The Australian dollar has rallied nearly non-stop for the past seven sessions but the move is about to hit some roadblocks, namely the 38.2% Fibonnaci retracement of the five-week move lower and psychological resistance at 90.00.

AUD/USD has cleared several hurdles on its rebound, including the lows of the old range at 0.8919 and 0.8946. This is a positive indication for the pair and shows that 0.94 may still be in play.

The key resistance levels are the Fibonacci ones — 0.38.2%, 50% and 61.8%. They fall at 0.8992, 0.9071 and 0.9150. If 91.50 is cleared we believe a re-test of 0.94 is likely. Another level that could offer some resistance is the 50-day moving average at 0.9104 currently but in the past the 50dma has been neglected.

We would like to see a close above 0.90 to confirm a contiued bullish trend but after such a run-up we believe a pullback is the most likely scenario. Expect 0.8916 to act as support, if not a slide back to 0.8750 and below is likely.

Have a Happy New Year.

We are in the midst of a powerful reversal in USD/CAD.

After breaking key support at 1.0406 and falling as low as 1.0367, we have seen an immediate and powerful reversal to as high as 1.0578 today — a more than 200 pip move in just over 24 hours.

The reversal has created a bullish reversal pattern on the daily chart.

The final three candlesticks create a textbook hammer reversal pattern that is confirmed by a bullish engulfing candle. Reversal patterns really don’t come any more clearly than this one but further confirmation would come with a close above 1.0509. If that’s the case, a retest of the top of the range at 1.0750 will be the favoured scenario.

A reversal the the USD on Tuesday has generated an pattern in GBP/USD that targets 1.57 but could be setting the stage for a larger breakdown.

 The pair has slipped below key support at 1.5920 after getting rejected by the 200-day moving average at 1.6050.

The pair is currently at 1.5913 and if we see it close below 1.5920, it will be a definite sell signal with a target of 1.5703.

We talked about the importance of the 200-dma in GBP/USD in a post last week, noting that the GBP fell 6000 pips the last time it fell through the mark. We targetted 1.58 and now that is just 70 pips away.

On the hourly chart we have posted, you can also see a messy head-and-shoulders pattern, that has been mostly resolved but points to 1.6070 as a key short-term stop.

At the moment, it seems like the momentum is aligned for a test of 1.57. Taking a look at the daily chart affirms that conviction.

The first thing we notice when looking at the daily chart is the period of indecision over the past week. We see three clear doji stars followed by a hesitant candle upwards culminating in a clear rejection of the 200-dma and a massive 120 pip reversal.

We have often talked about our enthusiasm for doji star patterns and how they so often preceed a big, lasting move. With this chart we need only to look back two weeks. From Dec 9 – 16 we saw similar doji star patterns followed by a bounce to the 100-day moving average that was shot down in quick 400 pip fall.

The potential for something similar certainly exists here. the consolidation of the doji stars cleared out oversold conditions and foreshadows weakness.

The difference this time is that there is major support at 1.5708, which was the low on Oct. 13 and also the lowest since May. A close below this level would be a major blow for GBP and would target at least 1.50 with the potential for a retest of the 1.35 lows.

The U.S. dollar continues to climb higher against the Japanese yen as it nears the Dec. 22 high of 91.86.

The period from April to late November saw a long, steady slide lower, culminating in the gaps lower on November 24-25 to a low of 85.00. Since then, however, the USD has rallied an impressive 600 pips.

The rebound could be seen as a retracement phase. The 38.2% retacement has already been cleared, with 50% at 93.11 and 61.8% at 95.09.

A rise to the 50% retacement converges with downtrend resistance and a minor high from early September. If 93.23 is cleared, it opens the way for a rally to 95.

In the short-term, the pair presents considerable resistance as well. If the first hurdle at 91.86 is cleared, then 92.32 show offer some stiff resistance.

We see here the significance of the 92.32 high as it was a medium-term top and led to the final leg of the decline.

The most likely scenario is a significant test of 92.32 but the multiple levels of resistance upcoming in USD/JPY likely means that the bulk of the gain has already passed.

Fundamentally, there was significant evidence that USD shorts were getting squeezed for much of December. Year-end demand has also pressed the U.S. dollar higher. Those factors are diminishing in much the same way as the chart is starting to look tired.

On the other hand, some of the U.S. dollar strength has come from optimism about a U.S. economic recovery and the sense that the Fed will hike by mid-year. The consensus has been shifting in this direction, even though we have yet to hear anything significant from the Fed.

