Extreme volatility warns of a turn in the US dollar pairs. In particular, the AUDUSD is showing signs of forming a bottom.
Momentum extremes almost always occur during 3rd waves. The EURUSD RSI extreme occurred in mid August, making it likely that the drop from 1.4908 is wave 5 of the drop from 1.6038. A rally through 1.4428 would be the first sign that a larger correction is underway.
Bigger picture, the advance from 95.72 is in 3 waves (corrective). Friday, the USDJPY broke below the trendline that had contained price since the March low at 95.72. The gap open this week leaves the pair above the line now but 109.17 remains the line in the sand for bears. The 200 day SMA is warning of a longer term trend change higher though as the slope has flattened out.
Various sentiment measures are extreme and suggest that a turn is imminent. “COT positioning is the most extreme in its history by some measures (net speculative shorts and net commercial longs).” 13 day RSI finished at its lowest level since the 1970s on Friday. On the 240 minute chart, divergence with RSI warns of a turn soon as does the structure of the decline, which is in 5 waves.
The USDCHF advance from 96.47 has reached (and exceeded) the 50% retracement of the decline from 1.2569. The 4th wave of one less degree stretches to 1.1594, which is just above the 61.8% at 1.1453. If the USDCHF is going to roll over, this is the area that it should do so.
The outside day last week along with RSI divergence suggests with a high probability that a top is in place. “The high of 1.0775 was just pips away from an important Fibonacci confluence at 1.0791/98 (61.8% ext. of the .9055-1.0378 advance) and 61.8% retrace of the decline from 1.1875 to .9055. A return to the center of the triangle near parity is probably underway now (at minimum).”
The AUDUSD has held up this morning (so far at least) but a 5 wave rally is evident from Friday’s low. 5 waves up make it likely that at least a temporary low is in place and that a correction of the decline from mid July is underway.
5 waves down from .7921 appear to be underway. As such, a countertrend move back to the .7200 area or higher is expected.
Jamie Saettele writes Forex Technicals: The Day Ahead, Monday-Thursday (published at 6 pm EST), Daily Technicals every weekday morning (9 am EST), COT analysis (published Monday mornings), and analysis of currency crosses throughout the week. He is also the author of Sentiment in the Forex Market.
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