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A Natural Retracement May Offer New Opportunities

A Natural Retracement May Offer New Opportunities

2010-05-24 15:48:00
John Kicklighter, Chief Currency Strategist
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Trends occur in spurts and fits. The more time a market carves a consistent direction and level of volatility, the more probable it is that a change will occur. For the currency market, this change is already underway in the form of a bounce for risk appetite / yield interest. This is a blatant move for those pairs that hold a significant carry (AUDUSD) and those that are more fundamentally inclined (EURUSD). This is a natural cycle of congestion and retracement. The question from here is whether this will turn into a true reversal or this is just a pause in a larger trend. Looking for guidance, their is little to expect from the economic calendar. There simply is no particular driver worthy of a shifting underlying sentiment. That means we must again refer to the unknown and inconsistent changes in investment sentiment. There is plenty of fuel to project the market's path through any of the three scenarios (a rise in risk appetite, further deterioration in yield demand and a continued balance between them). Though, regardless of the outcome, there are opportunities to be found. From last week, I only held on to the second half of my in-the-month short AUDCAD and AUDCHF positions. They have both retraced different amounts; but the latter pair has returned to its long-term, former channel floor. This former support can turn into new resistance which fits my fundamental outlook for this pair (whereby the Aussie dollar is seeing growth and interest rate prospects curbed). Therefore, I have added to my short AUDCHF position back up to a full size just below 0.9650 and have set my stop on both halves to 0.9720. On the other side of this picture, we are starting to see ascending wedge formation develop on other Aussie crosses. I am particularly interested in AUDUSD and AUDJPY. The major has a range high of 0.8350 on a short-term time frame, a break of which would be good for at least a few hundred points for run. AUDJPY could see the same; but a follow up resistance level in the former of former long-term support at 76.50 could make this one play out very different. Another pair that I am revisiting after being knocked out on a reversal last week is EURGBP. Short from 0.8685, my stop is set above the long-term rising trendline that had previously defined support for this pair for so long. Also, I am keeping my eye on EURUSD for a potential break of the historical 50 percent Fib at 1.2135.

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