Forex: Weekly Top Reversals & Momentum Breakdown
Currency trading in the week ended January 16, 2004 featured widespread weakness against the U.S. dollar. In addition to that, the weekly momentum deteriorated. Above weekly charts show trend development in the past year for 5 prominent currencies as well as the U.S. dollar index. Weekly stochastic indicator readings (14-period) also provide a momentum perspective.
All six chart stochastic readings turned from extreme levels, albeit only in the case of the Canadian dollar, did the stochastic indicator turn confirm a divergence (bearish).
Price action established top reversal ranges in the EuroFX, yen, Swiss, and sterling while the dollar index scored a bottom reversal. The weekly ranges in the EuroFX, Swiss, and sterling were as large as, or larger than, any range in the past year. From that behavior we infer that the markets reached levels that have elicited aggressive selling pressure that is typical of some sort of turn rather than of a countertrend dip. The stochastic indicator turns signify momentum-based price vulnerability.
While we are long-term bullish on select major currencies relative to the U.S. dollar, we have been anticipating a trade weighted dollar index low in IVQ 2003 or IQ 2004 (October 7, 2003 report that predates this publication). The past week's activity may be the start of an interim bottoming action. Admittedly, the powerful downward dollar momentum seen during November-January suggests that any dollar correction may be more shallow and short-lived than we would have previously thought.
Wave structure since early September, particularly noticeable in the EuroFX and Swiss(annotated in those as well as sterling and the $ index), suggests that those markets have probably completed 3 swings. If that is so, then one of two near-term price scenarios is probable: either the markets will establish a fourth-swing consolidation/correction that will be followed by another move into new high ground (low ground for the $ index) or they have reached the end of a 3-swing leg that is part of a larger corrective structure.
Our bias is that the former scenario will play out; that there will be a relatively shallow, generally sideways consolidation that forms a #4-swing triangle which will support trend continuation. However, because of several factors, two of them being the past week's Swiss reversal at the upper end of a long-term resistance zone and the yen within what we think is a critical upside area between approximately $.9380 and $.9600 (last week's high was $.9475), we want to guard against being overly confident about relatively quick trend resumption.
Trading in the past week was at least a cautionary shot across the bows as regards a more two-sided trading environment in the major currencies. Trading in the next 2 weeks should give us a better idea as to prevailing trend strength. Underlying levels that we would watch are EuroFX $1.21, sterling $1.75, Swiss $.7750. Values below those levels would suggest that markets are weaker than we currently think.
January 22, 2004
Copyright 2004 Eidetic Research
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any commodity, futures contract, or option contract. Although the statements of facts in this report have been obtained from and are based upon sources that are believed to be reliable, we do not guarantee their accuracy and any such information may be incomplete or condensed. We do not assume responsibility for typographical or clerical errors in this report. All opinions included in this report are as of the date of this report and are subject to change without notice.
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