What is clear is that the Bank of Japan will not be hiking rates any time in 2010 and likely not in the early part of 2011. If an economic recovery takes hold in places like Australia, New Zealand, Canada and even the United States. There are market participants eager to get involved in the yen-weakening carry trade.

The only currency to outperform the U.S. dollar over the past day and the past month has been its neighbour — Canada’s loonie.

The Canadian dollar has been the runaway best performer in the forex market recently has interest rate hikes from the Bank of Canada are priced in and oil regains its footing.

Last week, we talked about how the Canadian dollar was in danger of breaking its recently range to the upside. Instead, in a classic techncial move, it tested the top of the range and rejected it. Instead, it now looks to take out the bottom of the range.

The range we are talking about is 1.0406 to 1.0748 in USD/CAD. On this chart, we can see that it has been in force since the start of November.

We can see that the range has been tested at least twice on the bottom and twice to including last week when it was emphatically rejected.

At the moment, we think it’s highly likely that the bottom of this range will be tested. The momentum is clearly on the Canadian dollar’s side. Wednesday saw the release of Canadian GDP data that was disappointing yet the Canadian dollar still made gains — that’s the sign of a strong trend.

If we look at the clear rejection of 1.0750 as a double top, then the measured target is a move down to 1.0070. Of course we will need to see a break of the December low for that to happen.

The pound sterling fell for the fourth straight day on Tuesday as the U.S. dollar continues to make broad gains. Tuesday’s action was notable because GBP/USD declined below the 200-day moving average. The last time sterling fell below the 200dma, it went on to fall 6000 pips in the following two months.

We talked about cable just last week, noting that it was setting up for a big move. We recommended pivoting around 1.6378 and that proved to be good advice. After a quick headfake to just above 1.6400, it fell precipitously. We even warned about a false breakout. If you had sold at 1.6350, you would have made nearly 400 pips by now.

Sterling has fallen below the range we outlined there and the measured target of that move is 1.58, leaving a potential for 200 more pips of profits. We caution that it’s a dangerous market at the moment because of the lack of liquidity around the holidays. Keep your stops tight.

Let’s take a closer look at GBP/USD and outline some potential scenarios.

We can see the 200-da moving average in red. We also see major support (in blue) at 1.5707. This is a potetial target for the recent move but with the Bollinger Band already stretched and the RSI in severely oversold territory  32, we have a hard time envisioning a fall below 1.157 without a correction a period of consolidation first.

The hourly chart offers reasons for continuing bearishness in the short term.

Here, we see that the slow stochastic has climbed back and in danger of rolling over. The key resistance points we see are noted here. They are 1.6029 and 1.6100. The downtrend is also key.

The Australian dollar was the worst-performing major currency over the past day. It fell 114 pips to 0.8788.

The Aussie dollar had touched above 94 cents in mid-November but soon began to struggle and has now fallen more than 400 pips in the past week.

The long-term technical picture now looks bearish.

The uptrend has been broken and how the 100-day moving average (red) has been breached.

The recent declines in AUD come after the Reserve Bank of Australia said it could introduce a pause to its interest rate hiking cycle. This shook out some of the carry trade. At the same time, there has been a rally in the U.S. dollar based on short-covering and improved expectations for rate hikes in 2010.

The technical picture for AUD/USD looks perilsome at the moment. Some oscilators are showing that the pair is oversold but that’s to be expected in this sort of environment.

The initial target of the breakdown is the September low of 0.8568.

Looking at this four-hour chart, you can certainly make a case for extended declines. The measured target of the break below support is 0.8206 which falls roughly in line with the 200 day moving average of 0.8260.

There is no longer any doubt. The eight-month uptrend in EUR/USD is over. The chart is broken.

The only question now is: how far will the euro fall?

What we see on the daily chart is that the euro had a strong, steady uptrend that was broken in early December and has been sliding since. Thursday showed a big drop but Friday showed some stabilization, generating a doji star formation that can sometimes indicate a reversal.

When we look at some associated indicators, they show that the euro is severely oversold. The daily Bollinger Bands (in blue and green) show the euro driving down the lower Bollinger. The slow stochasic (red and orange) is deeply in oversold and the RSI has broken down.

All these indicators tell us that there will be a rebound in the euro at some point but our experience also tells us that markets can remain oversold for long stretches at turning points in a market.

