Dollar Stronger but Underlying Trend Unclear

10/01/2008 11:34 am EST

Focus: FOREX

Jamie Saettele

Senior Technical Strategist, FXCM

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The EUR/USD (and the USD in general) is at a crossroads. The advance from 1.3877 is in three waves to this point (corrective) and the drop below the short-term support line favors bears. Still, it is likely that everything from 1.3877 is corrective and that the drop from near 1.49 is the second leg of a larger correction (X wave?).        

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The USD/JPY range persists. There is little confidence right now in directionality at this time.  That feeling in itself warns of a breakout though. A break above the resistance line that has contained price since the end of August would warrant a bullish breakout play. A drop below 103.52 warrants a bearish bias.        

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The advance from 1.7443 is in three waves but probably only the first leg of a larger correction. I favor this scenario because the breakdown that led to the decline to 1.7443 was from a triangle. Breaks from triangles often lead to a retracement that brings price back to the center of the triangle (at least). In this case, the center of the triangle is near the 61.8% of the entire decline from 2.1160; at 1.9658. 1.7904 is the 61.8% of the rally from 1.7443 and may provide support that leads to a bottom in wave X. It is possible that bottom is in place at 1.7955.      

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Expect weakness in the USD/CHF and a break below 1.0686. Price ideally remains below 1.1092 going forward, which is close to the 100% extension of 1.0686-1.0940/1.0799.      

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The USD/CAD bounce from 1.03 may be a small fourth wave within the impulsive drop from 1.0827. Tracing out this fourth and then a fifth wave would confirm my longer-term bearish stance. 1.05 (38.2% Fibo is at 1.0493 and former fourth wave is at 1.0519) is serving as resistance.        

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The decline from .8524 is either a B wave within a larger correction from .7799 or the beginning of the next bear leg in a long-term downtrend. A break of .7799 would eliminate any bullish count.           

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The advance from .6435 is in three waves so the long-term decline may be back underway. It is also possible that a larger correction is underway that will end closer to .72. Action over the next several days should help to clear things up.

By Jamie Saettele, Senior Currency Strategist for DailyFX.com