These Pairs Look Like Solid Longs On Pullbacks

  • October 25, 2004
  • Dave Floyd

As
traders, we are always weighing the risk/reward of any given trade. 
With FX markets having been in a narrow choppy range for the much of the spring
and summer, it was reasonable to assume the break last week was yet another
false signal.  Even if you did feel that this was a valid break of the trading
range, it was still prudent to wait and seek a more ideal entry point on a
pullback of some sort.  Well, this has not happened, and at this point you
either chalk it up to a missed opportunity and wait patiently or you throw your
hat in the ring.  That boils down to a coin toss at present.

 

Yesterday afternoon’s bullish
price action was seen initially as simply low volume spikes in the New Zealand
session, but the bids were stable through Asian and London trading and are off
the highs a touch as we approach the New York open.  What is one to do?

 

Presently we have two options
and a combination of the two is the most comprehensive approach.  The case
against a weaker dollar, while never going away, is now again on the radar
screens and seen as a valid argument.  Twin deficits, excess currency reserves,
lack of central bank intervention, election uncertainty, technical break all
point to a lower dollar in the medium term. 

Purely from a technical
perspective, the market is clearly overbought at present levels although some
pairs are still not too overbought on daily and weekly time frames.  While there
are many traders and investors who do not want to be left behind of what has now
become a new downtrend in the dollar, we must be patient and look for entries on
pullbacks.

 

Unlike the last several weeks
where we have avoided the dollar-based pairs in an effort to avoid whipsaw price
action (which proved to be a wise choice and profitable), it is now time to play
in that arena again.  Below are some pairs that look like solid longs on
pullbacks.

 

NZD/USD:  solid technicals and
high domestic interest rates will keep the kiwi an attractive pair.  There is
some solid support on the short-term time frames at .6990-.7010.

 

AUD/USD:  similar scenario
here, .7445 is seen as decent intra-day support.  Daily and weekly charts are
not too overbought, so further upside exists.

EUR/USD:  while extended on daily and weekly time frames.  Intra-day models
suggest solid long entries in and around the 1.2710-1.2740 area.

USD/CAD:  this pair may finally have reached a low for now.  Indicators are
multiple time frames are stretched and suggest that further downside is not
likely at present.  However, any bounces could likely be met with more selling. 
Bottom fishing here is not recommended.

USD/CHF:  similar scenario here as in USD/CAD, however, with election
uncertainties this pair will likely find a sustained bid.

AUD/CAD:  our one open position (short), while not making much headway lower, is
in fact now establishing a lower trading range.  Maintain original stop loss at
.7250.

 

For the month we are showing a
positive total return, although with recent moves, we may be lagging relative to
the market as a whole.  Nonetheless, we are not needing to make up lost ground
as a result of whipsaw price action in September and August.  Our risk adjusted
returns are quite respectable.  Given the fresh start to the week, it will not
be long before we begin to capitalize on this recent break in the trading range.

As always, feel free to send me your comments and questions.

 


Dave

 

 



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