Online Forex Trading with Chart Patterns

The U.S. Dollar’s bounce from 74.48 has been holding since the 22nd. Seven days later we’re seeing some weakness in this rally.

While there still appears to be support in the move, the ceiling has shown itself to be at between75.58 and 75.72. The sellers have camped out here and this will be the next hurdle for the long climb up for the dollar. Not that we’re assuming this is going to happen now…

Stepping back from the rally that’s most evident on the intraday charts and focusing on the daily chart, it’s clear that this move has merely established a bottom and not nearly come close to anything more than a bounce within the context of an overall downtrend.

I’m focusing in mainly trending patterns as the dollar sorts out what it wants to do next with trend following in mind.

That’s not to say that there are not some differences in this bottom. Afterall, we’ve seen bottoms before most notable at 80.00.

This low — which could be a bottom — has a cast of characters that makes it a slightly more interesting scenario.  Namely the EUR/USD and USD/CAD.

The Fed is getting increasingly less dovish. As far as the dollar’s downtrend, that’s a start.

So in playing with the most common-sense approach to this movement in the dollar, this correction, it would be best to find trend following plays as the dollar is not even remotely close to a reversal until it reaches the 76.50 level.

And with each trading session, the level at which the dollar would make the shift from correction to reversal seems to be tightening.  For that reason, many traders are looking to shorter time frames to find opportunities in a dollar that is heading lower but not with the same conviction and market sentiment.  Can a market be too bearish to be shorted?  A lot of traders think so.

Let’s take a look at some 60 minute set ups for today.

Maybe it’s Tryptophan, Turkey, and Thanksgiving but the markets are already acting like they’ve feasted on the big meal…

Then again it could be the range-bound dollar, lack of economic data today, and a weak Dow that’s got traders sitting on the sidelines.

The U.S. Dollar continues to find resistance at the 76.00 psychological level and prices are retreating quickly from any pierces through this key level.  The dollar has made a short term bottom but this market is far from a significant reversal or even uptrend for that matter and that’s what trader must keep in mind if expecting the bounce to follow through.

The dollar’s intraday chart are beginning to transition to sideways cycles as the holiday week will certainly be a week of less participation and lower volume.

The Dow Jones continues to trade lower this morning as the 13,000 support level looks close to being tested. 

The USD/JPY is strengthening with the Dow down almost -170 points.

The USD/JPY is testing the 110.00 level - and this must be particularly disheartening to the carry trades as the 109.00 level was where the bounce began.  The current trend of the Dow suggests that there is likely to be strength only if buyers support 13,000 for a bounce and continuation up through the 13,250 level.

This weak Dow will continued to be watched closely by the carry trades as the current action is looking a lot like the USD/JPYsell off from early Summer.

The Dow is trading within a falling wedge pattern, keep an eye on the downtrend line resistance as this is what will be the first step to a bounce and reversal.

Talk is cheap but in this case, all the bullish talk about the U.S. Dollar has formed a neat term support level at the 75.00 psychological level.

Nothing has significantly changed between last week and today yet the dollar is poised to test 76.00 today - albeit in lower volume.

Every bounce in the dollar has been sold on strength and there’s little reason to think this bounce is an exception even with the talk of central bank intervention.

Fed Fund futures are still factoring a better than 60% chance of a December rate cut and the last week’s sell off in the stock market certainly stirred up more talk of rate cuts. Currently the Dow Jones has found buyers just above the key 13,000 level.

However, we must be ready if the 75.00 level does prove to be a bottom from which longer term support will be built upon.

Keep an eye on the 77.50 to 78.00 area as this is where a shift from weakness to strength will be made on the daily chart. Anything below the 77.50-78.00 level can be considered a correction and not a reversal.

Playing this bounce can allow USD/CHF, EUR/USD, and GBP/USD traders to play corrections.

The 76.00 level on the U.S. Dollar Index is primed for selling pressure and again, until there is a change in the dovish talk from Fed the selling pressure will return.

The upside target for the EUR/USD is 1.4700 if the 76.00 level proves to be too much for the dollar.

The USD/CHF set up could benefit from further strength or 76.00 dollar resistance.  The downtrend line resistance will be the decision level from an entry.

The sell off in the U.S. Dollar can’t come as a complete surprise to traders. 

The dollar continued its slide through the 77.00 and 76.00 major psychological number as expectations for a December rate cut  is being factored into the market due to the housing markets and banking credit issues. 

The announcement by the Chinese stating that there will be a shift away from the U.S. Dollar to stronger currencies like the Euro accelerated the dollar sell off during last night’s Asian session approx 9:00pm EST. 

This further reflects the global sentiment that the U.S. Dollar is has lost it’s standing as the dominant global currency.

But can this really be a surprise to traders watching the Dollar over the past 18 months?

The euro and pound continue to benefit from the weak dollar and there is very little reason to think that the prior support at 76.00 will not become resistance. 

However, 75.00 will not be broken as easily as some dollar bears would think.  The “too far too fast” journey to today’s low of 75.07 leaves some room for a corrective bounce…but do not read a significant reversal here.

The dollar correlated majors are not the only story here at crude oil seems poised to reach $100/barrel this week and gold climbs to a 28 year high. 

