It’s that time of week to recap some of the recent setups that have come our way as well as a few potential setups that could materialize in the week ahead.
First things first, non-farm payroll.
In case you are just logging in for the first time today, this morning’s NFP figure stunned the market, coming in much higher than expected. The US dollar index is certainly taking advantage of the strong jobs number as it currently sits well above the former 2015 high.
While I don’t trade the news, I do like to see a catalyst such as this push the market out of its comfort zone. It gives us something to work with from a technical standpoint and also offers the potential for follow-through, something that we might not otherwise get.
Let’s kick things off with one pair that has certainly seen its fair share of follow-through in recent weeks…
EURUSD has played out beautifully so far. After spending the better part of seven months consolidating within an ascending channel, the single currency made a significant break of support on October 23rd.
Shortly after the break, the pair found support at the 1.1010 handle. However this level wasn’t built to last as the bears began pushing for the next leg down on October 28th.
Fast forward to today and the pair has not only dropped 350 pips since the break of channel support, but is now sitting below 1.0820. This level can be seen acting as support in both May and July of this year.
A close below this area today would expose the 1.0658 handle going into next week. Of course a retest of the 1.0820 level as new resistance would be necessary in order to secure a favorable risk to reward ratio.
Note: I am still short from 1.1040 and will likely add to the position on a retest of 1.0820.
Summary: Watch for a selling opportunity on a retest of 1.0820 as new resistance. Key support comes in at 1.0658 and 1.0470. Alternatively, a close back above 1.0820 would negate the bearish bias and expose the minor resistance level at 1.0900.
After spending the last several months in a fairly directionless range, GBPUSD appears to be gaining some traction to the downside. Thursday’s dovish comments from the BoE caused the pair to take a massive tumble, dropping an impressive 350 pips in two days.
The pair is currently sitting just below the September/October low at 1.5110. A close below this figure would open up the potential for additional losses next week.
That said, GBPUSD has also traveled more than 400 pips this week and is currently looking a bit overextended. Therefore I would like to at least see some consolidation at current levels before considering an entry next week.
While this week’s move was impressive, there really wasn’t much in the way of tradable price action. As such, I will continue to stand aside until a more favorable opportunity presents itself.
Summary: Watch for bearish price action on a retest of 1.5110 as new resistance. Key support comes in at 1.4980, 1.4740 and 1.4565. Alternatively, a close above 1.5110 would expose the next key resistance level at 1.5345.
Speaking of favorable opportunities, we may just have one next week with NZDUSD. I mentioned the two levels that were containing the pair heading into the recent NFP release.
In that commentary, I noted that traders could watch for a selling opportunity on a close below the trend line that extends off of the July 10th high. Today’s session may just give us the close we need for that opportunity to materialize.
If confirmed, this break would signal that further weakness is likely, giving traders a nice foundation from which to begin looking for sell signals. A retest of the trend line as new resistance next week would be ideal from a risk/reward perspective.
Summary: Watch for a selling opportunity next week on a retest of former trend line support as new resistance. Key support comes in at 0.6455 and 0.6240. Alternatively, a close back above this trend line would negate the bearish bias and expose the key horizontal level at 0.6620.
Another favorable setup that actually materialized this past week was the head and shoulders pattern on NZDJPY. The reversal pattern formed following an impressive 1,000 pip rally off of the August low.
After confirming the price structure on Wednesday, the pair retested the broken neckline as new resistance during the following session. The bears managed to hold their ground and eventually found some help with today’s strong NFP figure.
One thing to keep in mind when trading a yen pair such as this is that it can often take a bit of time to see any meaningful follow-through. Today’s price action is a perfect example as the bears haven’t quite managed to completely tip the scale in their favor.
That said, there is nothing (so far) to make me believe that this reversal won’t play out in the coming days and weeks.
Summary: Opportunity to trade a retest of the broken neckline as new resistance. Key support comes in at 78.75 and 77.50. Alternatively, a close back above the neckline would negate the bearish bias in the short-term and turn our attention higher.
AUDNZD is working on becoming my top mid to long-term pick. While there is no confirmed setup at present, the potential inverse head and shoulders that has been forming since January could offer a huge opportunity for traders in the weeks and months to come.
That said, I have to take a step back and remind everyone that this commentary is no way a prediction of future price action. At this point it’s simply something to keep an eye on as we move into the last two months of the year.
There are two main reasons why I like this potential reversal pattern so much. The first has to do with a 20+ year cycle that I mentioned on Tuesday.
The monthly chart below illustrates this cycle.
Notice that since 1993, AUDNZD has been moving in alternating bull and bear trends, each lasting anywhere from three to five years. It just so happens that the potential reversal pattern you see in the chart below has formed at the four-year mark of the current bear trend.
Does this mean that prices must go up?
Not necessarily. Remember that there are no guarantees in the world of Forex.
However, the combination of clues from both the monthly and weekly chart point to a strong probability of a push higher in the coming weeks and months.
Summary: Watch for a buying opportunity on a close above the neckline near 1.1400. Such a close could open up the potential for a 1,300 pip move higher in 2016. Alternatively, a move below parity would negate the bullish bias.