A Look at 2010

We are basically a year and a half into the recession and things seem to have stabilized and even improving. The volatility that surged in late 2008 has somewhat subsided, but if you believe volatility is cyclical, another high volatility period should follow. If the previous one followed or coincided with the collapse of confidence in the global financial structure, the next one might correspond to return of confidence. Logically a panic compared to a build up of confidence, should be reflected by higher volatility. Therefore even a resurgence of volatility should not reach levels of late 2008. Below are some long-term views on EUR/USD, GBP/USD, USD/JPY, USD/CAD, EUR/GBP and GBP/JPY.

EUR/USD: Big Picture – Nugzar Dzuodzuahsvili (Chief Technical Analyst).

GBP/USD: Long-term Bullish Scenario

• Monthly: The GBP/USD has been in sideways action since June of 2009.  At the end of the year now, the market is testing the range support near 1.5800.
• A hint that we may continue the rally that started in the beginning of 2009, is the stochastic reading. It is a classic “knee” in which there was almost a crossover on the downside, but bullish momentum kept the fast line on top.
• A swing projection puts the pair at about the 1.9400 area towards the end of 2010 or beginning of 2011. This is the 78.6% retracement level, and would be a completed bearish Gartley.
• The 61.8% retracement level 1.8100 – 1.8200 is also a viable swing target if the market bottoms lower than 1.5800.
• Weekly: The weekly time-frame shows the ranging action in more detail. The stochastic reading missing overbought levels, may be an indication of weakness to start 2010.
• If the market doesn’t support the pair at the 1.5800 support, the market can fall further to 1.4850. This is both the pattern breakout projection (channel/double top) and the 61.8% retracement level.
• From here, if the market bottoms and shows bullish signals, can still indicate a continuation swing, a little lower at the 1.8000 area, which is 61.8% retracement instead of 78.6%.

USD/JPY: Recovery and Rally?

• Monthly: The USD/JPY pair has been declining even before the recession was official. The general correlation with the global economyis that the USD/JPY tends to rally during growth. However, what’s more important is that the FOMC recognizes this and raises interest rates so that USD/JPY becomes a possible carry trade pair.
• These conditions would help the bullish case for 2010 and 2011 as the world economy recovers.
• For now, the market seems to have bottomed as the stochastic shows a classic 3-pt bullish divergence.
• The bearish outlook would be in-line with the underlying downtrend, BUT we are already at lows not seen since 1995, so there is not much room to decline unless there is something major, like a double dip recession.
• Otherwise, we should probably stalk the possible bullish outlook of the market to hit 102.00 area (38.2% retracement; intermediate resistance) in 2010, and possibly the 110.00 (61.8% retracement) area by the time the global recovery has gone underway.
• Weekly: The current declining trendline looks to be tested. As the market is already entering overbought conditions, we may have a minor correction before it can crack. One scenario would be a decline from the 94.00 area back to the 88.00 area. A rally from there to break above 94.00, is a strong confirmation of the long-term bullish outlook.

USD/CAD: Rally Swing From Parity ?

• Monthly: The USD/CAD pair made news by hitting the parity level in 2008, but it has since rallied and stayed above in 2009. It’s not a stretch to expect a retest of 1.000 again, but the the market definitely has slowed since declining from the 2009 high at 1.3050 area.
• The stochastic is in ovversold conditions but is still bearish. If the market does bottom here around the parity level, and a bullish push starts, the market can rally to the 1.4000-1.4500 area. This is a wide zone of different retracement levels and would be a completed bearish Gartley.
• However, this may take a long time and may extend to 2011. A viable projection for 2010 may be the 1.3050 2009-high.
• Weekly: The weekly shows congestion pattern, and therefore the necessary upside breakout to signal the bullish scenario. The downsloping trendline is the minimal requirement, but a break above 1.10 would be a significant confirmation for this bullish outlook.

EUR/GBP Wave Count

• Monthly: The monthly look at the EUR/GBP has an apparent wave count developing. The pair has been bullish since 2001. This uptrend may be developing its primary III wave. The market was basically in a slightly downtrending consolidation. This could be the a-b-c wave correction, which would complete subwave iv within primary wave III. Wave iv should not go below 0.8200. Also Subwave v should complete at the same time as primary III.
• Weekly: The weekly look focuses on the a-b-c (in green) correction wave structure of subwave iv (of monthly chart). The fractal structure is shown by minor waves (a)-(b)-(c)-(x)-(a)-(b)-(c), ending with subwave C. This projection goes against the previous wave counts, but contradictions of alternate wave counts are common until further data clears it out.
• The practical assessment from this wave count is that the market may continue to decline in 2010. , but if it doesn, it should not decline below 0.8200 (Assuming we have the correct wave count).
• Also, if we want to follow this downtrend, we may have to wait for one more rally in the beginning of the year to complete (b) before heading down to (c) and C.

GBP/JPY: Possible Gartley

• Monthly: The GBP/JPY is similar to the GBP/USD in that both strongly declined towards the end of 2008, bounced up in 2009, and has been consolidating since June.
• A Gartley formation is possible if the wind of global economic recover strengthens. The swing projection for this possible 2nd leg of the retracement pattern is 184-185 area.
• Weekly: The consolidation range is split into two, the lower one from 140.00 to 154.00, and the upper range from 154.00 to 164.00. The market will have to break above these resistnace levels (154.00, and 164.00) before being able to reach the 185.00 area. This can be possible with a global economic recovery.
• The stochastic reading in the weekly is crossing above 50, and the stochastic in the Monthly has slight bullish implications as well.
• This 185.00 is a bullish projection for 2010. If the market’s sentiments remain subdued, or continue to be risk averse, then we may continue to decline to test the low around 125.00. This would be signaled by a break of the 140.00 support.

Fan Yang
Currency Analyst
Commodity Trading Advisor
fyang@cmsfx.com

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All screenshots are made from VT Trader 2.0 and are of actual market data at the time of the screenshot.