Classic Technicals: The Week Ahead, Apr. 29 - May 4, 2012

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Technical Developments to Watch:

* Bias determined by the relationship between price and various EMAs. The following hierarchy determines bias (numbers represent how many EMAs the price closed the week above): 0 – Strongly Bearish, 1 – Mildly Bearish, 2 – Neutral, 3 – Mildly Bullish, 4 – Strongly Bullish.

EUR/USD

The EUR/USD continued to grind higher last week, with rates inching above the round 1.3200 handle. Though not a smooth move higher, the pair has consistently rallied since bottoming at key 1.30 resistance 2 weeks ago. Meanwhile, the MACD has turned bullish, confirming growing buying momentum behind this move, but the Stochastics are showing that rates are overbought (with the %K above 80) and the pair may be due for a pullback. Overall though, we maintain a bullish bias in the EUR/USD for this week, with room for a potential move up to previous resistance at 1.3375.

GBP/USD

The GBP/USD continued to rally last week, extending the gains that prompted us to call the pair a “standout performer” in last week’s preview report. The pair broke above previous resistance at 1.6160, which represented the 7-month high in the unit and continued higher to close the week near the 1.6300 round handle. Looking to the secondary indicators, we can see that the momentum (MACD) remains bullish and the Stochastics remains in overbought territory, suggesting a higher probability of a near-term pullback. However, readers should remember to interpret overbought/oversold indicators cautiously in strongly trending markets – they have a tendency to remain overbought or oversold for much longer than most think they can.

To that end, the latest COT data shows that large futures traders have “flipped” to bullish positioning, a move that is often followed by a continuation of the recent trend. For this week, we maintain a bullish bias in the GBP/USD as long as the pair remains above 1.6160, and buying opportunities will be favored moving forward.

USD/JPY

The USD/JPY fell last week as traders were disappointed by weak U.S. GDP data and nonplussed by the Bank of Japan’s efforts to weaken the yen. From a technical perspective, the pair finished the week near 2-month lows at 80.30, but even a drop through this level may be contained by key psychological support at 80.00. With momentum still slightly negative, and the Stochastics showing room for further drops, the pair may well make a run at 80.00 this week. A break and close below 80.00 would open the door for further drops in the unit, and with it, significantly more discomfort for the BOJ.

USD/CHF

The USD/CHF continued to ratchet lower last week, with rates dropping from the mid-.9100s to the mid-.9000s. The break below .9100 is significant and suggests the pair may continue to drop to 2-month lows at .9000. Bolstering the bearish case, the MACD has crossed below its signal line and 0, suggesting growing bearish momentum, though the Slow Stochastics are in oversold territory, suggesting rates may be due for a bounce off support. Beyond that, USD/CHF traders should watch the technical and fundamental developments affect the EUR/USD, because as we noted last week, trading the USD/CHF is pointless right now.

USD/CAD

The USD/CAD sold off sharply in last week’s trade, with rates finally breaking out of the 3-month consolidation range from .9850 up to 1.0050. The pair finished the week near the round .9800 handle, a potential area of support, though a much more important floor sits below at .9725, representing the low from August 2011. Over the past week, the bearish momentum (MACD) has only accelerated, but the near-term selling pressure has left rates oversold according to the Slow Stochastics. Thus, we will watch to see if rates can manage to bounce of .9800 on Monday, and if rates drop through this area, a drop down to .9725 becomes likely.

AUD/USD

The Aussie rallied sharply last week, with rates putting in a higher low on Tuesday and never looking back. As the week drew to a close, the pair was testing previous highs at 1.0450, with signs that the pair could continue further. To wit, the MACD continues to trend higher above its signal line, suggesting the momentum remains to the topside, and the Slow Stochastics show room for further rallies before rates become oversold. Continued trade above the 1.0450 level would suggest the potential for a move up to previous-support-turned-resistance at 1.0600.

NZD/USD

The Kiwi followed its antipodean brother higher on Friday, but spent most of the week in a tight range near .8120 support. From a price action perspective, rates are approaching previous resistance at .8260, which may again put a cap on rates. Meanwhile, The MACD and Stochastics are about as neutral as they get, providing little additional insight. Moving forward, traders should keep an eye on the .8120 floor, with a break below this area opening the door for a drop to 3-month lows at .8060.

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