Many currency pairs within the forex trading market remain balanced near technical tipping points, as if traders are uncertain which direction the various financial markets may take. With dealer and analyst chatter increasingly focusing on the probability of recent equities gains comprising no more than a “sucker’s rally,” as in this recent canny editorial by Andy Kessler of the Wall Street Journal (http://online.wsj.com/article/SB124208415028908497.html), this could become a self-fulfilling prophecy. Here are some technical trading notes for the week.

On 15 July 2008, EUR/USD touched a high of 1.6037 and then began falling at a prodigious rate, reaching a low of 1.2329 on 28 October. Trend lines drawn from those points, touching the interim high at 1.4719 on 18 December, and the interim low at 1.2456 on 4 March 2009, reveal a massive consolidation pattern, within a tightening triangle, best visible on weekly charts as shown below:

On 8 May, EUR/USD broke above the upper trend line at 1.3557 as well as its 200-MA, and remains above both, although perhaps not enthusiastically so, at this date. A closer look on the one-hour chart, shown below, illustrates this lack of enthusiasm:

Note the lack of a clear directional bias despite the sharpness of the run-up that broke the currency pair above the trend line. Such a bias cannot be expected until the market makes up its mind as to the sustainability of its current enthusiasm, although some first hints might be observed with the release of German 1Q2009 GDP on Friday, 15 May, at 6:00 AM GMT (4:00 PM Canberra time) followed by the announcement of the wider Eurozone figures at 9:00 AM GMT (7:00 PM Canberra time). German GDP is expected to fall −3.0% q/q, −6.0% y/y, with the Eurozone expected to contract −2.0% q/q, −4.1% y/y. Should these figures print to the downside, EUR/USD could break back beneath that trend line and head for the lower one.

Balancing this is the release of U.S. April CPI at 12:30 PM GMT on Friday (10:30 PM Canberra time). Market expectation is for a flat reading m/m, −0.6% y/y, and 1.8% y/y core. A reading that surprises to the upside, signalling possible inflation from the Fed’s accommodative monetary policy, or to the downside, signalling possible deflation, could be USD negative or, alternatively, could trigger risk aversion trading, leading to safe-haven flows into USD and JPY.

In shorter-term action, in early March USD/JPY initiated the formation a possible head and shoulders chart formation, best seen on daily charts as shown below:

There is clear bearish divergence between the chart formation and the RSI in the indicator window. Also, the neckline of the formation, illustrated by the slanted green line, is wonky. However, the price action is clearly breaking below it, as shown on the half-hour chart below:

Again, there is no clear directional bias and a short-term retesting of the neckline is possible; however, pressure appears to be building to the downside, and USD/JPY could break lower toward late February’s trading range.

All forex trading contains an inherent element of risk. Traders are advised to remain cautious, using appropriately tight and trailing stops to minimise that risk and maximise profits.