Fibonacci Analysis of Forex Market—March 2010

Quite a bit has changed over the past three months in the forex market, but the next few months could be even more important in terms of determining the intermediate- to long-term trends in many of the currency pairs. Clearly, the divergences between the various pairs have become more pronounced, which requires more careful analysis and trade selection based on risk/reward. The various currency pairs have reached some important Fibonacci levels, so I wanted to look in-depth at not just the dollar index, but also many of the other popular pairs.

Figure 1 - Click to Enlarge

The monthly chart of the dollar index, using the continuous futures contract, gives us an interesting long-term perspective. The rally from the March 1995 lows to the June 2001 highs lasted 75 months, while the decline from those highs to the March 2008 lows was 80 months. Within this decline, there have been two eight- to nine-month contra-trend rallies.

The rally from the 2008 lows to the 2009 highs fell just short of the major 38.2% resistance (point 1) before the dollar turned lower. This now makes the downtrend, line a, in the 88 area, an important level of resistance. The rally over the past three months has so far fallen short of the minor 50% retracement resistance, but you will note that it has reached the long-term chart resistance, line b, that goes back to 1992.

Though often times we do see very clear divergences in the weekly or monthly indicators at major turning points, especially when using volume based indicators, this was not the case at the 2008 lows in the dollar index. The demand indicator is a volume-based indicator, and it has recently moved back above the zero line after confirming the 2008 lows, line f. Clearly, the extent of the next pullback will be important as it is critical that the support at line e does hold. For now, the rising weekly studies keep us positive on the dollar index’s intermediate-term outlook.

Figure 2 - Click to Enlarge

The short-term outlook does look much different as in early March, there were some signs that the dollar’s rally was losing upside momentum. Sentiment was also too bullish on the dollar and negative for the euro, which was consistent with the technical outlook, increasing the odds of a correction in the dollar index. The weekly studies had stayed negative from March 2009 (see chart) to early December 2009 (see related article) when the technical studies suggested at least a short-term low was in place. The initial upside targets were at 78, and then in the 80 area, which corresponded to the major 38.2% retracement resistance. The high so far has been 81.43 with the 50% retracement resistance at 82. The high was very close to the target from the Fibonacci projection using the rally from point a to b and then measuring up from the low at point c, as the equality target (100%) was at 81.00.

The daily OBV did form a short-term negative divergence at the recent highs and then dropped below its WMA and the uptrend, line 1. This is consistent with a short-term top, though with the weekly studies positive and not diverging, we are looking for a correction, not the resumption of the dollar’s long-term downtrend. There is key short-term support now at 79.60-85, basis the March contract. As long as this support holds, we can’t rule out one more push to the upside before a more significant correction. The 38.2%-50% band of Fibonacci support is in the 78.60 to 77.90 area. On a decline into this support zone, the bullish divergence support in the OBV, line 2, is likely to be tested. If it is decisively broken, it could alter the intermediate-term outlook.

NEXT: Latest Analysis on USD/AUD; What's Ahead for Euro?

Figure 3 - Click to Enlarge

The USD/AUD has been the currency pair with the best technical action from the early 2009 lows to the November highs. The corrective action since the 2009 highs, lines a and b, appears to be a continuation pattern that will set the stage for a move to new highs. A strong weekly close above 9330 should confirm the resumption of the uptrend. If the lows are in place, the initial upside targets are in the 9700 area, which correspond to the 127.2% extension target of the recent decline. The 161.8% target is at 1.00 with the equality target above 1.05. The RSI formed a slight negative divergence at the late-2009 highs, line 1, and then violated its uptrend, line c. Normally, I would expect to see a more significant divergence if a intermediate top were being formed.

Figure 4 - Click to Enlarge

The daily analysis of the AUD futures also suggests that this sideways action is part of a continuation pattern. The decline has held the 50% retracement support at 8520 with the 61.8% support at 8320. The AUD is now approaching the upper boundaries of the continuation pattern, line a. The OBV did form a slight negative divergence at the November highs, line b, and this resistance is now being challenged. The OBV has rallied impressively from the longer-term support at line c.

Figure 5 - Click to Enlarge

The euro has gotten most of the attention in the press over the past few months, and the crisis in Greece has not helped. A top was confirmed in early December as weekly support at line b was broken. The break was confirmed by the OBV, violating is WMA and the uptrend, line c (point 1). After a sharp drop to first chart and retracement support in the 1.4200 area, a technical rebound looked likely. I was looking for a strong rally back to the 1.4700 area, but instead, there was an anemic rally that stalled below 1.4600 as the selling again picked up. Unfortunately, I was not aggressive enough on the short side. The OBV gave a classic sell signal by just moving back to its moving average, point 2, before turning lower.

