Euro Could Form Secondary Higher Bottom; Reversal Bottoms Still Unconfirmed
The EUR USD traded sharply lower overnight and early in the
session as nervous traders reacted to the news that Spainâ€™s government had takeover a
struggling financial institution. The heavy selling pressure last night was
also a sign that short-traders were still lurking out there with their fingers
on the sell button.
This action triggered fear that sovereign debt problems were
spreading across Europe. Shortly after the U.S.
opening, the Euro began to stabilize after testing a daily chart .618
retracement level at 1.2345. Regaining the 50% level at 1.2407 will put the
Euro in a strong position to rally into the close.
From a technical perspective, todayâ€™s action was not bad.
Following last weekâ€™s daily/weekly reversal bottoms the market was expected to
confirm these patterns with a follow-through rally, but instead the bad news
drove the market back down into a retracement zone. If last weekâ€™s bottom is
good, then a secondary higher bottom should begin forming in this retracement
zone. In other words, stopping between 1.2407 and 1.2345 will be the first
strong indication that buyers are stepping in. The first leg of the bottoming
process is usually short-covering; the second leg is when the buyers step up.
The GBP USD traded a little lower after confirming a new
two-day main bottom at 1.4229. Based on the new range formation, look for the
start of a possible rally to 1.4810 over the near-term. The announcement this
morning of new budget cuts was received positively because it is a sign that
the new government is willing to work swiftly to help shore up the U.K.â€™s
budget deficit and huge debt obligation..
After earlier weakness, the USD JPY strengthened after the U.S.
stock market firmed. Earlier in the session, investors were selling the
Dollar/Yen in anticipation of a flight-to-safety rally. The recovery rally in
stock market has helped ease demand for lower yielding assets.Traders are also a little nervous about
holding long Yen because of the threat of a government intervention.
Stronger gold prices and a recovery in the U.S. equity markets helped to
pressure the USD CAD. On Friday, the Dollar/CAD found solid resistance at an
old top at 1.0738. The new range formation indicates that this currency is
poised to retrace back to 1.0430.
The recent strength in the Dollar/CAD was not related to any
bad economic news out of Canada.
Investors were dumping higher risk assets because of expected lower demand of
Canadian resources. The Canadian banking system and economy are still in pretty
good shape compared to the rest of the world. Speculators were merely
lightening up long positions in anticipation of a slow down in demand for
Canadian resources should the world enter another recession. Watch gold and
crude oil for direction.
The Australian Dollar finished lower but in a position to
confirm Fridayâ€™s closing price reversal bottom with a rally through .8365. A
trade through this price will put the AUD USD on pace to test a 50% level at
.8728. With the trend still down, this type of formation usually leads to a 2
to 3 day rally. This indicates that excessive volatility is likely to hit the
Aussie over the next few days. A failure to trigger a confirmation of the
reversal bottom will be a strong indication that this market is in the hands of
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