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AUDUSD Short Still Best FX Trade in Risk Off Environment

AUDUSD Short Still Best FX Trade in Risk Off Environment

2012-05-11 20:44:00
Jamie Saettele, CMT, Joel Kruger,
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***

As focused on throughout the morning notes in recent weeks, crude has been a leading indicator with respect to the next wave of deleveraging. The action in crude in the last year (top was in May 2011) dismisses the global growth story as fantasy. The break this week below the near term downward sloping channel (in red) indicates that the decline is impulsive rather than corrective and likely to accelerate from current levels. Copper is on the verge of breaking the trendline that extends off of the October and December lows and gold’s last hope goes out the window on a break of parallel channel support (in red). Gold’s run appears to have been the final speculative frenzy fueled by cheap money. The strengthened correlation since the March top between the 3 markets is also consistent with a deflationary environment. The AUD risk is greatest in such an environment and recent action confirms this assertion. Until further notice, my trading will focus on the AUDUSD (even on countertrend moves). The AUDCAD was the biggest loser today on the back of CAD jobs but underlying macro trends are likely to win out and support USDCAD over time. On that note, USDCAD support is expected from 9900-9930. AUDJPY is a candidate of course but I’d rather not deal with the intervention headache that comes with owning JPY. – Jamie Saettele, CMT

Attend a trading bootcamp next week and learn specific timing techniques

***

PRICE TREND / RANGE TABLE

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_Picture_9.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

-PriceRank is the percentile rank of the last daily close compared most recent 60 and 20 daily closes (100=highest close and 0 = lowest close)

-Range is the difference in pips of highest high – lowest low over X days (60, 20) – for example, a range of 500 under the 20 days column means that the highest 20 day high – the lowest 20 day low = 500 pips

-Rank is the percentile rank of the range over X days (60, 20) – for example, a rank of 100 under the 20 day column means that the range over the last 20 days is the highest it has been in 20 days

-ATR% is the average range over the last 20 days expressed as a %. The rank indicates whether the average range is high or low relative to the last 20 days.

Gold, Copper, Crude Continuous Contracts (futures)

Weekly

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_gold.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie – As focused on throughout the morning notes in recent weeks, crude has been a leading indicator with respect to the next wave of deleveraging. The action in crude in the last year (top was in May 2011) dismisses the global growth story as fantasy. The break this week below the near term downward sloping channel (in red) indicates that the decline is impulsive rather than corrective and likely to accelerate from current levels. Copper is on the verge of breaking the trendline that extends off of the October and December lows and gold’s last hope goes out the window on a break of parallel channel support (in red). Gold’s run appears to have been the final speculative frenzy fueled by cheap money. The strengthened correlation since the March top between the 3 markets is also consistent with a deflationary environment. The AUD risk is greatest in such an environment and recent action confirms this assertion. Until further notice, my trading will focus on the AUDUSD (even on countertrend moves).

SPY (on top) / IWM (on bottom)

Weekly

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_SPY.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie – The SPY (S&P 500 ETF) and IWM (Russell 2000) ETF are on the verge of breaking lower. The Russell pattern is much cleaner on both a long and short term basis. This is probably a function of the tendency for larger ‘safer’ stocks to top last in the cycle. Breaks lower expose 12970 in the SPY and 7692 in IWM. This translates to 1292.66 in the S&P 500 Index. Breaks of the January lows at 12643 and 7337 (1258.86 in the S&P 500 Index) would be significant.

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR)

Daily

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_usdollar.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie – “The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has broken through several trendlines and traded to 20 day highs. An explosion higher may be in the works as price has also cleared 10000. Above 10134 would confirm as much. Medium term players should trade from the long side with a stop below the May low. Early week support is 9977. Be careful about holding out for a pullback that never occurs. The best opportunities are often the ones that are most difficult to pull the trigger on.

JoelThe market remains locked in a multi-day consolidation and should continue to chop between the 9,600-10,100 area. Overall, we do retain a bullish outlook given the broader recovery structure out from a major base in 2011 and therefore recommend looking to buy on dips in favor of an eventual break above 10,100.

Euro / US Dollar

Weekly

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_eurusd.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie – “The EURUSD is inching towards the January low. Bulls can hope as long as price is above there (12622) but near term trend should be considered bearish below the May high (13283). Look lower towards 12880 and 12810 next week. Resist the urge to chase. Rather, favor shorts at resistance (12980 and 13080 being the strongest levels), especially if the rally materializes on a news announcement. We cannot predict what will happen but we can attempt to identify the trend and enter the trade in that direction. Use the levels to structure the trade so that you obtain a satisfactory reward/risk ratio. LEVELS: 13285 13180 13080 12980 12880 12810

JoelThe market has finally cleared some key support by 1.3000 and the break opens the door for deeper setbacks over the coming days towards the 2012 lows from January at 1.2620. However, short-term technical studies will need to unwind from oversold readings before we are to see any extended declines below 1.3000, and we recommend looking to sell into rallies into the 1.3100-1.3200 where a fresh lower top is now sought. Ultimately, only back above 1.3300 would delay.