The AUD/USD and USD/CAD have been major beneficiaries of this rally in commodities.

The dollar-yen sell off is likely to continue as the Dow looks to open weaker this morning.

The 2.000 hurdle was a huge psychological level for the GBP/USD and now that support has been tested at 2.0800 and 2.0780 there is a rallying point for a sustained move higher through 2.000.

The current resistance level is 2.0900 and even though prices hit 2.0906 prices have pulled back from this level twice.

The key is whether buyers will support 2.0900, which currently has not been established as support.

The U.S. Dollar Index has made a new low this morning as prices are heading down to the 76.00 level.

With the likelihood of a rate cut continuing to materialize there is little reason to think that 76.00 will be much more than a speed bump as price slide. Fed Fund futures are projecting a 2/3 chance of a 25 basis point cut.

As the GBP/USD tests the 2.880 minor psychological level, today is the third session in a row that the 2.0900 level has sent prices lower. Keeping this mind there is a good chance that there will be aggressive shorts entered between 2.0880 and 2.0906.

If there is a pullback, the 60 minute chart rising wedge pattern will be a great pattern to keep an eye on as the uptrend line support is positioned in the 2.0820 area.

Using Fibonacci levels to project potential resistance, there are two scenarios.

The 1.618 Fibonacci in the first Fibonacci chart at 2.0962 shows resistance well in front of the 2.100 level while the second Fibonacci chart shows the 2.618 Fibonacci level at 2.1152.

The U.S. Dollar Index shorts remain undeterred.  Friday’s 76.20 low remain intact however the sideways movement on the intraday chart hardly screams “bull” so before entering an ill-fated entry based on the expectation of a Dollar rally, keep a few things in mind.

The U.S. Dollar Index is still trading lower on the 240 minute and daily charts with resistance waiting not only at the psychological 76.50 and 77.00 levels.  Any move higher between current prices and the 78.20 level will only be corrections within the overall downtrend.  A reversal of the bear can be considered above 78.50.

In the meanwhile the the backdrop of Chuck Prince’s departure from Citigroup has Dollar bears thinking that the Fed will continue printing cheap money to help the banking crisis still suffering from the credit hangover.  Lower interest rates are expected because of this and this ofcourse would continue to point to a weaker U.S. Dollar.

The EUR/USD will continue to rally as long as this is the expectation in the market.

This morning’s action on the EUR/USD certainly reflects this as the 1.4500 was broken to the upside.  The break was not sustainable at the time but the retracement was not one that would dissuade Euro bulls from pushing prices higher again.  Current support waits between the 1.4450 psychological level and 1.4440.  The pullback from the morning’s high was supported as 1.4441.  Don’t underestimate the 1.4450 support level and don’t be to aggressive to short the EUR/USD unless it convincingly can break the “50″ pip.

The 240 minute chart continuation rising wedge pattern shows the support at the EUR/USD climbs to even rarer air as the 30 minute chart triangle breakout followed through.  EUR/USD strength also points to shorting opportunities in the USD/CHF (see chart alert below).

An uptrending market that set up a rising wedge pattern can be a perfect was to set up a reversal entry. 

Take a look at the break below uptrend line support on the chart of the 15 minute USD/JPY.

This break occurred below the 115.50 (so psychological resistance was overhead working in our favor) and triggered as prices broke 115.40.

Autochartist Inside the Range…Playing the inside of a range can be a powerful set up if you knwo when to use it.

The EUR/USD is setting up this entry on the 60 minute chart.

The rising wedge setting up on the daily chart is interesting mainly because price would have to break down through the 165.00 psychological level to confirm the pattern break.

The uptrend line support of the rising wedge would represent a fairly aggressive breakdown as it’s a steep line in a strong uptrend and I don’t expect the “00″ to go down without a fight.

Meanwhile, the 15 minute chart of the EUR/JPY shows some resistance just below the 166.50 level at the downtrend line resistance of it’s own patter:  a falling wedge.  A failing wedge can be traded as a continuation pattern or as a reversal pattern however in this case, the chart pattern is not a good match for the current market cycle so it’s not an ideal set but none-the-less can offer insight into the potential follow-through on the daily chart.

For moment, let’s pretend that there was no TIC data release this morning…

In that way we’ll look at the U.S. Dollar in terms of strictly price, support and resistance. There’s no argument that the dollar was stronger intraday across the 15, 30, and 60 minute charts. With the 3:00am EST UK open the dollar rallied to the strong side of the Wave.

Looking at the 180 or 240 minute charts, the dollar was neutral at best as prices had begun to trade within a range (see 180 minute dollar chart below)

So why is it that dollar bulls keep getting ahead of themselves? There is support t 78.00 and prices are also likely to attract buyers around 78.20. But overall these bounces simply have been sent down sharper with each correction. In fact take a look at the 30 minute chart and the ceiling at 78.330 - 78.36. Even if prices had enough buying support to continue up through this area, the 78.50 major psychological number was waiting.

So I am not saying that this alone would lead to trader to know that the TIC would be a huge downside miss…but trading up to resistance should already have us considering the potential hurdle prices would have to overcome to head higher.

The better set ups are made by taking advantage of the dollar bounces to enter on corrections in the dollar correlated majors.