The target we have been eyeing through this entire trade is the 200-day moving average (red). It comes in at 1.4187 today, which is nearlywhere the lows from August and the psychological support at 1.42 comes in.

It will be very tempting to go long EUR/USD in the next day if we see these levels. In a deeply oversold market, such convergence of support is generally a great place to put orders and hope they get filled on a sharp drop in the market. If those support levels give way, we wouldn’t rule out a drop to 1.39 in the near term.

Confirmation of the rebound will be found on the hourly chart, where we can see a well-definted downtrend.

We can see that this trend has been tested at least 4 times. It should pose initial resistance to any rebound in this pair. If it’s breached in the near-term, expect the 38.2% Fibonacci retracement level at just below 1.46 to be the next target. Those looking to sell a rebound in EUR/USD will start piling in at that level.

Overall, this is an exciting chart that will continue to add volatility and intrigue to the forex market in the coming weeks. The euro is definitely in a severe retracement following the past 6 months of gains but it’s growing oversold and market participants need to be prepared for a bounce.

The U.S. dollar is surging. We saw impressive moves all over the forex market on Thursday and with the big slide in stocks, more is likely on the way. If not through the holiday season, we will be seeing it in the New Year.

The euro and pound sterling have already broken down and USD/JPY has had a huge rebound. AUD/USD has fallen below support as well.

One chart stands out as particularily tranquil — USD/CAD.

When we see a chart like this in a volatile market, we get excited. There is a well-defined range from 1.04 to 1.0750 that has been well-established since early November. We have been watching this range trade unfold and wondering which way it would break.

Now, the clear indication is that it’s going to break on the upside. We see a strong series of higher lows and we are brushing right up against the top of the range. All around we see USD strength. Also hurting the Canadian dollar are slides in oil, gold and other commodities.

At the moment, the picture is very clearly bullish. A breakout through the top of the range would immediately target 1.0850 but 1.11 would be a more-likely result.

But wait, we are approaching the holidays and liquidity is going to dry up very quickly. The U.S. bulls may decide to take a break. If so, Thursday’s failure to break above 1.0750 will be seen as a definite sell signal. In that case, we could easily see USD/CAD falling back to 1.04, or lower.

Taking a look at the short-term intraday chart gives us reason to think that’s exactly what might be coming.

What we see here is a 15-minute chart that has reversed mightily after hitting resistance. The line coming in at 1.0636 is the 61.8% retracement of the push to 1.0750. A fall below there would likely mean a defeat of the attempt to break the range on the upside.

Overall, the picture remains bullish for the U.S. dollar and a break through the upside of the chart is the most favoured scenario. Oil and stocks both look vulnerable and further weakness in those two would almost certainly end the range trade to the upside.

In the meantime, keep a close eye on this chart and be prepared for a powerful move. It has happened everywhere else, and it’s bound to happen in USD/CAD too.

The pound sterling has our attention today. We have been keeping a close eye on this chart since it broke down at the start of the month and began to form a range trade.

Since Dec. 8, ther have been a five consecutive days where the candlesticks have shown indecision. The first three are clear doji stars and the following two are as well, when taken together.

Now, we have pushed to the top of the range and set up one of our favourite types of trades.

Doji stars are a great way to key in on what is usually a big move. When a market ranges like GBP/USD has, a breakout is usually a powerful event. When a range becomes established, it also gives you good, clear guidelines on where to put your orders. In short, a series of doji stars followed by a push to the upside are a technical traders’ dream.

So what’s the trade? Will GBP/USD breakout and shoot higher? Or will it go back to the bottom of the range?

On the daily chart, we can see that the RSI and stochastic are both showing bottoms and turning higher. But let’s take a look at the hourly chart.

This chart is showing the opposite — the RSI and stochasic are overbought. This is called divergence. It’s when two different charts are giving different signals and unfortunately, it’s common. In a breakout scenario, it’s almost inevitable.

Taking a closer look at the hourly chart, we can see that the parameters of the range are from 1.6167 to 1.6373. Already today, we have come very close to the top of this range but as we can see, it’s offering strong resistance.

The way to play both sides of this trade is by trading with very tight stops. One way to do it is sell the top of the range with a stop 15-20 pips above. If the stop is hit, turnaround and go long. This leaves you vulnerable to a false breakout but allows you to profit in either direction.

A variation of the same trade is to but a buy order in 10 pips above the range with a stop 15 pips inside the range. If you get stopped out or if the market breaks down and starts to fall back into the range, you can spin around and go short at around 1.6350.