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Technical analysis is a method of forecasting price movements by looking at purely market-generated data. Price data from a particular market is most commonly the type of information analyzed by a technician. The bottom line when utilizing any type of analytical method, technical or otherwise, is to stick to the basics, which are methodologies with a proven track record over a long period. After finding a trading system that works for you, the more esoteric fields of study can then be incorporated into your trading toolbox.
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Short USD positions reduced slightly: Non-commercial investors remain net short the dollar, but scaled back positions by USD1.7bn to USD16.9bn. Short USD positions are still mainly against NZD, AUD, JPY and CHF. The dollar has performed strongly since IMM data were collected on 30 August – with the DXY index gaining 1.5% - which is likely to have coincided with short dollar positions being scaled back further.
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USD/CAD is continuing to advance inside the highly Uniform Rising Wedge chart pattern identified by Autochartist on the daily charts. Autochartist rates the overall Quality of this chart pattern at the above average 6 bar level as a result of the following values of the individual contributing Quality indicators: low Initial Trend (2 bars), near maximum Uniformity (rated at the 8 bar level) and substantial Clarity (7 bars).
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GBP/NZD is moving down within the Falling Wedge chart pattern identified by Autochartist on the daily charts. Autochartist rates the overall Quality of this chart pattern at the 3 bar level, which reflects the following values of the individual contributing Quality indicators: one bar Initial Trend, 3-bar Uniformity and 5-bar Clarity. This Falling Wedge is developing in accordance with the strong prevailing downtrend visible on the daily, weekly and the monthly GBP/NZD charts. Low Initial Trend value corresponds to the sideways price action which preceded this chart pattern and which developed as the pair approached strong support at the major round price level 2.0000. Point D of this chart pattern formed when the price reversed from the support at 2.0000 with the sharp upward impulse bringing the pair to the resistance at 2.2500 (at point A) from where the downtrend resumed.
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Despite a continual stream of negative U.S. data releases, USD managed to end within recent summer ranges against most G-10 currencies this past week. Near term USD Index direction may be determined by a daily closing break above or below its recent consolidation pattern.
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Short dollar positions have been unwound, but the dollar is not stronger: The latest IMM data were collected on 9 August, the day when stock markets posted what until now has been the trough. Investors were cutting risk exposure fast and, coinciding with a broadbased move out of equities, short dollar positions were unwound. In one week, noncommercial investors reduced aggregate net short dollar positions from USD30bn to USD15bn – with the biggest unwound against AUD, JPY, MXN and CAD. Still, the dollar has not appreciated significantly and the DXY index is only up about 1%. This could be a warning about further upside, but more so we believe it reflects a higher US credit premium in response to the US credit downgrade and dismal H1 growth.
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GBP/USD is continuing to decline inside the Down Channel chart pattern identified by Autochartist on the daily charts. The overall Quality of this chart pattern is measured at the 4 bar level as a result of the low Initial Trend (rated at one bar level), average Uniformity (5 bars) and higher Clarity (6 bars). The top of this Down Channel (point A on the chart below) formed when the price reversed down sharply from the strong resistance at 1.6700, which the pair had failed to penetrate multiple times before - during the second half of 2009, as is shown on the second chart below. The first connecting point of the lower support trendline of this chart pattern (point C) formed when the price corrected up from the support at the round price level 1.6000.
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Stock markets have plunged in recent days as risk sentiment deteriorates on disappointing data suggesting the recovery in the US is still struggling. I think the S&P ratings downgrade is mostly background noise as evidenced by the surge in US Treasuries. What we are seeing is a classic 'risk-off' moment bordering on panic as investors adjust to weaker economic outcomes. But stocks are playing catch-up to what FX and bonds have been saying for several weeks and shares may even have overshot at this point. I think the ECB decision to start buying Spain and Italy debt this week has the potential to stabilize Eurozone debt markets and potentially pave the way for a broader stabilization in global risk markets. To exploit this outlook, I'm looking for opportunities to get long NZD/JPY as an FX proxy for risk-on. Readers should note that this strategy is counter-trend at the moment and akin to catching the proverbial falling knife, so stops must be rigorously adhered to.
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USD/DKK is moving down inside the well-formed reversal chart pattern Head and Shoulders, identified by Autochartist on the daily charts. The overall Quality of this chart pattern is measured at the strong 7 bar level, as a result of the following values of the contributing Quality indicators: low Initial Trend (rated at the 2 bar level) and near maximum Uniformity and Clarity (both rated at the 9 bar level). High Uniformity and Clarity describe a well formed chart pattern that is developing in accordance with the strong downtrend that has been affecting this currency pair during the last year.
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EURCHF - With the cross breaking and holding below its major support at 1.0000 the past week, risk of further weakness is now expected in the coming week. EURCHF has been weakening since collapsing off the 1.6826 level in 2007 and with bearish momentum remaining in progress, further declines looks to target the 0.0900 level, its psycho level. On a violation of that level, the 0.0800 and 0.0700 levels, all representing its psycho levels will be aimed at. Its weekly and monthly studies are bearish and pointing lower supporting this view. Alternatively, on any recovery higher, the 1.0000 level just violated will come in as the initial resistance with a breach of there turning attention to the 1.1296 level followed by the 1.1402 level, its July 18'2011 low. We expect a reversal of roles as resistance to occur at this level and turn the cross back down. All in all, having continued to weaken and hold on to its long term downtrend, the risk remains for more bearishness to be seen.
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Non-commercial investors are significantly short in the dollar: Aggregate net short dollar positions were built further last week to USD31.4bn, as the fiscal focus shifted across the Atlantic. Short dollar positions were added not least against the JPY and EUR, but also against the commodity currencies CAD and AUD, where net positioning is becoming increasingly stretched.
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