USDJPY - Possibly a very significant weekly close.

Coming on top of my recent USDJPY comments in some of my recent posts. -  Here is an interesting little observation on the USDJPY. 

Since the Mid 1980s the USDJPY has had 5 major downtrends, as highlighted by the red areas on the top chart below. - During all these declines the weekly candles failed to close above the 95 week simple moving average. - However, in all 4 previous cases, once a weekly close occurred above the 95 week SMA, the weekly candles never closed below the level of this break for at least 17 months and significant rallies occurred, the smallest of these being 13 big figures in 2006. - Well guess what just happened ? - See bottom chart.

Of course, past performance is no indicator of future performance, and 4 previous occasions of a phenomenon is not statistically significant. Also as is always the case,records are there to be broken. - But as a risk/reward bet it may be worth some consideration. 

 

Given how significant this may be, I thought it would be worth looking at the daily action around the previous breakouts, to get an idea of how this looked at the time. - As you can see, on closer inspection the breakouts were rarely straight-forward. - In all four prior cases, you can see there was quite a bit of noise around the 95 week SMA, this occurring before, during, and after the break and typically lasting around a month. [Note, I used the 470 day sma as a proxy of the 95 week sma, this was the closest in terms of matching levels.]

Looking at the current USDJPY chart, there has been very little action close to this level yet (perhaps a week at most). Hence, further significant USDJPY strength may have to wait for some consolidation over the next three weeks or so, possibly with some noise anywhere over the next few weeks in the broad 79.00-83.00 range.  - (See current daily chart below)

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USD INDEX(DXY) has also produced some interesting recent price action: - The weekly chart has produced a near 'Bullish engulfing week', whilst daily price action is very close to breaking out of a Bullish Falling Wedge pattern, which could have significant upside follow through on a clear break. - See charts below. 

Disclosure: I am currently long USDJPY.

Please Note: In additional to occasional technical analysis, my main profession is as a 'Trader Performance, Psychology and Development Coach'. - If you would like to find out more about my work and how it could help you or your business, please email me on sgoldstein@bgtedge.com or check out my website www.mindsetofatrader.com.

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Possible Red-Letter Day on AUDUSD and DXY and USDJPY

Just yesterday I highlighted the possibility of AUDUSD making a Bullish Flag breakout. - Today it did break out the top of this pattern, it also made a new high for this move, but it also may have had a spectacular failure in doing so, as highlighted by poor volume on the breakout and heavy volume on the failure. - Today's price action has also produced a bearish 'Shooting Star' candle. - On its own, not that significant, but given the breakout failure and the high volume, this may turn out to be a significant day for the AUDUSD in relation to the next few weeks. The first and second chart below highlight these points.

Below the AUD charts I have some other charts of interest. The first is today's USD Index, which has not yet closed, but it looks nailed on for a significant 'Bullish Engulfing Day', this is often a strong reversal candle signal. I would also like to point out this 'may' also be forming a 'Bullish Falling Wedge' pattern on the USD Index; if this were to complete, then the odds would be strong for a move back to the highs of the USD Index in coming weeks, and quite possibly higher. With the major constituent for the USD Index being the relationship to the EURO and European currencies, this could be significant for the EURUSD.

The fourth chart shows how today's strong up-move in USDJPY has produced a strong monthly candle. This suggests that today's move is based on USD strength at this stage rather than a risk-off flight. I touched on the possibility of a significant move for USDJPY a couple of weeks ago, that post can be seen here . Today's close near the high of the month is supportive of further upside in coming months and in the big picture seems very bullish.  Finally below this chart is some analysis courtesy of Barclays FX research, which also shows some interesting analysis on the USDJPY.

AUDUSD CME FX FUTURES CHARTS

USD INDEX CHARTS

USDJPY FX SPOT CHARTS 

 

USD Weakness, and watch the AUDUSD v SP500 link.

The USD is suffering a fresh bout of weakness this morning pretty much across the board. The chart below shows the USD index, this shows a short-term Head + Shoulders pattern, which suggests further weakness may lay ahead.

