Dollar Rally; Nothing More than a Correction

The EURUSD has sold off from the 1.6039 top but dollar bulls (EURUSD bears) should refrain from getting excited because the decline is corrective (3 waves).

The EURUSD has sold off a bit from the 1.6039 top but dollar bulls (EURUSD bears) should refrain from getting excited because the decline is corrective (3 waves). The weight of evidence continues to favor bulls. We wrote a few days ago that “this is a major breakout and the potential for extension does exist. Short term traders would be served well be lightening up on longs since this is just the second test of 1.60. However, keep the bigger picture in mind. The initial objective is not until 1.6325.” Bulls should take advantage of this setback and add to longs. Risk remains 1.5611.

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STRATEGY: Bullish, against 1.5611 (add to longs), targets 1.6325 and above

The USDJPY decline from 107.75 could be the beginning of a 3rd wave within the decline from 108.57. Bigger picture, the advance from 95.72 is in 3 waves (A-B-C). Wave C is nearly 61.8% of wave A, a common relationship. The pair has broken the support line shown above and held below the 200 day SMA. Look for resistance as high as 106.75/107.00; the former trendline and a congestion zone.

Visit our recently updated Yen Currency Room for specific resources geared towards this currency.

STRATEGY: Bearish, against 107.75, targets 101.97 and below

Wave C of a triangle may be complete at 2.0156 and wave D could be underway now. However, we favor the count that treats the advance from 1.9364 as wave C of a flat, which will not end until above 2.04. The red line on this chart is the 200 day SMA, which the GBPUSD is holding above. Keep risk at 1.9810 and look for support in the 1.9884-1.9925 zone.

Visit our recently updated British Pound Currency Room for specific resources geared towards this currency.

STRATEGY: Bullish, against 1.9810, target TBD

The short term picture remains clouded. When in doubt, focus on facts. The facts are that the rally from .9647 is in 3 waves and that since early May the USDCHF has made a series of lower highs. This evidence is bearish. As long as price is below the most recent high (1.0352), a bearish bias is warranted. 1.0250 may provide resistance.

Wave E is still underway but is nearing an end. E waves (as we’ve written here often) are usually sharp and the decline has accelerated. In fact, do not be surprised to see a test of the lower triangle line near .99 before the USDCAD turns up. We’ll look to identify the bottom next week.

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Recent commentary was that “the pair is testing a parallel channel line (on the daily). Also, rapid rallies such as the one that we have just witnessed are prone to quick reversals. While we do expect a test of 1.00 at some point, we think it wise to exit at the confluence of this fibo extension (.9815) / long time parallel channel line.” The AUDUSD setback has been shallow so far. A correction could be complete at .9728 but the decline has failed to reach even the 38.2% of the most recent rally. As such, we are staying out for now.

We wrote this week that “the next trade for NZDUSD will be a short against .7921. We’ll wait for now and see how action around this gap plays out.” It looks as though a push through .7761 is required in order to complete wave C from .7483. We’ll look to sell that rally.

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