We are going to take a look at the euro against the U.S. dollar today. The euro rebounded from early risk-driven losses to close higher on Thursday. The move sets up a bullish hammer pattern as the USD is beginning to look weak on multiple fronts.

It seems everyone is jumping into the fray and picking a bottom in EUR/USD but we think it’s time to take a look at the long side. We have been consistently bearish on the euro for a long time and have been right. We have been neutral for sometime now and despite the structural headwinds that face the eurozone, we think tactical longs are in order.

We can see that the pair has been stuck in a clear downward channel but the last few days have shown signs of a bottoming formation. Today we had the opportunity for deeper gains but EUR/USD found support above the earlier lows and traced out a hammer formation. On the upside, we will be looking for a rebound to 1.40 or even 1.42. We think this move could happen quickly as shorts are covered.

We have a firm stop at Thursday’s low.

The U.S. dollar was whipsawed by poor data on new home sales and testimony from Federal Reserve Chairman Ben Bernanke. The USD tumbled against the yen and then later climbed back. On the intraday chart, the pair made a toppy formation around 90.25, with further resistance at 90.35. On the downside, 90.00 is a significant psychological level.

The levels are so close together that it’s highly likely that in the day ahead, the support or resistance is will give way. When it does, the move is likely to be strong. This is futher reinformed by the doji star pattern on the daily chart.

The doji star pattern is a signal of a big move. It’s not necessary to make a directional call just yet. We would be a buyer at 90.40 and a seller at 89.80.

We can’t remember a time, in many years of trading, that the market has been so focused on 200-day moving averages. It seems like everyone has them up on their screens. It seems to have started with the breakdown in EUR/USD to the 200-dma, the subsequent stabilization and then the second leg lower. We have also seen fascinating interactions with AUD/USD and AUD crosses and the 200-dma.

At the moment, we are looking at EUR/GBP, which is flashing some very strong technical signals.

The 200-day moving average is in red and we can see that the market has now failed twice in efforts to close above the key level. The second key point is that we have now put in a double-top at 88.41 that targets 83.60. Finally, the double-top/200dma resistace comes in right at the bottom of old support from mid-November.

It all adds up to a brilliant show of convergence that has every technical trader pounding the sell button today. We have also added the RSI to show that it’s also flashing sell signals.

We can think of some fundamental reasons to stay out of this trade but we never fight the technical trend and in this trade, it’s very clear.

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It has been a quiet day in the fx market today. There has been no economic data and little to jar the market out of its quiet state.

The lazy market has given us a chance to take a look at some charts and USD/JPY is flashing some interesting signals. The week-long run-up ended with a failure at the 200-day moving average on Friday. Today the market attempted another push higher but it has faded and the dollar is now in negative territory against the yen. We also have downtrend resistance and uptrend support to contend with as we search for the initiation of a medium-term trend.

We aren’t willing to commit too strongly in one direction or the other. The rejection of the 200-day moving average even as stocks have been rising is the clearest signal we have seen. However, the rejection came at the end of a strong uptend and an overbought correction was to be expected.

We think there could be another test of the 200-day moving average and we would prefer to be long is it breaks. If USD/JPY can close above the 200dma it will also likely break downtrend resistance and should test the recent high of 93.65.

 
We would turn bearish if the pair falls below 90.

We were impressed by the strength in the euro yesterday and thought it might be start of a bigger short squeeze but that has proved to not be the case today as the huge gains have been wiped out in a matter of hours.

We have been bearish on the euro right from the start of the nosedive we have seen and the technical picture after this recent downleg leaves us as bearish as ever.

The European Union finance ministers had a chance to do something to support Greece and boost confidence in the euro but it seems as though the political players have dug in and are holding back on bailout out the euro.

The next main event won’t be until next week, when Greece will reportedly tap the debt markets. We don’t want to be short ahead of that event but we will prefer to sell until then.

We see that the bounce yesterday didn’t reach as high as the highs from the 8th, 9th and 10th of February. To confirm a further downleg we will need to see a lower low. 1.3532 is the target for that confirmation.

We are wary of trading EUR/USD without a tight stop. No doubt there are specs involved in this market that know how short the market is positioned and would like to blow it out like we saw yesterday.

Update: As expected, the pair broke to the upside of the range. It was a nice 100-pip trade if you made it. Now, we have reached our target of 91.20. We would be selling here, with a tight stop.

It was an exciting day in the forex market with the EUR, GBP, AUD and NZD rallying significantly against the dollar and yen.

Today we’re looking at a pair that avoided most of the noise and has carved out a nice, technical channel trade. We can see it here:

There are two ways to trade a channel.

1) to buy near the bottom of the range and sell near the top

2) wait for a breakout and go with it.

