In our opinion, the following forex trading positions are justified - summary:
EUR/USD
We wrote these words yesterday:
(...) the pair extended losses and reached our first downside target [the green horizontal support line based on the mid-September peak]. The sell signal generated by the Stochastic Oscillator remains on the cards, giving support to the bears.
Nevertheless, we think that as long as there is no daily close below the above-mentioned line, a reversal from here and a test of the 50% Fibonacci retracement or even the recent high can't be ruled out.
The situation developed in tune with the above, and EUR/USD reversed and rebounded during recent session. Thanks to this move, the pair came back above the 50% Fibonacci retracement, but the bulls didn't manage to go higher. Such a show of weakness triggered a pullback, but just as we wrote earlier, as long as the green horizontal line remains on the cards, the way to the south may not be open.
Additionally, even if the exchange rate moves lower from current levels, the bears will have to overcome two supports: the lower border of the potential purple trend channel, which in the following days will intersect the previously-broken orange area that serves as support now.
Connecting the dots, we will carefully observe the actions of both sides of the market in the mentioned areas, waiting for more clear clues about future moves.
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. However, we will carefully observe the actions of both, bulls and bears, in the areas discussed today, waiting for more clear clues as to the direction of the next bigger move.
USD/JPY
The overall situation in USD/JPY hasn't changed much as the pair is still trading inside the blue consolidation. Therefore, our Tuesday's commentary is up-to-date also today:
(...) USD/JPY moved to the orange resistance area, which was strong enough to stop the bulls several times in the past (especially in June and July). As you see, the resistance zone is also supported by the 61.8% Fibonacci retracement, which is slightly above it.
Therefore, it is our opinion that as long as they remain on the cards, the way to higher levels is blocked and reversal in the very near future should not surprise us - especially when we factor in the current position of the daily indicators: they both rose to their overbought areas and the Stochastic Oscillator even generated a sell signal.
On top of that, the pair started consolidation, which suggests that the bulls could have lost their strength and their rivals may take over in the very near future.
What about opening positions?
If the bulls break above the nearest resistances (which looks quite doubtful at the moment) we'll consider going long. On the other hand, if the bears push the pair below the lower border of the formation, we'll likely open short positions.
We will keep an eye on the market and let you know when signs strong enough to justify opening positions emerge.
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
USD/CAD
The first thing catching our eyes on Tuesday's USD/CAD chart, was the invalidation of the earlier breakdown below the lower border of the short-term trend channel. Additionally, the exchange rate came back above the green horizontal line based on the late-July low that day, which gave the bulls another reason to act.
While these are positive developments for the bulls, and the daily indicators show oversold readings, we decided to focus on the buyers' behavior around the mentioned green line instead of opening positions based on unconfirmed signals.
Was that a good decision? Let's take a closer look at the chart below to find out.
While the buyers overcame two previously-broken lines, they didn't manage to close recently above the green line, which caused a pullback on Tuesday.
On the following day, the bulls tried to go north once again, but they failed for the second time in a row, and their weakness encouraged the bears to act.
As a result, USD/CAD slipped below the declining red trend channel, invalidating the prior positive developments. Earlier today, we noticed one more attempt to move higher, but the bulls disappointed just as previously, and the pair remains trading below the lower border of the formation.
What does it mean for the exchange rate?
If the buyers do not manage to come back into the channel later in the day, we should treat today's upswing as nothing more than verification of yesterday's breakdown. If the situation develops in line with the above, we'll likely see further deterioration and a test of the green support area created by the July lows in the very near future.
Finishing today's USD/CAD commentary, we would like to add that the CCI and the Stochastic Oscillator are very close to generating their buy signals, increasing the probability of reversal in the coming day(s).
Should we see reliable signs of the bulls' strength, we'll consider opening long positions.
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
