Forex Trading Alert originally sent to subscribers on August 14, 2014, 10:58 AM.
Earlier today, the European Union's statistics office said that gross domestic product in the 18-member currency block was flat in the second quarter compared with the first. The euro zone's three largest economies failed to grow, which had a negative impact on the EUR/USD pair. Although fundamental factors pushed the exchange lower, we think that there are some technical factors on the horizon that could support a rebound in the near future. What are they?
In our opinion the following forex trading positions are justified - summary:
EUR/USD
The situation in the medium term hasn’t change much as EUR/USD is still trading slightly above the green support zone. Today, we’ll focus on the daily chart once again.
Although EUR/USD moved little higher earlier today, the situation in the very short term remains unchanged as the exchange rate is still trading in the consolidation range. Therefore, our commentary from Monday is up-to-date:
The first thing that catches the eye on the above chart is a declining wedge created by the red resistance (based on the May and July highs) and green support lines. (…) the upper line of the formation is reinforced by the 38.2% Fibonacci retracement based on the recent declines and the lower border intersects the green support zone. Therefore, even if we see a breakout above the upper line of the consolidation (or a breakdown below the lower border), the space for further moves will be limited by one of these lines. Taking this fact into account, we are convinced that as long as there is no breakout or breakdown above/below one of these areas, another sizable move is not likely to be seen.
Before we take a closer look at the next currency pair, we would like to draw your attention to a potential reverse head and shoulders formation. If this is the case, and the pair is building a right shoulder at the moment, we may see a trend reversal in the near future.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
USD/CAD
The situation in the medium term has deteriorated as USD/CAD reversed and invalidated the breakout above the orange resistance zone. On top of that, the recent candlesticks formed a bearish engulfing pattern,which suggests further deterioration in the coming week (or even weeks). Where will the exchange rate head? We think that the best answer to thisquestion will be our commentary fom Monday.
Back then, we wrote the following:
(…) the pair didn’t break above the last week’s high, which suggests that if the exchange rate extends losses, we may see a double top formation (this bearish pattern will be confirmed, if the pair drops below the bottom of the recent correction at 1.0902). If this is the case, we’ll see further deterioration and a decline to around 1.0820, where the size of the downswing will correspond to the height of the formation. At this point, it’s worth noting that before currency realize this scenario, they will have to push USD/CAD below the 38.2% Fibonacci retracement (around 1.0844) based on the entire June-Aug rally.
(…) There are clearly visible negative divergences between the CCI, Stochastic Oscillator and the exchange rate, while the RSI dropped below the level of 70, generating a sell signal.
As you see on the daily chart, the exchange rate dropped below the bottom of the recent correction at 1.0902 as we expected, which provides us with bearish implication and suggests that the lower values of USD/CAD are just around the corner.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
AUD/USD
The first thing that catches the eyeon the above chart is an invalidation of the breakdown below the long-term green line. This is a strong bullish signal that suggests further improvement. If this is the case, we’ll likely see an increase to at least the lastwek’s high of 0.9373. Nevertheless, we should keep in mind that this scenario will be more likely if the exchange rate closes the week above its major support line.
What can we infer from the very short-term picture?
On Monday, we wrote:
(…) the pair reversed and came back to the major red support line earlier today. If it withstand the selling pressure, we’ll see a rebound from here and an increase to around 0.9327, where the 38.2% Fibonacci retracement based on the recent decline is.
From this perspective, we see that the situation developed in line with the above-mentioned scenario as the exchange rate moved higher, approaching our upside target. Taking into account the current position of the indicators, it seems to us that the pair will extend the rally and we’ll see an increase to the next Fibonacci retracement level, which corresponds with the Aug 7 high of 0.9356.
Very short-term outlook: mixed with bullish bias
Short-term outlook: mixed with bullish bias
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion, no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
On an administrative note, there will be no regular Forex Trading Alert on Friday - we will post the next one on Monday, Aug 18. Thank you for understanding.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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