British Pound / US Dollar

Weekly

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_gbpusd.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

JamieThe larger trend remains up but the inability to find a low early in the month decreases confidence in bullish continuation as per my trading rules (learn about them next week). Additional support comes in from the trendline that extends off of the January, March, and 4/16 lows. The line is at 16010 on Monday.

JoelFinally starting to see signs of a medium-term top and potential 2012 high after the market has stalled and retreated from the 1.6300 area. Key support now comes in by 1.6065 and a break and close below this level will confirm bearish bias and accelerate declines towards 1.5800 further down. Ultimately, only a break back above 1.6300 would negate and give reason for reconsideration.

Australian Dollar / US Dollar

Daily

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_audusd.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie I’m looking towards the trendline that extends off of the May 2010 and October 2011 lows. The line is at about 9983 Monday. Ultimately however, expect a flush lower into the December 2011 low at 9860 (in line with the July 2008 top at 9849 and 100% extension of the decline from the late February high). I’m positioned with the thinking that we are staying below 10143 on the way to 9860. Exceeding 10143 however would shift focus to the breakdown level (former support) at 10225. LEVELS: 10360 10300 10225 10145 10080 9980 9840/60

JoelOur bearish outlook in this market remains intact and we continue to project deeper setbacks over the coming days and weeks towards the October 2011 lows by 0.9385. A fresh lower top has now been confirmed by 1.0475 following the latest break below 1.0225 and from here; look for acceleration back below parity. Daily studies are however starting to look a little stretched, so we would not rule out the potential for a bounce somewhere in the 0.9900’s, from where the next lower top is sought out, ideally ahead of 1.0300. Ultimately, only back above 1.0475 negates.

US Dollar / Japanese Yen

Weekly Bars

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_usdjpy.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie“The inability to find an early month low decreases confidence in a bottoming scenario for May.” The USDJPY tested and held the October 2011 intervention high this week and closed near its high for the week. This week’s range is small but the action at the October 2011 level (7950) is impressive. A pop above 8060 is needed for me to consider a bullish strategy again (on a pullback). LEVELS: 8180 8060 7942 7915 7830

JoelThe latest pullback from the 2012, 84.20 highs is viewed as corrective and it looks as though the market could still see a bit more weakness before considering the possibility for the formation of a medium-term higher low. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate.

Euro / British Pound

Daily

AUDUSD_Short_Still_Best_FX_Trade_in_Risk_Off_Environment__body_eurgbp.png, AUDUSD Short Still Best FX Trade in Risk Off Environment

Prepared by Jamie Saettele, CMT

Jamie – The EURGBP is at its lowest level since November 2008. The momentum extreme registered on Thursday gives scope to a bounce, perhaps into 8094 (gap). A move into there would be a candidate to short against the May 1 high of 8197 (statistically significant that the high is on the first day of the month) for a test of the low just under 8000.

JoelThe cross rate has now accelerated to fresh yearly and multi-month lows, leaving daily studies well oversold and in serious need of a major corrective bounce. In the previous week, we had warned of the potential for another drop down towards the 2010 base by 0.8060, but also said that we would be looking to buy on a dip once this level was broken. The latest downside break has finally cleared 0.8060, and we will look to take advantage of the pullback. There is also now a good deal of previous resistance turned support at current levels, with some consolidation and congestion from back in 2008 likely to prop for the time being. The daily RSI tracks down by 20 and is dramatically oversold, and we like the idea of the fresh long in favor of a significant bounce over the coming sessions. Ultimately, only a daily close below 0.7950 would concern.

--- Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com

To contact Jamie e-mail jsaettele@dailyfx.com. Follow him on Twitter @JamieSaettele

To be added to Jamie’s e-mail distribution list, send an e-mail with subject line "Distribution List" to jsaettele@dailyfx.com

Jamie is the author of Sentiment in the Forex Market.

--- Written by Joel Kruger, Technical Strategist for DailyFX.com

To contact Joel e-mail jskruger@dailyfx.com. Follow him on Twitter @JoelKruger

To be added to Joel’s e-mail distribution list, send an e-mail with subject line "Distribution List" to jskruger@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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