British Pound / dollar at Support; Rally Expected

Tue, 13 Jan 2009 08:52:30 -0500

By Jamie Saettele, Senior Currency Strategist

-euro / dollar shows signs of short term low
-GBPUSD forming right shoulder of incerse head and shoulders?
-USDCAD triangle underway
-AUDUSD due for a bounce; resistance at .6784



The decline from above 1.47 is wave (b) in what is either a triangle or flat that began at 1.2327.  In either case, additional downside is expected but probably not before a test of resistance near 1.3450.  We should have the opportunity to buy below 1.30 late this week.     


To review, the USDJPY rally failed just short of “the 61.8% of 1006.60-87.09 at 95.21.  This is also the center of a former congestion zone (roughly 94-97) as well as the 100% extension of the rally from 87.09 to 91.31; at 94.08.”  The rally from 87.09 is in 3 waves, which is corrective.  As such, a drop below 87.09 is expected.  Near term, the decline from 94.67 appears impulsive and a small second wave corrective advance may be complete at 91.69.  Staying below there keeps the bear count on track.  A move above 91.69 would bring to the forefront the possibility that the corrective advance from 87.09 is not complete and that a complex correction (w-x-y) is underway that will end above 95.21.


The GBPUSD has plunged to test 1.4550 this morning.  1.4347 is viewed as the end of a 3rd wave that began at 2.0162 and a retracement of this decline is underway now.  If this count is correct, then the GBPUSD should find a bottom soon (before 1.4347).  An inverse head and shoulders pattern may be unfolding now as well.      


The sharp drop from 1.23 is in 5 waves and probably wave A within an A-B-C correction that will end below 1.0367.  The rally from 1.0367 is the B wave of that sequence and likely tests resistance from Fibonacci 1.15, eventually.  Since the advance from 1.0861 is an impulse (5 waves), wave b is considered complete at 1.0861.  Near term, it is unclear whether or not a small second wave is complete.  


Recent strength in the USDCAD suggests that a triangle is unfolding as wave 4.  Triangles unfold in 5 waves (a-b-c-d-e) and wave d is underway now.  There is potential resistance at 1.2520 and 1.2750 going forward.  The best strategy is to wait for wave e to end before attempting a long position (may be at least a week).  


I wrote yesterday that “weakness likely extends to .6750.”  The AUDUSD has dropped below .67 and at least a corrective advance is due in what could be a small 4th wave.  Initial resistance is at .6784. 


The advance from .5186 failed to retrace even 38.2% of the drop from .8219.  As such, it seems unlikely that the rally from .5186 is complete.  There is potential support in the .5346-.5415 zone.  Additionally, an inverse head and shoulders may be underway from the October 2008 low.


Jamie Saettele writes Forex Technicals: The Day Ahead, Monday-Thursday (published at 6 pm EST), Daily Technicals every weekday morning (9 am EST), COT analysis (published Monday mornings), and analysis of currency crosses throughout the week.  He is also the author of Sentiment in the Forex Market.


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