We feel the Australian dollar has entered a medium-term downtrend and we want to use the strength in the currency late this week to establish a short position.

AUD/USD rallied in a wonderfully uniform fashion for six month starting in May 2009 and ending in November of the same year with a high just above 0.94. Afterwards we moved sideways for a period before the market broke down over the past month.

An initial drop culminated on May 5 before a short retracement phase. This week, we have seen a similar retracement, bouncing from 0.8066 to a high of 0.8555 today – nearly 500 pips. The rebound is precisely 50% of the drop from 0.9028 that began on May 13. It’s no surprise that AUD bounced to the key 50% Fibonacci level.

This gives us a great level to follow the downtrend but with minimal risk. We would initiate a short position on a fall below 0.8429, which is slightly below the 38.2% retracement level. Our stop would be at 0.8670. The initial target is 0.8100 followed by a much deeper fall toward 0.7500.

The euro once again turned lower today on reports that Spanish banks are unable to borrow and a story in the Financial Times suggesting that Safe — the Chinese government investment fund at holds an estimated $620 billion in euroarea debt — is worried about its investments in Portugal, Italy, Ireland, Greece and Spain – the so-called PIIGS.

The euro tumbled on the news and has fallen below initial support at 1.2177. The cycle low of 1.2144 could be breached imminently and that would be a very bearish signal for EUR/USD.

The pattern that points to further losses is also a classic head and shoulders formation.

The neckline has already been breached and the negative outlook would be confirmed by a fall below 1.2144. The measured target of the head and shoulders is 1.1683, which dovetails nicely with the 2005 low of 1.1639.

Overall, the fundamental and technical reasons are in place to be short the euro. Sell any bounce.

The rebound in ‘risk’ trades today left some interesting patterns. Some look like they could be putting in bottoms, others look convincingly like the trend will continue. We are looking for clearer signals but in the meantime we see some charts that are flashing trading opportunities.

Cable has posted an interesting pattern over the past 10 days, bouncing in a 300-pip range. We will be watching this trade over the next few days and think a break to either side will be a good barometer of the broader risk trade.

As we can see, GBP/USD has traded in a 294 pip range since the gap lower to start the week of May 16. The gap lower co-incided with the election of a new government and we are now getting a sense of the austerity measures they plan to unveil to curb the huge UK deficit. It’s possible that announcements on that front will be what pushes this pair from its range. If the measures are too severe of too leniant, the pound will fall. Poilcymakers will need to strike a plan that’s both credible and promotes economic growth.

Technically, there are two ways to trade. The first is to buy at the bottom of the range and sell at the top. The second is to await a breakout. At the moment, we would favour selling a rally if GBP/USD reaches the top of the range and covering a portion at the bottom of the range. Playing a breakout is also an attractive strategy. The measured target of a range-trade breakout is equal to the range, so a fall to 1.3940 or a rally to 1.4822 is expected.

We are trading very well at the moment. We have repeatedly warned about the Australian dollar and our downside targets against CAD and USD have been met. We were impressed by the continued weakness against the euro today and it looks like the bearish phase in the euro against the commodity currencies might be coming to an end.

Today, we want to focus on gold. For years we have been skeptical of gold bugs and their prognostications of $5000 gold. It’s a group that’s filled with conspiracy theorists and worry-mongerers.

In the last siz months, however, we have grown more and more convinced that the gold rally is just getting started. Sovereign debt worries are for real and many countries will eventually give in to inflation as a solution to their overspending. The implications are unambiguously bullish for gold.

After reaching all-time highs last week, gold has slumped. For us it’s not a matter of buy or sell, it’s only a matter of when to buy and when to take profits. At the moment we are looking for buying levels.

We see that the RSI has fallen into oversold territory but it could still fall lower. On the downside we have the fibonacci lines at roughly $1170, $1150 and $1120.  We also see various trendlines with the most meaningful one (to us) at $1140 currently. On the whole, we see a great deal of support in the $1120 – $1170 range but support thins out below that.