Our bias is to see a breakout to the upside at this point, so buying at the bottom of the range and holding until it’s clear that the top of the range is holding. If we saw a break through the bottom, however, we would be sellers.

 From a longer-term perspective, we can build a technical case for strength or weakness. We will be watching 91.20 as key medium-term resistance.

We have been keeping a close eye on the Australian dollar over the past few weeks and AUD/JPY continues to grab our attention.

Two weeks ago, we warned about the potential for AUD/JPY fall below the 200-day moving average. When it did, it immediately fell 300 more pips before finding support at the quadruple bottom at 76.35-50. It has since rebounded back above the 200 dma to 80 cents.

The move higher has relieved short-term oversold conditions and the overall technical set-up remains bullish for the Australian dollar. We would have a very difficult time going long here, however. A clear quadruple bottom is not something that you see often and it’s usually a sign that a further sustained rally is failing. What has is saying that the chart still looks bullish is the fresh high at 86.50 after the late-November test of 76.50 (a 1000 pip rally).

We don’t want to fight the long-term trend of higher highs in AUD/JPY and we have been impressed by the Australian dollar’s ability to rebound back above the 200 dma. There is no reason to think the AUD can’t go higher in the short-term. At this point, however, we see a rally above 86.50 as unlikely and that will trigger a mixed, or negative technical picture.

We do expect this pair to eventually fall back below the 200 dma and below 76.35. At that point we will be agressive sellers as we could see this pair quickly falling to 67.00.

The short-term trend in gold has been higher but the medium-term trend is lower. This is complicated because the long-term trend is undoubtably higher.

Everyone has an opinion about where gold prices are going. We look to the charts for answers. At the moment, gold is approaching several resistance levels that converge and will make it very difficult to see further short-term gains.

As we can see, there is downtrend resistance as well as the 50-day moving average at $1,112 and the 100-day moving average at $1097. The rally from $1045 up to $1095 has also put gold in a short-term overbought position. The silver and oil charts are also looking stretched.
We favour selling gold at this point but we would certainly cover (and potentially go long) at $1112.

The Canadian dollar was the top-performing major currency on Wednesday but we would look to sell the strength.

USD/CAD is the most compelling chart we see among the majors. It has formed a clear double-top bottom on the daily chart and the recent two-day pullback looks like a good entry point.

The double bottom comes in around 1.02 at it was confirmed by the early January rally in the pair. The measured target of the move is 1.15 and that’s where we think this pair is going.

In the shorter-term, we have seen USD/CAD struggle to break above 1.0780 and there is resistance beyond that at 1.0872. These remain as significant hurdles and we will manage risk around them.

On the downside, there is some support at 1.0545 and we will put our stops here. That limits the downside to about 80 pips from the current level with a minimum upside of 140 pips and potentially 900 pips.

Adding to our conviction is the oil chart. We have seen oil bounce after falling on huge volume on Friday. It is now nearing its 100-day moving average at $75.73 and that will be resistance; as will be $77.

We haven’t written often about relative value amongst the commodity currencies here, but it’s a topic we have given some additional thought to over the past two weeks.

We have been watching as the Australian dollar underperforms its Canadian counterpart.

Since the start of February we have seen this pair awake from its sleepy state and show some interesting volatility. On days when risk aversion rises substantially, we see the Canadian dollar outperform the AUD while on days like Tuesday, the opposite happens.

The takeaway might be that a leveraged AUD/CAD carry trade is in play. We applaud anyone who has been involved in this trade as the pair rallied from 0.77 to 0.99 and earned a reasonable amount of interest since Feb. 09.

The game looks like it is up, however, as we saw the first unwind in late December. this makes a great deal of sense, as longer-term players would be booking a year-end profit.  The trade recovered on the first trading days of the year but struggled at 0.96 and the slump last week looks like it shook out some of the longs.

We believe that levered, macro, long-term longs are involved in this trade but are growing increasingly worried. We know this about carry trades: when they unwind, they unwind fast. If we see the 200-day moving average taken out again and then see 0.9199 breached, we expect to see the pair fall further. Perhaps to 0.8992 followed by 0.8780.

We recognize, however, that if sentiment improves, this remains a very attractive carry trade with minimal volatility. In an improving economy, Australia will hold a yield advantage over Canada for the foreseeable future. If the downward sloping trendline we have drawn breaks, we will exit shorts.

On Tuesday, the pair traded in a range 0.9273 to 0.9386 as the AUD rejected support at the 200-day moving average and put in a strong rally. So far today, the pair is indecisive, trading between 0.9343 and 0.9385. Support is at 0.9312 but nothing substantial until 0.9258. Resistance is at 0.9387 and 0.9418.