Risk aversion was the dominant theme for most part of last week until Friday, when stocks and oil staged a strong rebound, together with treasury yields. It should be noted that DJIA, S&P 500 and WTI crude oil defended recent lows and the strength of rebound in yields from Thursday’s low was impressive. The stage is likely set for further near term strength in the risk markets. But these markets are help well below key near term resistance levels. Also, there was no depth in gold’s retreat after hitting 1263.9. Hence, there is no evidence in an overall change in sentiments yet. Risk aversion would come back after easing for a little while in near term. Meanwhile, in the currency markets, Yen and Swiss Franc still ended as the strongest major currencies while commodity currencies and Sterling were the weakest.
DJIA dipped to as low as 15450.56 last week but received support from 15370.33/15450.56 support zone and recovered. Some more upside would likely be seen this week. But it’s getting clear that price actions from 15450.56 are developing into a corrective pattern. And thus, upside should be limited by 16593.51 resistance. Break of 15370.33 is expected to follow as whole decline from 18351.36 resumes later. And in that case, DJIA would target 61.8% retracement of 10404.49 to 18351.36 at 13440.19 next.
Looking at 10 year yield, TNX spiked lower to 1.567 last week but rebounded to close at 1.748. A short term bottom is likely formed based on oversold condition in daily oscillators and the strength of the rebound. From near term point of view, TNX would consolidation above 1.567 for a while with prospect of climbing back to 1.800. But we’d expect strong resistance from 1.906 to limit upside. The overall down trend would likely continue at a later stage. We’d probably see a take on 1.394 (2013 low) later in the year. Both the above suggested stabilization in sentiments in near term but there is no change in the overall trend.
Dollar index dropped further as expected and reached 95.23 before recovering mildly. The index is now in the third leg of the consolidation pattern from 100.39 and deeper fall should be seen to 161.8% projection of 100.51 to 97.19 from 99.82 at 94.44. But we’d start to look for reversal signal below there and above 92.18/62 zone. Meanwhile, above 97.19 support turned resistance will suggests that the fall has finished earlier than expected.
Regarding trading strategy, we sold AUD/JPY at the start of last week and initial target of 79.20 was already met. We’re looking at the next target of 74.55. There are two risks for the current short trade for the moment. Firstly, the above mentioned stabilization in risk sentiments might give AUD/JPY some support in near term and the cross could recover further this week. Secondly, the cross is also getting support from the lower channel line. However, the earthquake in New Zealand would send Kiwi lower initially this week and drags down the Aussie. Also, China would be back from holiday on Monday. Hence, overall, we’ll stay short in AUD/JPY for the moment with stop at 82.00 and monitor the development on Monday first.
USD/CHF Weekly Outlook
USD/CHF dropped sharply to as low as 0.9660 last week before forming a temporary low and recovered. Initial bias is neutral this week for consolidations first. Upside of recovery should be limited below 0.9984 resistance and bring another fall. Break of 0.9660 will target 0.9475 key support level next.
In the bigger picture, the failure to sustain above 1.0239 key resistance and sharp fall from 1.0327 is raising the chance of medium term reversal. Sustained break of 0.9842 resistance turn support should now turn medium term outlook bearish for 0.9475 support first. Sustained break there will send USD/CHF to 0.9072 support and below. Overall, the price actions since 0.7065 long term bottom (2011 low) are corrective in nature and we’ll probably see more range trading ahead.
This article originally appeared at Action Forex.