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Daily Observations: July 30, 2012

Daily Observations: July 30, 2012

Christopher Vecchio, CFA, Senior Strategist

Current Positions:

- Short AUDNZD from 1.3060, Stop at 1.3080, Target 1 at 1.2850

- Short AUDUSD (1/2) from 1.0495, Stop at 1.0530, Target 1 at 1.0310/30, Target 2 at 1.0245/65

- Long EURCHF from 1.2018, Stop at 1.1990, Target 1 at 1.2500, Target 2 at 1.2750

- Long USDJPY from 78.22, Stop at 77.60, Target 1 at 78.60, Target 2 at 79.40, Target 3 at 80.60

Pending Positions:

- Pending Short AUDUSD (1/2) at 1.0515

- Pending Long USDJPY >80.65

- AUDJPY: It appears that the pair has completed its Wave 4 rally off of the June 1 low at 74.45/50. The formation is neat considering the Wave 4 termination at 82.35/40 fell short of the Wave 1 termination at 82.48/50; this is imperative for the impulsive decline off the March highs. We now look to sell rallies for a test of the 2011 lows at 72.00/05. Near-term support comes in at 79.40/50 (former swing highs and lows) and then 78.35/50. Advances should be capped by 82.35/40; a break above this level signals a reversal and invalidates our bearish setup. Bias: bearish.

- AUDNZD: The move above the Triangle topside resistance was indeed a fake out as outlined here in previous notes, and the short trade from 1.3060 appears to be sanguine, for now. On a test of 1.2850, I will take 1/2 profit and then resell rallies back into 1.2920/30. With my Stop at breakeven (1.3060), the current position is insulated from losses. Given the divergence between the AUD and the NZD recently, I’m looking to sell further rallies in this pair. Bias: bearish.

- AUDUSD: The move to 1.0490/1.0505 as indicated late last week was completed today, though with the channel trendline slightly higher, there is scope for gains into 1.0510/15 now. Still, with the 4-hour RSI hitting overbought levels as the pair hits crucial resistance, there is scope for a pullback. We now look lower towards 1.0480 then 1.0440/45. Considering the price action in the EURUSD today, we expect that the US Dollar stands to gain, so rallies into 1.0490/1.0505 should be sold. Near-term support comes in at 1.0380/85, 1.0310/30, 1.0245/65, 1.0210/15, then 1.0170/90.Bias: bearish.

- EURJPY:Similar to the EURUSD, the EURJPY has retraced Friday’s entire move higher and is now looking for a test back in of the lows. A daily close below the former yearly low at 95.60 should trigger further selling in my opinion. For now, any shorts should have Stops placed above last week’s high at 97.30/35. A move below 94.10/15 should trigger Stops for a move to 93.80/85. Bias: bearish.

- EURUSD: While the EURUSD traded up towards 1.2400 on Friday little was made of the move as the pair hit 50 on the daily RSI and has since reversed. Today’s price action has thus far yielded an Inside Day, and it appears that there could be an Evening Star candlestick cluster of sorts in the works (we would expect a bigger sell-off today to suggest a true reversal pattern). Resistance comes in at 1.2310/30 and 1.2375/90 (July high). Support comes in at 1.2220/45, 1.2155/70, and 1.2110/20. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875. Bias: bearish.

- GBPUSD: While an Inside Day is forming today after the rally from the past two days, we note that the GBPUSD has broken weekly and daily highs and we would thus expect more gains through the end of the month (just Monday and Tuesday). Considering that the pair failed to retain gains, we expect topside resistance at 1.5735/45 (former July high, 200-DMA). Above, resistance is close at 1.5775/80 (100-DMA) then 1.5790/1.5805 (channel resistance, Bollinger Band). As noted last week, “Failure to break these levels should lead to a sharp pullback towards major support confluence in the 1.5575/1.5605 zone (former channel resistance, 10-DMA, 20-DMA, 50-DMA).” A daily close below this zone exposes the weekly lows from last week at 1.5455/60. Bias: bearish.

- USDJPY: Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there; but the daily close below 78.60 suggests that the pair could trade as low as 78.15/25 before buying interest returns. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. Watch the 5-DMA (78.18) for advances; the USDJPY closed above it on Friday for the first time since July 11 and another close above it today would perhaps signal a shift in the trend. Bias: bullish.

Any other trade ideas and general macroeconomic musings can be found in the Real Time Newsfeed, or by following me on twitter @CVecchioFX.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail

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