EURUSD FX shows a similar pattern, though inverted, and also this has not yet broken through the potential neckline of the pattern (See chart below). I do however have concerns with the above mentioned Head + Shoulder pattern on the USD Index and the inverted pattern on the EURUSD . My concern is that these H+S patterns are not 'End of trend' patterns, ideally Head + Shoulders patterns work best at the end of a significant trend, however the moves prior to these H+S patterns are sharp corrections rather than trending moves. - This does not mean it is invalid, since the essence of the formation exists, however this leads me to question how reliable this particular signal may be.

























USDJPY FX

The JPY appears to be the strongest currency this morning, the short-term chart below shows the USDJPY has broken out of a 'Descending Triangle' pattern this morning, if this can be maintained then this could see a move to the low 81s.  Note - the strength of the JPY is something which should be watched, as it would still suggest that 'Flight to Safety' fears remains strong, however over recent days stock markets have certaintly not reflected this. - As an observation, the EURUSD posted a very similar pattern in late May (can be seen on second chart below), this proved to be the 'Last Hurrah' of the large 6 month bearish trend in the EURUSD, of course that does not mean we will have the same here, but it is worth remembering nonetheless, in case this breakdown shows signs of stalling.

AUDUSD FX


The AUDUSD has reached a significant level. Which may have big consequences for the Risk-on/Risk-off trade. The first chart I will show you is a comparison of the AUDUSD v SP500 Index. It shows how over the past year every time the AUDUSD has failed following each approach to the 93.70-94.00 key resistance, at the same time the SP500 has also found key resistance. The initial approach in late 2009 saw the SP500 hit a temporary wall of resistance, it eventually overcame this, however the next approach in January, saw a firm correction in the AUDUSD and a sharp correction in the SP500. The subsequent approach of this key level in the AUDUSD occurred in late April 2010, this was very firmly rejected, and this also was the start of the very sharp correction in the SP500. -- Nearly 6 months later, and the AUDUSD is once again approaching this key level, the SP500 has lagged strongly, however as the AUDUSD moves close to this resistance, the SP500 is also approaching the key resistance which I highlighted yesterday at 1130/32 (Click here to see yesterday's post). - The next chart below shows the AUDUSD weekly chart, this time I am highlighting a pattern which has strong Bullish potential, it is a 'Right-Angled Expanding Triangle'. This pattern is in my opinion amongst the more reliable of patterns, and suggests strong bullish potential on a confirmed break over 94.00/10, however until this occurs the risk of failure/rejection remains high.- If it does make the confirmed break over the 94/94.10 area, then perhaps this could also see the SP500 index make a significant break over 1130/32.

AUDJPY FX

Just a quick update on the AUDJPY cross, this failed to hold yesterday's intraday break (See below). This could be a bearish development for this cross, and could also have implications for stocks, since as previously mentioned, this cross has also been well correlated with equity markets.

SP500 and wedge pattern + USD Index

The - 'Falling Wedge' pattern during an uptrend-  has been one of the most reliable trading patterns over the years. A couple of years ago (during one of my more anoraky moments) I decided to look back and see if I could characterise these patterns to see if they possessed certain attributes which could help assess the likelihood of future price action. At the time I was more involved in Fixed Income, and that was the market I used to assess these wedge patterns. My research led to two conclusions: Firstly, that there are basically four different types of falling wedges patterns prevalent within an uptrend. and secondly, that I really should get out more.

