Dollar Downside Limited - Bottom Is Forming

· Euro Turns Over
· Japanese Yen May Test 119
· British Pound Slipping Lower
· Swiss Franc 3 Wave Correction
· Canadian Dollar could Test 1.1600
· Australian Dollar Stagnant
· New Zealand Dollar Testing Trendline

EURUSD - We wrote yesterday that “the rally is likely nearing its terminus. Strong resistance lies ahead at a potential resisting trendline drawn off of the 12/5 and 1/2 highs. Fibonacci resistance is at the 61.8% of 1.3370-1.2865 at 1.3177.” Yesterday’s rally reversed right at the trendline and just shy of the aforementioned Fibonacci level. We maintain that this could be a MAJOR top (the end of an A-B-C correction from 1.2865). Only a break below 1.2865 confirms that wave 3 down is underway. A break of 1.2865 would shift focus to 1.2667, which is where the 1.3370-1.2865 decline would equal the decline from 1.3174. 1.3174 needs to hold in order to keep the immediate bearish bias intact. A break above, while not expected, would give scope to a rally to 1.3263 (78.6% of 1.3370-1.2865).

USDJPY - “A decline below exposes the next support level, which is the 38.2% of 114.42-122.21 at 119.24.” The USDJPY decline has stalled at Fibonacci support, tagging 119.17 yesterday. One more low is likely given the RSI extreme in place (240 minute) at 119.17. Rarely does a market turn up (or down for that matter) following a momentum extreme. One more low would create bullish divergence with oscillators and free up the USDJPY for a rally. Still, this pair is nearing at least an interim bottom if not a major one. The 78.6% of 117.97-122.21 at 118.89 may be the level at which the USDJPY ultimately turns higher.

GBPUSD - The GBPUSD also reversed at a trendline, albeit one day earlier than the EURUSD. The wave structure remains unclear in the short term but the longer term wave structure suggests that a major top is in place at 1.9915. In fact, the rally from 1.8090 traced out an ending diagonal. Ending diagonals are often fully retraced. A decline below 1.9260 strongly suggests that a top is in place at 1.9915. A weekly close below the short term trendline on the chart below would bolster the bearish case. Short term resistance is today’s high at 1.9543.

USDCHF - Little has changed regarding the USDCHF. An A-B-C correction from 1.2575 may have ended at 1.2332. Additional support is at the 38.2% of 1.1878-1.2575 at 1.2310. The analysis is the same as the EURUSD (but in the inverse). That is, we are looking for a bottom. The pair is holding right at the 200 day SMA as well. Very short term resistance is at the former support shelf of 1.2376. A break above there exposes the high from yesterday at 1.2412.

USDCAD - Friday’s turn lower likely marks the resumption of the long term downtrend. Long term focus is to below 1.0927. There are (or nearly are) 5 waves down from 1.1879 so now is not the time to get short term bearish. A bounce to Fibonacci support could see the 38.2% at 1.1718 or the 50% at 1.1749 (which is also the 4th wave of one lesser degree). The USDCAD may make one more low prior to a rally as small ending diagonal may be forming from 1.1692. Support is former resistance at the 12/15/2006 high at 1.1591.

[B] AUDUSD - The AUSDUSD rally looks extended. The pair has stalled near the 61.8% of .7941-.7697 at .7847 and RSI has turned down from above 70. The rally from .7697 to .7867 could be the end of a 3 wave correction, although the c wave is a bit longer than the a wave. At least a corrective setback is due. Short term Fibonacci support is at the 38.2% of .7707-.7862 at .7803 and the 61.8% at .7766. A level to watch is the confluence of the 78.6% of .7941-.7697 / trendline drawn off of the 1/3 and 1/23 highs at .7888.

[B] NZDUSD - Kiwi backed off yesterday just before the trendline drawn off of the 1/2 and 1/23 highs. Yesterday’s reverse hammer at the trendline (and 78.6% of .7038-.6789) gives scope to a downside reversal. A break above the trendline negates the reversal scenario and targets the 1/23 high at .7038. A decline below .6896 (former resistance) warrants a bearish stance.

Glossary of Terms
CCI(20) – 20 day Commodity Channel Index
> 0 – bullish
0 > – bearish
> 100 – extremely bullish
-100 > - extremely bearish
RSI(14) – 14 day Relative Strength Index
> 50 – bullish
50 > – bearish
> 70 – overbought
30 > - oversold
MACD ? - MACD slope (MACD – MACD[1])
> 0 – bullish
0 > - bearish
Mom(21) – 21 day Momentum
> 0 – bullish
0 > - bearish
ATR(14) – 14 day Average True Range (volatility)
Medium – 75th percentile* > ATR(14) > 25th percentile*
High - > 75th percentile*
Low – 25th percentile* >
*measured against past 3 months