We will be stacking up buy orders in this range on the possibility of a quick spike toward the bottom of the range. If we see a fall below $1120 we may be forced to reconsider.

Yesterday we pointed out the weakness in the Australian dollar and noted the bearish patterns. AUD/USD went on to fall badly. Today, we are looking at EUR/AUD and an interesting weekly chart.

The downtrend in this pair has been clearly and cleanly in place for 10 months. On Wednesday we went from the bottom of the range to nearly the top in a one-day 600-pip move. This is a positive for the euro on this cross but it doesn’t yet signal a reversal. Instead, it looks more like a short squeeze. Watch for a test of the top of the range in the day ahead but look for heavy selling around 1.50. Gold is very important to this pair. With the $30 fall in gold on Wednesday, we are cautious of a further pullback, which would be bearish for AUD.

The currency market seems to have disconnected from stocks, bonds and the broader correlations are stretched. The AUD and NZD were beaten down badly today while the EUR and GBP rallied, throwing a wrench into the risk-aversion/risk-appetite trade. We have to note that when correlations start to break down, as we’re seeing, it’s a sign of very high uncertainty in markets. It often leads to high volatility and quick moves. We see no end in sight to the incredible trading opportunities that are presenting themselves every day.

The Australian dollar is nearing critical support and in danger of falling to an eight-month low. There are signs of oversold conditions as we near support at 0.8578 and a bounce is possible. A sustained break below that level would be very bearish.

We also have to address the euro, given the events of the past 24 hours. We were constructive on the euro’s fortunes heading into yesterday’s session. We saw the potential for a bounce to 1.27 or even 1.31 on extremely oversold conditions. The market was tracking higher for most of yesterday’s session as the market touched 1.2445 but the legs were kicked out from under the euro after Germany banned certain types of short sales. German financial regulators banned naked short sales of exchanged traded euro area debt, credit default swaps and on the shares of 10 financial institutions. In the medium term, this is very bearish and the market closed below our sell line at 1.2330. We will look for levels to enter short positions.

The Australian dollar was beaten up badly on Tuesday and continues to face pressure so far today. Notice how close we are to the 8-month low.

We have fallen very quickly in the past two weeks. After the panic low on May 6, we have rebounded only to trace out a fresh low. That price action is bearish, no doubt.

We have to point out that the RSI is flashing a very oversold signal. In this case, we will ignore that signal if we see a sustained move below the 0.8578. The measured target of the drop would be 0.7754, there is also support at 0.7702.

Stops were cleared out in EUR/USD in the Asia-Pacific session as the euro plunged to a four-year low of 1.2234. Sentiment quickly began to shift, however, with conditions heavily overbought and the market managed to reverse for a positive close. The change in sentiment generated a bullish hammer reversal pattern on the daily charts.

The euro rebounded to close above key support at 1.2330 so the breakdown to the 1.22s will likely be seen as a false breakout. If we can put in a bottom here (even if only for a few days or weeks), there is considerable upside. We wouldn’t rule out a test of 1.31 but think 1.27 is a more likely short-term target.

We remain on guard against a close below 1.2330 as the trigger for another sustained downleg.

All eyes on the critical support level at 1.2330. That was the low in October 2008 after Lehman Brothers collapse and was the low from the credit crunch. In Asia-Pacific trading we fell as low as 1.2333. A sustained break below that level would be bearish for the euro and would likely ignite further stop loss selling. On the other hand, if sentiment begins to improve, a sizeable bounce is possible.

We think this presents a good opportunity to cover EUR/USD shorts. As the weekly RSI shows, the euro is due for a bounce. We are also at a critical support level that won’t be given up easily. The risks, to us, a skewed badly to the upside.

Another factor that we will watch is the U.S. stock market. It has rallied nearly every Monday since the start of 2010. Futures are pointing to losses, but it’s early and we don’t like to fight a trend.

