1-2 (expanded flat) base that will lead to a strong rally to new highs (suggesting that a multi-year USDCAD low is in place). Either way, price will come below .9755. Potential support from Fibonacci is at .9652 and .9511. 
 
Visit our recently updated Canadian Dollar Currency Room for specific resources geared towards this currency.
 

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The decline from 1.0378 is clearly a 5 wave decline and an a-b-c corrective rally could be done at 1.0128 -- very near the former 4th wave and 50% of 1.0378-.9872. If a larger upward correction is underway, then a test of the 61.8% at 1.0184 is possible. However, our stance is that the larger decline has resumed and that price is headed below .9755 is coming weeks.
 
Visit our recently updated Canadian Dollar Currency Room for specific resources geared towards this currency.
 
STRATEGY: Bearish, against 1.0128, target below .9755
 

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As long as the AUDUSD rallies in 5 waves and declines in 3 waves, there is no reason to adopt a bearish outlook. The rally from .8512 is expected to exceed .9400 in the coming weeks. Objectives are near 1.00.

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Recent commentary states that “we do think that the rally from .8512 to .9014 completed wave 1 in a larger 5 wave bullish cycle and that the decline from .9014 to .8817 completed wave 2 of that cycle. This count implies that wave 3 up is underway now and that the rally should accelerate. The rally has yet to do that, which calls into question our count. Still, as long as price is above .8817, we remain bulls.”  The bull case is reinforced by the 5 wave advance from .8874.  Look for support near .9016 in order to initiate or add to longs.  
 
STRATEGY: Bullish, against .8874, target TBD

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The drop on 1/22 to .7383 completed a large correction that had been underway since November. Like the AUDUSD, the NZDUSD trend remains up and an upside breakout will probably lead to a test of the July 2007 high at .8108.

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One can make the case that a larger decline is underway from .7966 because the decline from .7966 to .7781 is in 5 waves. This suggests that another 5 wave decline will occur. The rally from .7781 could be an a-b-c rally with wave b as a triangle; which supports a short term bearish bias.  Our confidence in the pattern is low though given that the AUDUSD favors dollar weakness (after a brief period of Aussie weakness).  If what we are seeing is correct, then the AUDNZD may be ready to break out to the upside.

 

 
 
STRATEGY is a quick summary of our best technical ideas. The ideas are subjective and are subject to change everyday although trades are typically held for at least a few days and sometimes a few weeks or more. Ideas are also included for crosses throughtout the week; these are published at separate articles at DailyFX. 
 
TREND ANALYSIS is based on a rolling pivot model. LONG TERM TREND is determined by the last 3 months of price data (high, low, close). SHORT TERM TREND is determined by the last 4 weeks of price data (high, low, close). Optimal entries, risk, and targets are based on traditional pivot formulas that calculate R3, R2, R1, P, S1, S2, and S3. These are objective measures and our subjective analysis (STRATEGY) may differ. 
    
SENTIMENT ANALYSIS takes into account COT reports and analysis of news headlines. Studies done by Jamie Saettele (to be published in an upcoming book) indicate that the greatest number of headlines and the most negative headlines about a currency appear at bottoms and that the greatest number of headlines and the most positive headlines about a currency appear at tops. 
 

ELLIOTT WAVE VIEW is our assessment of both the longer term (DAILY BARS) and shorter term (60 MINUTE BARS) EW structure. This is the basis for our STRATEGY.

 Tell us what you think about this report: contact the strategist about the article at jsaettele@dailyfx.com

 

EXPECTATIONS THIS WEEK is a general forecast for the coming week. It is based on our across the board assessment of Elliott Wave patterns in the seven USD majors that we follow. 
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