Hello Forex Traders!
Today’s article will be evaluating the recent continuation of the USD strength at the end of last week.
The USD continued its upward march and none of the currencies, not the EUR, GBP, JPY, AUD, nor CHF have been able to stop it.
Currently all of these currency pairs are at crucial talking spots:
1) EURUSD and GBPUSD are massive weekly bottoms and trend lines
2) The AUDUSD is approaching the 0.9 levels
3) The USDJPY is close to the bigger 103.50ish top
4) The USDCHF is approaching the top as well
In all of the currencies, the question is:
Will the USD break the resistance or do we see a bounce, retrace, or bigger reversal? What is your answer? Please comment down below! The main focus of this article however will be on the EURUSD and GBPUSD.
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Weekly bear candles
The EURUSD made a great fall in recent weeks. Each of the 3 weekly candles has a good size, bearish close, and is very near the low. Last week was no exception and the EURUSD fell from a high of 1,3075 to a low of 1,28. The candles are indicating a downtrend on lower time frames and there is no doubt that the bears are in control.
However, from a bigger perspective it is obvious that the EURUSD is back at potential support levels. There lots of key and strong levels that could offer potential support to this currency pair:
1) 1,28 – last week’s candle low and current bottom
2) 1,2795 – bottom of mid May (before the EURUSD rallied 1,3410)
3) 1,2740 – bottom of end March
4) 1,2660 – bottom of mid November 2012
All of these levels are tough and not easy to crack. I am not saying that the USD cannot break them, but I do want to warn for these levels and personally am waiting to see if the EURUSD breaks or bounces.
Trading the break varies in my opinion on which time frames you usually trade.
On lower time frames, such as the 1 hour chart, the safest trade is to wait for the following steps to be completed:
a) Let the EURUSD to break one, some or eventually all of these support levels
b) let the currency make a hook / pull back and wait for the continuation to the downside
c) That way the support level has been broken and a pullback and continuation ensure that the currency is moving down again and enough risk to reward and space is created to the next support level
From a day chart perspective, a break of the lower support level at 1,2660 is needed as the break of other higher support levels (in between 1,2660 and 1,28) would not create sufficient space towards the next support level. Taking a trade at the bottom of the wedge would not make any sense and have no logic. A break of the 1,2660 support would signal that the momentum is strong enough to break the bullish support and drive this currency to the next support level at 1,24 and 1,2040.
If we do break, the a trending mode is in effect, and you want to check out this article on how to build strategies that are geared towards different environments here. Here is an example of an actual strategy.
Just because the currency has tons of downward momentum does not mean that a break of the support levels will indeed materialize. A bounce off the trend line / support / bottom of the wedge is indeed possible. The EURUSD is definitely at a talking spot.
A bounce would be tricky trade to catch, and always very risk as the momentum is clearly bearish. Trading against the momentum is always riskier. But the reward to risk could be decent if the EURUSD were indeed to make it back to the top of the wedge at around 1,33-1,34.
Here too monitoring the lower charts (1 and 4 hour charts) and waiting for a break of the last resistance could indicate a potential bounce. Be careful of last week’s high at around 1,3080, as well as last week’s low at 1,2805.
Please write down below if you are expecting a bounce or break? And how will you trade it? OR will you skip the currency and look at other pairs? Same holds true for the Cable here underneath, don’t forget t drop a note with your thoughts 🙂
The Cable is in a similar spot as the EURUSD. The Forex market is showing roughly the same structures on other currencies as the USDJPY, USDCHF, and AUDUSD. Although there are important differences to note between the Aussie and the Euro and Pound: above all because of the recent Aussie weakness.
The Cable is similar to the EURUSD because it too is in a bounce or break situation. The Cable is back at the 1,4830 low and bottom so it too can either break that bottom and go, or make a small or big pullback, or reverse.
The main difference is that the EURUSD is still stuck in a wedge, whereas the Cable has broken the massive weekly wedge. This wedge started back in January 2009 and was broken in mid February this year when the massive GBP weakness saw the currency weaken 1,500 pips in 10 weeks.
This break of the weekly wedge could spell massive downside to come. Once the 1,4830 major bottom gets broken and is out of the way, the currency pair has space to fall to 1,42ish and 1,35ish levels before encountering major support levels on the weekly chart.
Break of wedge caution
In my articles so far, I have been cautious in assuming that the downside momentum is back in play. The reason for my caution was the fact that the summer months (for the northern hemisphere) could decrease volatility and create an extensive wedge formation. Yes the correction could have been completed, as the minimum 3 wave correction has taken place over the last 3 months, but a bigger correction with 3 waves in wave 3 was also a realistic scenario.
Odds are shifting
Currently, however, the downside fall scenario has a high probability of materializing because of the following points:
a) the correction made a hook back to the broken lower wedge trend line and the 618 Fibonacci retracement
b) Moreover, the Cable has been moving down in rapid speed ever since
In need of break
However, before I assuming that the massive downfall option is indeed in play, I would like to see a break of the bigger bottom at 1,4830 as a conformation. When the bottom breaks, the chance is very high that the Cable has nothing to stop it from falling. But until that moment, there is always a chance that the bottom can provide a support area for the Cable re bound.
Until that moment, the weekly high and low are key for this week’s price action.
Alright, thanks so much for reading and for sharing this article. Hope you all had a great weekend! My weekend was great, as I made a 3 day camping trip in the forest and mountains. Couldn’t be better!
Thanks again and see you tomorrow!
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