July 27, 2010: The US Dollar-Japanese Yen (USDJPY)pair is reaching a long term support zone which can lead to a reversal in the currency pair.

Prices came down to that level in November 2009 and produced a bounce and now drifting back down. It is possible for the pair to fall lower and go deeper into the support zone, but chart patterns show that a bounce is imminent.  At this point in time it's not clear if the bounce will lead to a reversal of downtrend or just one more bear rally like in the past 15 years and then go lower.

However, one thing is clear. Now is not the time to short the pair and it is a good time to book profits on the short side and begin building long positions as prices fall. The stop loss would be below the 81 area. There are several reasons for moving from a bearish to a bullish bias.

First, in 1995 the pair rallied strongly from the area it is right now, indicating strong demand. Secondly, there has already been a strong bounce from the area, which shows that the support zone is still relevant.  Finally a look at the chart will show that price has made lower lows, but the commodity channel index (CCI) has made higher highs. This clearly indicates positive divergence, which is a bullish sign. A positive divergence is when price makes lower or equal lows and the CCI makes higher lows.

Euro-Dollar

As predicted last week, the pair corrected to the 1.27 area and then bounced. The bullish trend is still intact, but the pair faces resistance in the 1.31 area. Support for the pair is in the 1.26 area. Going long at support and short at resistance might be a good strategy to trade the pair. 

Australian Dollar- US Dollar

The pair broke out of resistance in the 0.8875 area and is heading higher. Longs should look to take profits in the 0.90 area. Note that the 0.90 to 0.9090 is an area of resistance, which can result in a correction. The pair has a carry trade advantage due to the higher interest rate on the Australian dollar. But it clearly showed signs of weakness in May when prices fell nearly 1000 pips. Any increase of risk aversion in the market can result in a sell off.

Dollar index

Keep an eye on the dollar index as it has some more downside to the 80 area. This can affect all the dollar pairs. Additionally with the stocks showing a bullish trend a further weakening of the dollar index should be no surprise.  The S&P 500 closed a little above resistance last Friday and the next proximal level of resistance is near the 1120 area, which can take the dollar index lower.

Chart Analysis

USDJPY Chart