There is a remarkable amount of confluence on the currency charts right now. To a new investor, there might not be much there. But for technical pattern traders, this is literally lining up to be a blockbuster May.
I want to show a pair of charts I showed once before. They have all reset to a very interesting place on the charts.. Let's start with the last year, then we'll zoom out to the big picture. I'll comment on each price plot below.
We are moving through the charts in their proximity to breaking the lower trendlines.
You can see when Japan broke the trendline in early October, it created an massive move lower.
When the British Pound broke, it was another critical move that created a significant downward spike.
You'll notice it made its tops on May 1, September 14 and retested at the end of December. The first date matched the date where the $SPX retested the April high. The second was the Fed QE Infinity. The third high was just the opposite. It was the day the market made the Dec 31st low and has moved down since then.
You can see the British Pound, the Canadian Dollar, and the Aussie Dollar all broke the blue trendline within a few days of each other. This symmetry is important as we view the current setup.
The Canadian Dollar has followed the pound in a downward channel, topping last September on the start of the infinite QE program. We have weakened ever since. We didn't even retest the high like the British pound did. You'll notice a small head/shoulders top in Aug, Sep, October. We broke the neckline at 101.50. We would expect to see a backtest after breaking down. All of the top three charts did not even have the energy to do that. You'll notice the Canadian dollar failed on a retest of the December high, and then fell through the blue trendline with a downward gap to start the move.
I like to look for a retest at three places. The previous high, a backtest of the neckline, or at the neckline breakdown price level. Sometimes, synergies will emerge at a point that is common amongst 2 or 3 of those typical locations.
The Aussie dollar has been in a sideways channel. It looks stronger than the Canadian dollar. On this last pullback it started with a large 1 cent gap. I would suggest a firm test of 101.75 is coming soon. You will also see that the price tested back to the blue trendline which just happened to coincide with the two previous tops.
The Swiss Franc has been building a head and shoulders (H/S) pattern. After breaking through the blue trendline, it went back up and retested it. This looks like a right shoulder to me. You can see this 107 level was support before. If it fails to hold, I would expect a quick trip to the green neckline of the head shoulders pattern.
The Euro is the big one. It makes up 56% of the dollar index. After breaking through the upsloping trendline, it made a retracement move back up almost to the breakdown point. Usually when right shoulders get weak, the price falls quite quickly. Notice the symmetry of the H/S pattern so far. The right shoulder is currently the same price as the left.
Finally, the Swedish Krona was making a high on the same day as the start of QE Infinity. After rallying higher, it fell below the blue trendline in March and rallied back up for a retest of the line. This retest was when the $SPX rallied to a new all time high as well. But the $SPX was only able to hold the breakout for 3 days. That appears to be about how long the Krona lasted too. After failing to hold above the blue trendline again, it gapped lower. Now it is testing neckline support. If support doesn't hold, it looks like another 6 cents lower for the currency. It might even confirm a topping $SPX if that was to happen.
To summarize this chart, 6 of 7 charts look likely to test the lower trendlines in the next 2 weeks. The british pound has had a countertrend flag building. It looks like it is up against the downward trendline. The Canadian and Aussie charts look like they'll test the March lows. The last three charts all have a head/shoulders pattern that looks vulnerable.
Obviously the $USD is important here. It's always important. Why don't I think all these charts can go higher instead? Just that all the patterns seem to point lower. The H/S are topping versions not basing patterns. The 7 charts have broke shorter term blue trendlines which would suggest a new trend underway in a big way. That is the $USD going higher trend. Lets look at the long view again.
The Yen looks like a waterfall. No Comment. I think the trend in down.LOL. Eventually it gets a bounce. Notice the 4 year trendline was holding the major price action. The break of the green H/S neckline was almost irrelevant. It just kept going.
The British Pound is a great example of the long term pennant, breaking to the downside. You'll notice the right side of the british pound pennant is very similar to the recent look of the Aussie dollar. From October 2011 to January 2013 was a nice sideways channel. Notice the british pound gapped lower after breaking the green trendline. It didn't wait for the horizontal support line. I think this is important for the Aussie Dollar which I'll cover below. ($WTIC is currently testing the low side of a four year pennant).
The Canadian Dollar is my home currency so I stare at that one a lot. After seeing $COPPER, $GOLD, $JPY, and $XBP all break 4 year trendlines, I am expecting the rest of these to break as well. The $TSX broke a 10 year trendline vs. the $SPX, and $CRB broke a 10 year trendline vs. the $SPX last year. How many clues do I get? So, any more weakness in the Loonie will make my expectations fall like a toonie in a Coke Machine.
The Australian Dollar feels as vulnerable as the British Pound did in January. It is just above the 4 year trend line. The failed breakout leads me to believe lower is the direction.
The Swiss Franc is harder to read on the big picture. After gapping below the blue trend line, I get worried. But it is still above Horizontal support and rising lows. We are narrowing in on the final 5 price points between 105-110. One to watch for sure. An argument could definitely be made for a head and shoulders bottom with Jan 12/ July 12 / Mar 13.
I don't see the Euro going higher. Everyday they downgrade the economy of some country. Lately the $DAX chart has been weaker too. But we'll watch the charts to see. I think this large H/S pattern is just completing the right side and down it goes. This could be the trigger that breaks all the other charts if it does.
The Swedish Krona just broke the big uptrend and gapped down as reviewed on the shorter term. It has a 4 year Head/Shoulders top that stretches wider than the $JPY chart above but looks similar. It also has the giant 5 year pennant. The upside is a 40% for me, the 60% is to the downside based on the direction of the other charts.
Lastly, the $USD tested the 4 year trendline. It pulled back and now it is knocking on the door again. With commodities getting crushed, it feels like they see the $USD surging higher and the trend is just starting. The currency bulls will say the failed breakout on the $USD a few months ago is the clue that the USD is topping out.
I am definitely leaning with the directions recently given. From Copper, Tin, Aluminum, Zinc, and even Gold and Silver, the metals look to be creating a giant banner saying watch out below. Crude is already testing the low side of the 5 year pennant and usually the lows are in June or July, not now.
I think the next tale will be told by the currencies. Following them should help us stay on the right side of the summer trade. Remember how a lot of the currencies started to fall as the $SPX topped out. That might also help be a broader clue.
Lastly, Stockcharts is in California with StockCharts University this weekend. Check the other classes in Seattle and Toronto coming up sooner than you think. You can find that information here. SCU Seminars
Good Trading,
Greg Schnell, CMT