With the recent price action on the SP500, I have decided to apply these patterns to a ' look-back' over the past 20 years of SP500 price action. The criteria for the wedge patterns can be seen on the following insert.
(Click on insert to Enlarge)

The following chart is the SP500 weekly Log-Scale 1990 - 2010. I have applied my look-back and labeled each pattern, as per the above categories.  As can be seen on the chart below, most the wedge patterns conformed well to the expected behaviour as per the above insert.  In light of the above, I have labeled the recent Falling Wedge which had developed over H1 2010 as a 'Type 2' wedge pattern. These typically start out looking like Head + Shoulder pattern, then morph into a falling wedge pattern. Once these patterns break over the right shoulder of the 'Failed' Head + Shoulder pattern, they typically move sharply higher. - I say typically, because there are exceptions, however on this chart, two prior 'Type 2' Wedge patterns can be seen to have acted in this fashion. The top of the Right Shoulder of the 'Failed' Head + Shoulder pattern occurs at 1131.  - One final note for those with a more Bearish Bias, and fundamentally I do still possess a Bearish Bias. Type 2 wedges tend to occur late in the trend, this can be seen in both previous Type 2 wedges on this chart.

(Click on chart to enlarge).

(This following paragraph is an addition to the original post.)
Just to add a layer of confusion (The market does not like to make it too easy). Though I have labeled the recent wedge as a 'Type 2', it is not out the question that it is a 'Type 3' or even part of a larger non-wedge pattern.  - This possibility has to be given consideration. - In particular the arguments for an alternative labeling are, Type 3s tend to be larger,(This has been a large wedge), Type 3s tend to be more complex, and most significantly Type 3s tend to breakout to the upside before failing. Currently I consider this a Type 2, but the possibility of this being a Type 3 (which would potentially be much more bearish,) remains a possibility.-- One final point, the suggested price behaviour in the wake of a patterns is a tendency not a rule. This is important to remember, since even the best set-up is no guarantee that the market will move in the suggested direction.


In relation to the recent large 'Falling Wedge', the chart below shows this large Falling Wedge currently in conflict with a smaller 'potentially bearish' 'Rising Wedge' pattern. Though if the S+P can break through the top of this smaller rising wedge pattern, it could morph into a more regular uptrend channel. - On the chart I have highlighted a Blue horizontal line at the significant 1131 area, which I mentioned above as being the top of the right shoulder of the 'Failed' Head + Shoulder pattern.  However, this level is also significant since it marks the level where either a series of lower highs (Bearish) from late April and higher lows (Bullish) from early July meet. Only one of these series can continue and a break above or failure at 1131 line will decide which series dominates. 

One final note. The USD index dropped sharply through a series of levels which I had identified on my Friday's posting as offering the potential to reverse sharp losses in this index. Often how a market performs at certain levels can give a strong clue as to where the underlying power lays. This failure to even pause for breath does not bode well for the USD. I will watch how this develops, but my feeling now is that we will see  further USD selling short-term, with eventual corrections now likely to be dips to be bought.

EURGBP , EUROSTOXX, SP500 .

A couple of weeks ago I did an analysis of EURGBP, (that can be viewed by clicking here) . I concluded that EURGBP was probably heading lower medium term, though short-term there was a possibility of a deeper correction higher, but that the correction could end anywhere in the 0.8400 - 0.8800 zone. -  Since then it has corrected lower (Currently .8270), I now believe there is a strong possibility that the correction higher and re-test of the breakout of the large 2 year reversal triangle may be complete. (The chart below shows this).

The next chart shows the action since the early year breakout in closer detail. The re-test move through May to July appears to have unfolded as an 'Inverse Head + Shoulder' pattern. However the move over the past couple of weeks, suggests this is a failed Head + Shoulder pattern, with today's move below the low of the Right Shoulder strongly favouring a move lower if it can be sustained.  - In addition the pattern over the past month has also unfolded as a Head & Shoulder top pattern, which has broken down today. --The conjunction of these two patterns, the 'Inverse H+S', and the 'H+S top', could inject some dynamism into this move lower.  (See chart below).

Looking at equities now. Last Thursday and Friday morning's move lower appears to have been completely retraced, as I write (Pre-US market open). The first chart below is the Eurostoxx 50 (current level 2790), last week I commented that a breakout of its Symmetrical Triangle pattern would favour a move to the early year highs (that chart can be seen here). The breakout occurred, though I probably should have given more credence to the resistance from the May and June highs and the 200 day sma, which coincided at around 2793/2800. However, the move at the end of last week re-tested the Triangle breakout, and the stoxx50 is now again pushing up to critical resistance at 2800. This is the key pivot, and a break and close through here could be very bullish. (See chart below).

