On Friday, the Commerce Department reported that U.S. gross domestic product expanded at an annual rate of 4.6% in the second quarter, while GDP was initially reported to have increased by 4.2%. These positive numbers supported the greenback, which hit a fresh six year high against the yen. With this move, USD/JPY reached an important resistance. Will it be strong enough to encourage forex trader to push the sell button?

In our opinion the following forex trading positions are justified - summary:

• EUR/USD: long (stop-loss order: 1.2568; initial price target: 1.3188)
• GBP/USD: none
• USD/JPY: short (stop-loss order: 110.23; initial price target: 105.20)
• USD/CAD: none
• USD/CHF: none
• AUD/USD: none

EUR/USD

In our last Forex Trading Alert we wrote that the space for further declines seemed limited as the next support level created by the Nov 2012 low of 1.2661 was quite close. As you see on the above charts, EUR/USD extended declines and reached this downside target earlier today. In our opinion, this support level will encourage forex traders to push the buy button and we’ll see a rebound from here. If this is the case, the pair will increase to at least 1.2900, where the Sep 23 high is. Please not that this scenario is currently reinforced by the position of the indicators (they are not only oversold, but there are clearly visible positive divergences between them and the exchange rate), which suggests that a bigger upward move is just around the corner.

Very short-term outlook: bullish
Short-term outlook:mixed with bullish bias
MT outlook: mixed
LT outlook: bearish

Trading position (short-term; our opinion): Long positions with a stop-loss order at 1.2568 are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

USD/JPY

Looking at the above chart, we see that USD/JPY broke above the recent high and the upper line of the consolidation range. But is this move as bullish as it seems at the first sight? Not really. Firstly, although USD/JPY hit a fresh multi-month high, the pair reversed and invalidated earlier breakout (at the moment, this is not a strong bearish signal as the session day is not over, however, if the pair extends losses, we may see an invalidation of the breakout also in terms of daily closing prices, which will likely trigger further deterioration). Secondly, there are clearly visible negative divergences between all indicators and the exchange rate, which suggests that a pause or correcion is just around the corner. Thirdly, and most importantly, USD/JPY reached a very important resistance level (marked on the weekly chart). Let’s take a closer look.

Quoting our Forex Trading Alert posted on Sep 25:

(…) we should keep in mind that if we don’t see a bigger or at least similar correction to the one that we saw at the beginning of August, another move higher can’t be ruled out. In this case, the next upside target would be around 109.62, where the 100% Fibonacci price projection (based on the Oct and Feb lows and Dec high) is.

From this perspective, we see that the pair reached our upside target, hitting an intraday high of 109.73. Taking into account the importance of this resistance level and combining it with the position of the indicators (similarly to what we saw on the daily chart, they are not only overbought, but there are also negative divergences between them and the exchange rate), we think that the buying pressure will wane, which will encourage currency bears to push the sell button. If we see such price action, and the pair invalidates today’s breakout above the Friday’s high, the initial downside target will be around 108.24, where the bottom of the previous pullback is. In our opinion, the correction will accelerate, if the daily and (even more importantly) weekly indicators generate sell signals.

Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: bearish

Trading position (short-term; our opinion): Short positions with a stop-loss order at 110.23 are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

USD/CAD

The daily chart clearly shows that the situation in the very short-term has improved significantly on Friday as USD/CAD moved higher and broke above the strong resistance zone created by the 76.4% and 78.6% Fibonacci retracement levels, the 161.8% Fibonacci extension and the key resistance green line. This bullish signal triggered further improvement and the pair hit a fresh multi-month high earlier today. Despite this improvement, the exchange rate gave up some gains and approached the previously-broken levels. Will we see further deterioration? In our opinion, the best answer to this question will be the weekly chart.

From this perspective, we see that USD/CAD reached its key resistance line – the upper border of the rising trend channel. Although the pair broke above the Fibonacci retrecement levels on Friday, this major resistance succesfully stoppedfurther improvement and the pair reversed. Taking this fact into account, and combining it with the very short-term picture (which shows that the pair is close to invalidate the breakout above the green support/resistance line and there are negative divergences between the CCI, Stochastic Oscillator and the exchange rate), it seems to us that even if USD/CAD moves little higher from here, the space for further growth is limited and the next bigger move will be to the downside. If this is the case, the initial downside target will be around 1.1097, where the mid-Sep high is.

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: mixed with bearish bias
LT outlook: bearish

Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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