Top Currency Trading Ideas for the Week of May 12, 2008

The current psychology (news headlines and COT data) is suggestive of a short term bottom in the EURUSD. Recent newspaper headlines include "Steady Dollar Tempers Allure of Some Bets" (WSJ, 5/12) and "A Signal From Fed Could Aid Dollar Rally" (Online WSJ, 5/12). The first headline demonstrates complacency and the second, a media prognostication, is typical of an impending low in the EURUSD.

EURUSD

It remains possible that a large 4th wave (IV) is underway towards the 1.43/1.47 area but we are presenting an alternate today because the current market psychology (news headlines and COT data) is suggestive of a short term bottom in the EURUSD. Recent newspaper headlines include "Steady Dollar Tempers Allure of Some Bets" (WSJ, 5/12) and "A Signal From Fed Could Aid Dollar Rally" (Online WSJ, 5/12). The first headline demonstrates complacency and the second, a media prognostication, is typical of an impending low in the EURUSD. In other words, once the media catches on, get out or even go the other way. The alternate count is in red.

A rally through 1.5594 would negate the bearish bias and trigger the alternate count (in red). Price has stalled at a resisting trendline that dates to the 1.6018 top but the rally from 1.5283 can be counted as a 5 wave advance and the decline from 1.5488 can be counted as a 3. A rally through 1.5488 warrants a bullish bias.

STRATEGY: Flip (from bear to bull) above 1.5488, against 1.5283, target TBD

USDJPY

The USDJPY count that treats the rally from 95.72 as a 4th wave is valid as long as 107.20 remains intact. The structure of the rally from 95.72 and weakness last week support our bearish argument. The bear case is strong below 107.20 although price ideally remains below 105.70.

The USDJPY decline from 105.70 is probably a series of 1st and 2nd waves. Potential resistance is at 104.10/50 (Fibonacci and chart congestion). Remain bearish below 105.60.

STRATEGY: Bearish, against 105.60, target TBD

GBPUSD

The GBPUSD declined in 5 waves from 2.1160, indicating that a significant top is in place. The 5 wave decline is viewed as either wave 1 in a 5 wave bear cycle or wave A in a 3 wave bear cycle. In other words, longer term bearish potential is great. The rally from 1.9337 is either wave 2 or B and is complete at 2.0396. The decline should accelerate this week or next if a 3rd wave lower is underway. The alternate is still longer term bearish but treats the decline from 2.0396 as wave X in a complex correction. This alternate is gaining traction each day.

"Over the last 2 months, the pair has gone sideways and it is more likely that this serves to build a bullish base that will lead to a rally through 2.04 in wave Y of a large W-X-Y complex correction." Cable has rallied from a support line this morning. COT positioning indicates a bearish extreme, which suggests that a GBPUSD rally is in its early stages. Also, very short term charts show that the rally from 1.9441 is impulsive.

STRATEGY: Get bullish near 1.9550, against 1.9441, target above 2.04

USDCHF

The drop from 1.1105 was wave 5 within a 5 wave drop from 1.3295. Under this count, a major low is in place and the USDCHF is working higher towards Fibo resistance; which does not begin until 1.0840. Former support at 1.0728 may provide resistance as well.

The USDCHF pattern is tracking our count nicely. We wrote Friday that "we favor the upside but not before a drop into the 1.0325/50 area. The decline to this level would complete a 4th wave within the advance from .9887 and give way to a rally through 1.06 and maybe into 1.10." The drop reached 1.0389 and wave 5 of C is likely in its early stages now.

USDCAD

The decline from the 2002 high at 1.6189 may be complete as a long term double zigzag corrective decline. If this count is correct, then a multi-year low is in place for the USDCAD.

We maintain a bullish bias against .9997. The rally from there, which is in 5 waves, is what keeps us bullish. Due to the 5 wave advance from .9997, it is proper to treat the decline from 1.0241 as a truncation (wave Y). The minimum objective is above 1.0324.

STRATEGY: Bullish, against .9997, target above 1.0324

AUDUSD

Longer term, the AUDUSD is in the process of forming a major multi year top. We view the advance from the 2001 low as an A-B-C advance. The rally from the 2004 low at .6771 is wave C. The rally through the November 2007 high at .9400 satisfies minimum expectations for wave 5 of C from .8512. The longer term implications are that a multi-year top will form (possibly has already formed) and the AUDUSD will decline significantly.

With 5 waves down from .9541 and a 3 wave rally potentially complete at .9506, at least one more bear leg is expected for the AUDUSD. The minimum objective is below .9290 and risk is at .9506. This is roughly a 1:1 reward/risk ratio at the current juncture but if the decline does materialize, there is the possibility that it extends whereas risk is set at .9506.

STRATEGY: Bearish, against .9506, target below .9290

NZDUSD

The break of a support line drawn off of the 8/17/07 and 1/22/08 lows strongly suggests that the wave C decline has started. The long term count calls for this C wave to eventually end below .5927.

We wrote Friday that "although the major top is probably in place at .8215, the fastest part of the decline is probably about to begin." This outlook holds as long as price is below .7747 although the larger bearish bias is valid below .7935. The broken support line that was mentioned in the weekly chart is shown in this short term chart. The break occurred in late April and the Kiwi tested the line as resistance last Tuesday. The failure at that level inspires confidence in the bearish bias.

STRATEGY: Bearish, against .7747, target TBD

DailyFX

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