Moving on to the S&P, last week's move appears to have been a re-test of the Bullish falling wedge. The low was almost exactly at the same level that the index broke up through the falling wedge upper line (See chart below). Assuming last Friday's low is not broken, I feel the S+P500 should continue moving higher for now, with a re-test of the June high at 1130 a good possibility this week. A break above there, should see further gains, although how dynamically this possible move unfolds is likely to be the clue as to whether the S+P sees significant gains back to at least the April highs. The other alternatives currently under consideration, and which remain possible are:
a) A stumbling move back to the mid to upper 1100s, before another relapse:
b) Prolonged sideways actions around recent levels, with a resolution being a breakout of any extended sideways range.
c) Another failure below 1130, and a break through last weeks lows, which favours a re-test of July's 1010 low.

One final point. My current favoured view of further S+P gains, does not appear to sit comfortably with the USD index analysis I posted on Friday which suggests a possible reversal of the USD index lies ahead. That is a circle which may need to be squared. However, a look back at recent history suggests it may not be such an unrealistic possibility. November 2009 through to April this year, the USD Index post gains of about 10% whilst the S+P posted a near 20% rise. - Something to watch....

USD Index - Into the Retracement Zone

The USD Index has corrected sharply lower since it topped out in early June, posting 8 consecutive weekly lower closes adding up to just over an 8% decline in that time. Whilst on the face of it, there seems little love for the USD right now, there are some signs that suggest traders should be on watch for a possible reversal.

Firstly the Head and Shoulder pattern formed through May and June has reached its target. (See chart below).

Secondly the USD index has moved into a Fibonacci Cluster Zone. This is an area of four Fibonacci retracements from four different significant low points to the June 2010 high. (See chart below)

The next chart shows shows how the USD index has moved into a price area that acted as congestion on the way up during February through April this year. This congestion band covers a wide price range, however given the Fibonacci cluster mentioned above, it may not penetrate much further into this zone.  Also notice how there are some early signs that momentum maybe turning up as price moves lower, suggesting this may be forming 'Bullish Divergence. (Click on chart to enlarge).

The next chart shows the USD index at the 174 day simple moving average line. The 174 day sma line has acted as support to large downward corrections of each of the previous strong moves higher since 2004 (Highlighted by the Green arrows on chart). On each occasion the price rejected the 174 day sma, the USD index made strong subsequent advances. [ I have no idea why this particular sma should be significant, other than the fact that 2/3rds of a full trading year is equal to around 174 days.]

One further point; the Large Multi-Year Inverse Head and Shoulder pattern on the USD Index remains a possibility (See chart below) despite the recent setback. However, I also want to draw attention to the major downward trending line (Red line on chart below), which has acted as pivotal resistance on a number of occasions over the past 40 years. This line was always unlikely to yield on a first attempt, but on the two occasions it did eventually yield, the index had initially corrected in the region of 7 - 7.5% before pushing up towards this line again. - The current correction is around 8%, which just keeps it in the ballpark. -- However to play 'devil's advocate', any further correction much below current levels should reduce the chances of a break up through this resistance line and would also suggest the Major Inverse Head and Shoulders pattern may fail.  I would also like to point out that today's monthly close has confirmed a strong Bearish Monthly Candle pattern known as an 'Evening Star Pattern' (See lower chart). Note: the index also produced one of these patterns in late 2008, but that pattern failed to follow through.

(Click on Chart to Enlarge)

It is my Humble opinion that the current level on the USD index may prove to be a bit of a battle ground. I would not be surprised to see a reversal from these levels, at least in the short-term, with its magnitude determining whether it evolves into something much larger. - Should on the other hand USD index continue to decline and break much lower than the current level, it is likely that it could portend further weakness, with this area becoming the first support area of a bigger downtrend.