Euro Rolls Over, Next Bear Leg Underway, and Additional Currency Pair Analysis

12/10/2008 10:42 am EST

Focus: FOREX

Jamie Saettele

Senior Technical Strategist, FXCM

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I wrote in an article on another Web site yesterday that “If a triangle is unfolding, then wave E is in its latter stages and must end before 1.3085. 1.2933 is where wave c of E would equal wave a of E. The triangle resistance line intersects 1.2975 today. E waves tend to be sharp, just as this latest rally is.” 1.2967 was yesterday’s high (late in NY trading) and the EUR/USD has rolled over. Coming below 1.2626 would be a strong indication that the triangle is the correct interpretation and that the EUR/USD is headed below 1.2330. Near term, staying below 1.2893 best serves the bearish bias.   

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The resistance line drawn off of the October 3 and November 4 highs defines the downtrend. Above 97.46 is where I would reconsider the bearish outlook, although price ideally remains below the mentioned resistance line (which is below 95 now). Further, the rally from Friday’s (Dec. 5) low is in three waves and suggests additional downside action.

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Yesterday, I also wrote in a separate article that, “The GBP/USD surge through 1.50 may have completed an a-b-c advance (or the first part of a larger more complex correction) from 1.4465. The high came close to former resistance at 1.5073, which is in the middle of the Fibo zone (50%-61.8%) at 1.50-1.5129.” That level (1.5052) did mark the high and the GBP/USD has declined steadily from there. Near term, price ideally remains below 1.4832 although the trend is considered down as long as price is below 1.5052.  

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Higher highs and higher lows since the March low favors the bulls longer term. Near term, the decline from the top side of the channel looks impulsive, and the rally from 1.1828 looks corrective. However, the EUR/USD and GBP/USD bearish counts bring a USD/CHF bearish bias into question. A rally above 1.23 may lead to prolonged strength into 1.30.

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Weakness could still extend below 1.2120. A drop below 1.2120 would potentially complete wave ii of five (within the five wave rally from .9055) and give way to a strong wave iii rally that exceeds 1.30. Another possibility, which has gained traction given the USD bullish counts in other pairs, is that the USD/CAD burst through 1.3025 before dropping below 1.2120. The best strategy in my opinion is bullish breakout above 1.3025.

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The clear triangle pattern in the EUR/USD and failure of the AUD/USD to accelerate higher requires a re-labeling of the AUD/USD pattern. Instead of five waves complete from near 1.00, I now favor the idea that the AUD/USD has also just completed a triangle and that the decline will end below .60.

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Until the NZD/USD rallies through trend line resistance (drawn off of the September and November highs), the chance of additional weakness remains high. Additionally, USD bullish counts in the EUR/USD and AUD/USD favor the downside for NZD/USD as well. Trend line resistance for the NZD/USD is near .55 for the rest of the week.

By Jamie Saettele, Senior Currency Strategist, DailyFX.com

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