3 Great Currency Set-ups on Now

05/20/2011 6:00 am EST

Focus: FOREX

With clear-cut patterns shaping up in the USD/CAD, GBP/USD, and USD/JPY currency pairs, technical traders should be ready to act. Here is a profile of all three set-ups and how to trade them.

The US dollar/Canadian dollar (USD/CAD) currency pair has carved out a clear-cut head-and-shoulders bottom bullish reversal chart pattern, taking out the formation’s neckline at 0.9682 and pushing higher through the first layer of falling trend line resistance set from late-December 2010.

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Prices stalled and pulled back from a longer trend line dating back a month prior to November, but an inverted hammer candlestick hints that the bulls are ready to recapture the initiative.

We will look for confirmation on a daily close above the latter barrier (now at 0.9790) to enter long. The head-and-shoulders set-up implies a measured target at 0.9920.

The British pound/US dollar (GBP/USD) pair completed a bearish engulfing candlestick pattern below familiar resistance at 1.6744 and sank to support at the bottom of a rising wedge chart pattern carved out over the past 12 months.

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The set-up looks acutely bearish, but a clear break of the wedge bottom (now at 1.6154) is needed for confirmation to enter short. As such, we will remain on the sidelines for the time being.

We entered long US dollar/Japanese yen (USD/JPY) at 81.09 last week, as the pair followed up a bullish piercing line candlestick pattern with a break above resistance at a falling channel top, as well as the 23.6% Fibonacci retracement of the decline from April’s swing high (80.96).

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After some brief consolidation, the pair has started to pick up momentum, with prices now within a hair of our initial target at the 38.2% retracement level (81.83).

We will remain long, looking for continued gains in line with our fundamental outlook. A stop-loss will be activated on a daily close below 80.74. A close above 81.83 will trigger a revision of the stop level to the breakeven point and nudge the soft target level to 82.54, the 50% Fibonacci level.

By Ilya Spivak of DailyFX.com

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