In the past few months since I started writing for the Penny Sleuth, we’ve covered a lot of ground. So today I’d like to pause and scan some key currency pairs to see if the geometry of price action suggests some option trading strategies.

We’re going to do that by using technical analysis – a technique that uses chart patterns are used as tools to determine where a financial instrument’s price is going.

By using basic resistance and support (two precepts of technical analysis), you can gain a very good idea of what is going on and what to anticipate. A big-picture view helps gain some perspective and stimulate some thinking.

So let’s get started.

USDCAD

The USDCAD pair – the “loonie” – remains in a consolidation. It has come down from its highs of March ’09, where it was at 1.3045. If you look at the chart below, you’ll see it is forming a “triangle” pattern, a classic hesitation signal. It means that the bulls and the bears are struggling to dominate over one another.

What will it do next? We know that it can’t stay where it is. It has to break out. And the fundamentals are pointing to a fall in the Canadian dollar’s favor. Dollar weakness… oil prices increasing… global growth… all key variables in a strengthening of the Canadian dollar, and a fall in the USDCAD.

If it breaks out of the triangle being formed, parity with the dollar is on the horizon.

EURUSD

After the recent “forex flu,” where fear and risk aversion from the Greek sovereign debt crisis spread into other markets, we’re now seeing a return of risk appetite. The EURUSD weekly is now at a very significant resistance point at 1.3123. It is significant because that is 38.2% of the way back to the highs of 1.5156 from November ’09.

This doesn’t mean the EURUSD will go all the way back. It does mean that if it succeeds in going above 1.3123, there is technical support for it going much higher. In fact, the next target will be 1.3511, which is 50% of the way back to the top.

From an option strategy point of view, I will be watching the price action very carefully. The smart money next week could very well be a call on a break above the resistance, or a put on a failure to break. This is just one of those situations where we’ll have to wait and see how it plays out.

GBPUSD – Very Bullish

Sentiment for the pound sterling is very bullish against the U.S. dollar. From a pure technical point of view, the trend is clearly dominated by buyers. The GBPUSD pair is at a current weekly resistance point of 1.5631, which is 50% of the way back up to the stratospheric highs of 1.7045 of August ’09.

Just two weeks ago the GBPUSD penetrated an earlier resistance level at 1.5298. It is not letting up. And the next target is 1.5965 – 300 pips away. News of a slowdown in British economic growth could weaken this uptrend, however, so we will be watching.

AUDUSD – Very Bullish

The Aussie passed the most important technical resistance level in its weekly chart. Now we have to see if it confirms the uptrend and keeps going higher. It is slowing down a bit, but that is natural after a big move up because of consolidation and profit taking.

Keep in mind, when a currency pair makes a key breakout, it does so for a fundamental reason – strength in its economy. I am bullish on the Aussie in the coming months.

Hopefully, that forex analysis gives you some insights into trading some of the most important currency pairs on the market. I’ll be keeping you updated on this alternative to stocks…

Sincerely,
Abe Cofnas
Penny Sleuth

August 5, 2010

Abe Cofnas

Abe Cofnas has been a full-time analyst of global currency trading for over twenty years and ranks among the top Foreign Exchange (Forex) traders working today. He has written three books on the subject. The most recent, Sentiment Indicators was published in 2010. Cofnas is the managing editor of the Fear & Greed Trader, Agora’s primary source for currencies information. He has also been Futures Magazine’s Forex Trader columnist since 2001, having written over 100 pieces.

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