US Dollar Back to 95.00 As Equities Convulse: Price Action Setups
Forex Talking Points:
The past week has brought pain into global stocks with a noticeable sell-off yesterday from which we haven’t yet recovered. There has been a show of support in US equities since the Asian session last night, and this could open the door for the possibility of bullish reversals. But, until we see a return of consistency on the long side of stocks, traders would likely want to remain cautious. In currency land, matters appear to be a bit more calm, even with USD/JPY mirroring the moves of the Dow Jones Industrial Average. In this webinar, we looked at a series of setups on either side of the US Dollar, and we also went over a simple trend strategy in the latter portion of the presentation.
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Stocks Rocked, Is the Pain Over?
US equities came into Q4 flying high on the back of a bullish trend that lasted throughout Q3. From the late-June lows to the early-October high, the Dow Jones Industrial Average gained 12.4%. But after that fresh all-time-high was set last Wednesday, pressure has started to build and this hit fever pitch during yesterday’s session as a significant sell-off took place and prices were propelled down to deeper support levels.
On the long side – we don’t yet have indication that this sell-off is over. The hold at lows from the Asian session last night is an encouraging first step but, as of this point, that could only open the door for bullish reversal strategies so that risk on topside plays could be concentrated to a minimal outlay; but for that topside trend, we’d need to see a bit of consistency before that could become a viable theme again.
On the short side – this move is pretty stretched already, and we don’t have much for nearby resistance swings to use for stop placement so managing risk on bearish continuation could be of a challenge. Traders that want to press the short theme could look for either a) a pullback to resistance or b) bearish breakouts below support.
Dow Daily Price Chart: Testing 25k, Mid-August Swing-Lows
Dollar Slide Continues as USD Drops to 95.00 Support
The US Dollar has pulled back from the prior topside trend, and prices are no back to testing the 95.00 level for support. This level had helped to bring buyers into the mix as we closed Q3 and opened Q4, and a break-below 95.00 would mark a fresh October low. There are deeper areas of potential support around 94.73 and a zone that runs from 94.20-94.36. A bit deeper, at 93.86, we have the three-month low in the currency.
US Dollar Four-Hour Price Chart
EUR/USD Pushes into Resistance Zone
EUR/USD has broken above the 1.1530 level that we were looking for as resistance, and bulls have continued to push over the past two days with prices rubbing up against a former support trend-line as fresh resistance. The pair is now testing the zone that runs from 1.1590-1.1625, and a break through this zone exposes the 1.1685-1.1736 zone.
EUR/USD Four-Hour Price Chart
GBP/USD Sets Range Near Resistance at Prior Support
GBP/USD has spent the past day setting-in an area of support around a prior zone of resistance. This could be seen best on shorter-term charts, such as the hourly, and this keeps the door open for topside strategies as we had looked at coming into this week.
GBP/USD Hourly Price Chart
USD/JPY Resembles the Equity Declines
While not quite as expressive as the move in stocks, USD/JPY has put in a very similar pattern to the decline in equities, highlighting Yen-strength as an item of risk aversion. This is setting up a fairly nasty weekly setup as an evening star formation has formed near a key point of resistance at 114.00.
USD/JPY Four-Hour Price Chart
EUR/JPY Still Bearish, But Beware Bull Flag Break
We looked into the pair coming into this week as there were setups on either side of EUR/JPY. The short-side setup filled in fairly quickly, and prices ran-lower in a rather aggressive manner as we traded into this week. The bull flag formation remains, and a topside break through the bearish channel could open the door for topside but, until then, the bearish theme retains potential.
EUR/JPY Four-Hour Price Chart
Nikkei Trend-Line Test
We looked at the Nikkei coming into September as an ascending triangle pattern had shown on longer-term charts. That breakout filled-in rather aggressively, and prices ran-up to fresh 27-year highs in the initial days of Q4.
But – as the risk aversion theme began to show last Wednesday, prices started to pullback and haven’t yet stopped. At this stage, we’re seeing support from the same bullish trend-line that had helped to mark the ascending triangle pattern in September.
Nikkei Daily Chart: Breakout Retracement
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX