US dollar building a more positive outlook
We have been following the US dollar quite closely in recent weeks as the currency builds a more positive outlook.
USD/JPY has seen a good recovery in the last two months to test important two-year trendline resistance at 114.35/45. This is now the main challenge for bulls. We should struggle here in severely overbought conditions.
As I write today we are backing away to first support at 113.75/80 but this is holding so far. Further losses would target 113.40/35, perhaps as far as 112.95, before a buying opportunity at 112.80/70. Bulls will need to see a weekly close above 114.50 to maintain control into next week.
We have been following the development of the bullish inverse head-and-shoulders in the US Dollar Index. In the daily chart below you can see how we broke above the neckline for a buy signal confirmation a week ago but the rally has stalled. Bulls need not worry yet. It is not unusual to re-test the neckline before the rally develops, or hover just above it as we have been for five days now, especially as we battle overbought conditions.
Indeed there is no reason we cannot continue sideways for an extended period. This would allow the overbought conditions to ease before we head towards the first target of 95.90/96.00. There is then some resistance at 96.50/96.70.
The pattern will only look like it has failed if we start to hold below 93.80. So the downside risk is very low on a long trade compared to the profit potential of up to 300 pips.
The euro makes up the majority of the US Dollar Index so it is no surprise to see a near mirror image below. Today EUR/USD topped at 1.1671 as I write, so we have clearly re-tested the neckline as is normal for this pattern.
So far the pattern is developing in a textbook fashion. Obviously, however, bears will need to hold the price below 1.1700 to remain in full control. This would eventually trigger moves towards 1.1440/20 and the ultimate measured target of the 200-day moving average at 1.1280/60.
Again a short trade with stops above 1.1750 is low risk with a profit potential of up to 400 pips.
NZD/USD held the 2017 low at 6820/16 perfectly in oversold conditions when re-tested last week. We are seeing a slow recovery and gains are likely to be limited in the three-month bear trend after we broke the important two-year upward-sloping trendline. See the weekly chart below.
The outlook remains negative despite oversold conditions. If the pair manages to bounce as far as short-term resistance and the longer-term trendline at 6960/65, this will likely be the high for the recovery.
USD/CAD trades sideways, unable to beat the 1.2916 high with a small-but-negative double-top in severely overbought conditions, at important resistance. Risks are to the downside therefore. Bulls need a break above the red 200-day moving average at 1.3000/05 to ignore the overbought conditions and remain in full control.
We can then go for the 61.8% Fibonacci target of 1.3130. Perhaps we can even reach as far as the 500-day moving average at 1.3160/70.
Watch the low for this week so far at 1.2809. A break below 1.2800 risks a slide to 1.2780/75 but look for a buying opportunity at 1.2720/10. Once overbought conditions have eased we are likely to see the two-month bull trend recovery resume.
Technical Analyst & Trader
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