If we see a further breakdown and close below 1.2330 in EUR/USD we will initiate new short positions but until we see that, we are looking for better levels to sell. Agressive traders might even attempt small longs, with tight stops.

The trend is your friend. We have heard that axiom so many times and we still feel like it can’t be repeated enough when we see a trend like this.

Notice the beautiful, consistent downtrend in this pair. We also have to note that this was the worst performing pair over the past week. It fell 810 pips from top to bottom.

We are now bouncing off the bottom of the channel. Despite the problems in Europe, we see the potential for a bounce here and believe that aggressive traders might want to wade into long positions, with very tight stop losses.

The RSI is not yet extremely oversold but, at 23, it’s close. We’re not sure whether a bounce will come from euro strength or Canadian dollar weakness. We are long-term CAD bulls but the action over the past week concerns us. CAD was the weakest performer on Friday and closed above some key resistance levels. Oil also continues to struggle.

The Australian dollar fell to an 8-month low today against the Canadian dollar, breaching technical support and breaking out of a 3-cent range. This commodity currency cross is one of the least volatile trades in the forex market because eliminates much of the ‘risk’ trade and allows market participants to focus on the relative strengths of Australia and Canada. Last week, Canada posted the largest one-month gain in jobs in history and that has increased speculation that the Bank of Canada will hike interest rates in June. On May 12, Australia will reveal its April jobs report. The market is expecting  22.5K new jobs. The strength of the report will be a big factor in whether the Reserve Bank of Australia raises interest rates. The market, however, is showing that it expects the Bank of Canada to hike rates more than the RBA in the coming 18 months.

As we can see, the pair carved out a rough range between 0.9178 and 0.9475 (297 pips) since the start of the year. Today, the range broke to the downside after higher-than-expected Chinese CPI cooled optimism for the Asia-Pacific region. Technically, the measured target of the range and breakout is 0.8881, which corresponds very well with the 38.2% Fibonacci retracement of the huge March 2009 to Nov. 2009 rally at 0.8867. Other support includes the July 2009 major low of 0.8796 and the Aug. 2009 low of 0.8983.

Short-term momentum indicators show the pair as oversold. The RSI has fallen to 28.70 and we are beyond the lower reaches of the Bollinger bands. That indicates that the market is potentially oversold in extremely short-term durations. It should be noted, however, that momentum indicators usually flash overbought/oversold signals after a range break.

Beward of tonight’s Austrlian employment report.

We worried about the euro in our post yesterday and it appears our worries were well founded. The European session led to a huge short squeeze in the euro, pushing it briefly above our resistance level at 1.3016. The gains were short-lived, however, and the euro has plunged back below 1.28.

We can see the huge reversal on the daily chart. The implications going foward are bearish. The Eurozone rescue efforts won’t be seen as a failure unless we fall below the 1.2521 low from May 5 but at this rate it won’t take long.

Analysts around the world were quick to dismiss the rescue efforts. Some noted how the 750 billion euros will be enough to cover funding needs for Greece, Portugal, Spain and even a portion of Italy’s deficit over the next three years but others noted that the required deficit-cutting and growing public unrest in Germany and Greece are threats.

We won’t argue with the market’s reaction. The European sovereign debt crisis will be over when it’s over. Some stability above 1.2521 will be a good sign but until we see a close above 1.3016, we will remain in the bearish camp.

European leaders unveiled a nearly $1 trillion rescue effort designed to stop the  euro’s fall and stabilize sovereign debt spreads. The move led to a rally in EUR/USD and a big improvement in broad sentiment.

EUR/USD is now in the fibonacci retracement ‘box’ which falls between 50% and 61.8% of the May 3-6 sell-off. The values are 1.2918 to 1.3016. We feel that the euro will have to break above 1.3016 in order to trigger a full retracement to 1.33.

Interpreting fundamental news in a volatile market is difficult. Our initial inclination was that the package was very bullish for the euro. Our long trading history, however, has taught us to very important lessons: 1) don’t fight the trend 2) listen to the charts.

