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Daily Observations: August 30, 2012

Daily Observations: August 30, 2012

Christopher Vecchio, CFA, Senior Strategist

Current Positions:

- Long AUDNZD from 1.2835, Stop at 1.2750, Target 1 at 1.2930, Target 2 at 1.3030

- Short GBPAUD from 1.5260, Stop at 1.5400, Target 1 at 1.5060, Target 2 at 1.4830

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

- Long USDJPY from 78.58, Target 1 at 79.60, Target 2 at 80.60/65

Pending Positions:

- Pending Long USDJPY daily close >80.65

- Pending Short EURUSD daily close <1.2200/20

- AUDNZD: The AUDNZD came into support on a daily Ascending Triangle dating back to early-March. Accordingly, a long trade was taken. Confidence in this pattern is high as this is a pattern I’ve traded to the short side in the past month alone, from 1.3060 to 1.2850, from August 25 to July 23. The upswing was confirmed with a daily Morning Star candle cluster, a bullish reversal pattern. Considering that our long-term outlook for AUDNZD is bearish, this will be reversed upon completion (barring a daily close above 1.3080). Bias: bullish.

- AUDUSD: The bullish RSI divergence on the hourly charts from Tuesday gave way to a quick rally to 1.0400, but failure at the round figure suggests that downside pressure remains stubbornly strong. Curiously, the declines today failed to reach corresponding channel support at 1.0305/10, also the 200-DMA. Alongside budding bullish RSI divergence on the 4-hour chart, there is scope to believe that another test of 1.0400 may be in order. A move above 1.0400 exposes channel resistance near 1.0435/40, also the 200-SMA on the 4-hour chart. Elsewhere, near-term resistance comes in at 1.0480, 1.0530/45 (former swing highs, and would also represent a break of the downtrend off of the August 9 high), and 1.0600/15 (August high). Should we see a rally up towards 1.0600 again, another failure would market a Double Top and signal a push for a test of 1.0200/05 (100-DMA). Near-term support comes in at 1.0330, 1.0305/10 (descending trendline support, 200-DMA), and 1.0200/20 (100-DMA, 161.8% extension on August 9 high to August 17 low, measured against the August 23 high). Bias: bearish.

- EURUSD: Little has changed over the past several days although the EURUSD maybe working on a Bull Flag within its ascending channel/wedge off of the July 24 low, as well as within an Inverse Head & Shoulders pattern in the works since late-June. Given the Head at 1.2040/45, this would draw into focus 1.2760 (would come amid a major breakout) as long as price holds above 1.2405. Interim resistance comes in at 1.2560, 1.2615/20 (channel resistance, 100-DMA), and 1.2660/70 (long-term descending channel resistance). Near-term support comes in at 1.2500, 1.2440/45 (former swing highs), 1.2405 (Neckline), 1.2310/30, 1.2250/65, and 1.2155/70. Bias: neutral.

- GBPAUD: The pair has traded into key 200-DMA resistance, triggering a short at 1.5660. The potential for this trade to the downside is limited from a fundamental basis, given the fact that rapidly rising Chinese concerns (affecting the AUD component) are overshadowing the otherwise dull European situation (affecting the GBP component). Technically speaking, the pair is reaching overextended levels on the daily chart, with the RSI showing a significant divergence from price. There is potential for the GBPAUD to run higher and show a false break above its 200-DMA, currently at 1.5245/50, before pulling back. Near-term resistance is 1.5365/70 (mid-June swing low) and 1.5425 (100-DMA). Support comes in at 1.5105/10 (50-DMA), 1.5005/30 (20-DMA, mid-July swing low), and 1.4825/30. Bias: cautiously bearish.

- GBPUSD: The pair has trended higher, with the GBPUSD riding its 50-SMA on the 4-hour chart as support before finding support in the 1.5770/1.5790 area on Tuesday. As I wrote earlier in the week “Whereas RSI dropped to 36.58 yesterday on the 4-hour chart, the last time RSI was this low, the GBPUSD traded in the 1.5500s. Likewise, last time price was at this level (1.5793), the RSI was at 71.59. Through and through, this is a bullish development.” Thus, the rebound could be representing a final push higher before the next leg lower. Key levels for the near-term are 1.5880/1.5900 to the upside and 1.5770/90 to the downside; we are continuing to become overextended on shorter-term charts, suggesting that another failure at 1.5900 could lead to profit taking before further bullish price action. A daily close below 1.5770/90 over the coming days should lead to a drop into 1.5700/20. Beyond that, support comes in at 1.5635/40 (last week’s low), and 1.5625 (ascending trendline support off of August 6 and August 10 lows). A daily close above 1.5900 points towards 1.5985. Bias: bullish above 1.5770/90.

- NZDUSD: The NZDUSD has sputtered along key support today, the 100% extension on August 6 high to August 15 low, measured against the August 23 high, at 0.7995/0.8000. This also represents support in the descending channel in place since early-August. Alongside growing bullish RSI divergence on the 4-hour chart (price keeps falling whereas the RSI has started to rebound), there exists scope for a rebound. Interim resistance comes in at 0.8035/40 (mid-August swing low), 0.8070/90, and 0.8160 (descending channel resistance off of August 6 high). A daily close below 0.7995/0.8000 would represent a breakout and thus shift our bias to bearish, and look for a test of the 1618% extension at 0.7885. Bias: bearish.

- USDJPY: The USDJPY closed above the key 78.60 level yesterday, though price has oscillated around both sides and has started to move lower intraday. This level coincides with former June swing lows and a level of resistance for most of July (note the daily wicks above said level but no closes). For now, this is the most important level: potential exists for a rally back into 79.10/20 as long as 78.60 holds, whereas a daily close below suggests a move towards 78.10/20 at the minimum. Penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30. 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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