The next wave of selling has taken the euro down to the 61.8% support in the 1.3450-1.3500 area, where it is trying to stabilize. The recent bounce back above 1.3700 has turned some of the daily technical indicators positive. The plunge in the weekly OBV suggests this is not the best way to play a correction in the dollar and I would look for a rally back to 1.40-4100 as a chance to sell.

Figure 6 - Click to Enlarge

The intermediate-term view of the USD/JPY has not changed much since last December, and while it still appears that an intermediate-term low has formed, we have not gotten confirmation. The rally from the November 2009 lows took the dollar up to the resistance at 93.75-94 area, point 1. The rally failure at the weekly downtrend, line b, has dropped the dollar back to support in the 88-88.50 USD/JPY. This also corresponds to the 61.8% support of the rally from the 2009 lows. The RSI has formed a long-term positive divergence, line d, but a strong move above the resistance at line c, is needed to confirm the divergence. The weekly RSI has moved back above its WMA, so the action over the next few weeks could be important.

NEXT: Dollar Versus Swiss Franc, Loonie; New Outlook for Pound

Figure 7 - Click to Enlarge

The technical pattern in the USD/CHF looks fairly similar to the dollar index as it also suggests that we should see a daily correction within the intermediate-term uptrend. As the dollar was making new highs versus the CHF in the latter part of 2008, the MACD-His was forming a negative divergence, line c. After a sharp, four-week decline, the dollar rebounded strongly in early 2009 as the financial markets were collapsing. The dollar peaked below 1.2000, but the rally was strong enough to turn the MACD-His positive for one week before it and the dollar again turned lower. The dollar declined to a low of .9916 in late November. The MACD-His shows a long-term positive divergence (line d) as it bottomed in June and then continued to move higher while the USD/CHF was declining. It turned positive one week after the lows (line 1). The rally from these lows has just slightly exceeded the major 38.2% retracement resistance at 1.0830, but the dollar has made little upward progress over the past month. The weekly MACD-His is positive and has formed higher highs.

Figure 8 - Click to Enlarge

The daily chart of the USD/CHF shows the rally from the November lows to the 1.08-1.0900 area, where the rally appears to have stalled. The daily MACD-His formed multiple divergences at last year’s lows, line e, before moving sharply into positive territory. The positive signal on the daily data coincided with a positive weekly signal, which should have increased the trader’s confidence. The rally from the November 17 lows peaked on December 22, and the following correction held the 61.8% support at 1.0140. The next rally was significantly stronger, but started to stall in the latter part of February as the MACD-His formed a negative divergence, line d, before dropping below the zero line on February 25. A break below short-term support at 1.0650, line 2, is needed to complete the daily top formation. There is next support at 1.0530 with more important trend line support and the 50% retracement support in the 1.04-1.0450 area.

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The USD/CAD has been in a fairly tight range since last September with resistance at 1.0780-1.0880, line a, and key support at 1.0230. A break of this level should signal a decline to the band of stronger support in the .9700-1.000 area. The weekly RSI formed a pronounced negative divergence at the early 2009 highs, line c, when the USD/CAD was near 1.3000. Since last summer, the RSI has been diverging as it has stayed above support at line d. This combined with the breaking of the RSI’s downtrend, line c, caused me to be much too early in looking for a bottom. Also, I should have been skeptical about the fact that this divergence was occurring in the 30-35 area. The repeated rally failures do increase the odds of another break to the downside that could take the RSI below its year-long support.

Figure 10 - Click to Enlarge

As discussed in December, the rebound in the GBP from the early-2009 lows was even weaker than expected, which was not surprising in light of the plunge in 2008. The OBV confirmed the break of support at 1.9300 in August 2008 as it violated its uptrend and the WMA (point 1). The OBV was also much weaker in 2009 as it violated support at line d while prices were holding above support (point 2). The rebound in the OBV (point 3) presented a great selling opportunity. The OBV continues to act much weaker than prices, but is now well below its WMA, which increases the odds of an oversold rally.

If the dollar did form an intermediate-term low in late 2009, the next decline should present a good buying opportunity in the dollar index and USD/CHF, as well as an opportunity to sell the euro and the pound, which look the weakest. Regarding the USD/AUD, I would expect the pair to make new rally highs, and I will be watching closely for a confirmed upside breakout. The selling pressure still seems to be dominating the USD/CAD and a break below parity does now seem likely.