The 10 minute chart looks like this.

We have highlighted the ‘gap’ that opened on the weekend. Early in trading we saw a series of lower lows and the gap looked like it was going to be closed. When the news of the bailout was announced, however, the euro pushed higher. Unfortunately,  EUR/USD was unable to breach the 1.2947 high. This will now act as short-term resistance.

In light of the inability to break above 1.2947, with resistance looming at 1.3016 and a with long-term downtrend in place we have no choice but to be bearish of EUR/USD. The key support in the short-term rests at 1.2809.

This is a high-volatility market and nothing would surprise us. There is definitely money to be made.

The

The market seems to take every small bounce as yet another opportunity to sell the euro. Earlier today we traced out a low of 1.2804 before bouncing a full 100 pips. The euro then started to fade again and eventually fell to 1.2790. Support is thin below 1.28 with 1.25 as a target that many are touting.

One school of thought has shorts being scaled back leading up to the ECB rate decision in about 16 hours’ time. That would lead to a euro bounce. The other school believes the ECB has very little ammunition to fight the falling euro. ECB officials have tried to ‘talk up’ the strength of the Greek bailout for weeks now and the market is now at the point where there really nothing Trichet and Co. could say to stop the tide of euro selling. The focus has shifted to actions they could take and policy moves such as bond buying or interest rate cutting are far fetched. The biggest risk to the euro is that policy makers sound tired, repetitive and helpless. That would unleash another round of euro selling. In the lead-up to the decision, however, we don’t expect a further powerful push to the downside. The risk are likely skewed toward consolidation but in the short-term 1.2790-1.28 will be key.

It’s a scary day in markets today. Stocks are getting beat-up like the credit crunch was still raging and the S&P 500 have given up some important support. Commodities are down big. The Australian dollar is getting crushed despite a rate hike that wasn’t fully expected. And our long gold trade is giving back most of its gains (but it’s still in the money).

Everyone knows the markets are in for a rough ride at some point after the generational rebound from The Great Recession. Is this the big correction? We think it could be, but our conviction is still low.

In the meantime, we look to the charts. Yesterday, we talked about USD/JPY and we have to note that it got as high as 94.99. We warned about the possibility of a false breakout. Now that we’re back to 94.40, we think the chance of a reversal is growing but we reserve judgement until Japan comes back from holiday at the end of the week.

The pair we want to focus on today is EUR/GBP. The euro is getting smashed today. Greek 2-year yields are back up to 14% and European policymakers must be starting to think about hitting the panic button.

Two months ago, the euro was beating up on the GBP on worries about a hung parliament in the UK. Now, it seems like electoral deadlock in Thursday’s election is among the most minor problems in the eurozone and its periphery.

This is an important break below support at 0.8601. We expect a bounce to a re-test of this line and that bounce should be sold. The problems in Europe far outweigh concerns in the UK. Moreover, the Conservatives have gained momentum heading into the election and could pull out a majority (we put the odds at 50-50).

We target 84.50 or 84.00.

The U.S. dollar made strong gains against the yen on Monday but was unable to close above a key resistance line. The pair briefly traded at its highest since August but gave back a portion of its gains to close below of the April high of 94.69.

We remain long CAD/JPY but note that even though CAD was the leader in the forex market today and JPY was the laggard, the pair was also unable to break out.

In any case, the price action was short-term bullish. Friday’s slump in stocks and late-day plunge left us questioning our negative JPY bias. It also set up a bearish spinning top formation on the daily charts. Monday’s trading neutralized that though and painted a conditionally bullish picture.

The key in the day ahead remains the resistance at 94.69 stretching up to 94.78. If we see some stops blown out we will be encouraged. What makes us hesitate, however, is that Japan is on holiday until Thursday because of the Golden Week festivities. Holiday trading is treacherous and prime for false breakouts.

If the market fails to make a clear break above 95 before Thursday’s Asia-Pacific session we will be very cautious. The Golden Week is traditionally a down time for JPY so we are on guard.