We have started a new week; and so far, things are looking more like Friday’s price action than Thursdays. What’s the contrast? The early day was excuding extreme volatility and a defined since of direction (risk aversion) that finally put the market in motion. Friday’s price action on the other hand was congestive and sapped conviction from the burgeoning, three-week trend. Turning to stability can be confirmed as neither a stall before continuation or the setup to a reversal. Therefore, I will stick with the positions that I have already in my portfolio (short EURJPY and EURGBP) and wait for a number of meaningful technical setups to playout (like a potential bullish break above 1.08 from USDCAD.
In the meantime though, there is an opportunity to take another risk appetite / commodity position that can establish a position on both sides of the coin. Often times, I like to setup opposing direction positions on two pairs that are typically highly correlated. The relationship between AUDUSD and NZDUSD is hard to miss from a fundamental or technical standpoint. Both the Aussie and kiwi dollars are prized for their high yields and are thereby linked to the market’s underlying appetites for return. However, in this period of congestion, where direction isn’t necessarily clear, there are technical patterns that suggest opposing futures. For NZDUSD, the pair is at the bottom of a descending channel (going back to October), 200-day SMA and 38.2 percent Fib (of the 4/20 to 10/21 bull wave) around 0.6800. Alternatively, AUDUSD has bounced off its 200-day SMA and finds itself retesting former support at the 0.8750 swing low as new resistance. Depending on how long its takes to revive the market’s convictions through a trend and what direction it ultimately takes; I can have a long NZDUSD setup and short AUDUSD position to take both sides. If the markets truly consolidate this week, both will likely maintain these technical boundaries (but make little progress). Alternatively, a trend revival will revive direction and the correlation, and allow me to profit with one pair and stop out on the other. A stop below 0.68 will be set for NZDUSD and above 0.8775 for AUDUSD. I will book profit (or exit with a loss) by Wednesday if the markets are making progress.
The AUDUSD has broken below its December low and focus is now on 8400. If the decline from 9055 is a 3rd wave, then the decline should extend to at least 8400, which is the 161.8% extension of wave 1. Price should stay below 8774.
The USDCAD completed an expanded flat last week (at 10543). A break above 10875 is expected this week as the pair is in a 3rd wave higher from 10543. A drop under 10642 cannot be ruled out. 10610 would be support.
