Hello Forex Traders,
This week’s Forex market opened up with a dramatic landscape: major gap on the majors. All three majors, the EURUSD, GBPUSD and USDJPY, had serious gaps of USD weakness to contend with:
1) GBPUSD 55 pips
2) EURUSD 53 pips
3) USDJPY 78 pips
How should we interpret these gaps? Are they exhaustion gaps? Break out gaps?
We are going to analyze the majors one by one and provide you our current road map for the currency market.
Last week I was explaining that I need the 1.5750 resistance level to break sustainably above this level before even thinking about going long, even though the GBPUSD is moving along very neatly in an uptrend and a well-defined uptrend channel. Very simply put, it is a rule of mine never to go long before a major resistance like that, nor would I ever enter a short before a major support. The Cable eventually did break later last week, but the important part is how it broke through resistance.
FALSE OR TRUE BREAK?
As the traders in our trading room know, we have many methods of identifying whether a break is sustainable or a potential false break. One of them is to measure whether the candle can close above the identified support or resistance. The reason why that is important is because it identifies whether price can remain at its new break out levels, or whether price is rejected back towards old levels.
In order words, is the breakout sustainable with a close above resistance or below support or is the breakout accompanied with a wick, which would increase the probability of a false break out.
In the case, Wednesday’s daily candle closed well above the 1.5750 price level, and it closed very near to the daily high (no wick on top of candle). Translation of this info: lots of Cable strength!
A small inside candle on Thursday had its candle body totally above the previous resistance, indicating another time that the bulls were in control and the bears were running towards the hills and seeking cover from higher grounds. After that, we saw a strong continuation on Friday with a very bullish weekly candle close and even a weekend gap continuation.
LEVELS TO RESPECT
The next major resistance levels and potential turning spots for some downside are:
1) The 786 Fibonacci retracement level at 1.6020
2) The 886 Fibonacci retracement level at 1.6170
3) The weekly trend line (purple)
4) The psychological 1.60 price level
Any of these levels could be strong enough to act as resistance. The same cat and mouse game will be played as with all the other previous Fibs such as the 382, 500, and 618 Fib at 1.5750: will the trend be able to push through the long-term resistance? Price action will tell us. With a weak response to the 786 Fib and a bull flag pattern, then look for one more up move to the 886 Fib. If there is a strong response to the 786 Fib with an impulsive down move and ensuing bear flag, then more downside is probable.
The EURUSD is in a similar situation as the Cable. Also this currency pair is climbing and it is right at resistance. The EURUSD in fact gapped up towards the 786 Fib retracement. Will the 786 Fib be the retracement level, or will the currency move up and retrace to the next Fib which is the 886? Here too we will have to see how price responds to the 786 Fib.
In any case, the space to the upside is currently limited and if the 786 or 886 Fib retracement levels do get respected, then there is plenty of space back to the bottom of the daily wedge. If the Fibs and top get broken, then we should see plenty of upside continuation.
The USDJPY has broken out of a weekly triangle but it has done so with some doubt. Two weekly candles have wicks on top, which is definitely not signaling a strong break out. Will the break out get totally rejected or will the broken wedge still provide support for more upside continuation? One method is to keep an eye out for potential bullish price action candle stick patterns at the Fibs mentioned in the screenshot.
That wraps it up for today! Hope you had a great weekend.
What do you think of the Cable and US Dollar? Do you think the Fib levels will prove to be the starting point of USD strength or do you see price break through those? Let us down below in the comment section!
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