On February 13, the Bank of Japan surprised the market when it announced it was increasing its asset purchasing program. In addition, it set an “inflation target” at 1.00 percent. The move by the central bank is designed to strengthen the economy which is wallowing in deflation.

Typically, a central bank tries to prevent its economy from growing too rapidly; however, the action by the BoJ is an effort to give the Japanese economy a jolt. While the move by the BoJ seems aggressive, it had to be done to keep up with the U.S. Federal Reserve’s decision in January to keep interest rates at extremely low levels until late 2014. In fact, the two central bank policies are similar except that the Fed usually sets a time limit while the BoJ bases its exit strategy the economy’s performance.

If this week’s selling pressure can be sustained, then a break through the October bottom at 1.2609 is likely to trigger a further decline to a major 50 percent price level at 1.2519. Additional support is expected to come in at the 1.2500 psychological support price. Since these prices form a solid support cluster, expectations are that short traders will begin to take profits and bottom-pickers may even emerge so traders should be on the lookout for a possible technical bounce to the upside.

If downside momentum continues, then look for the old bottom and 50 percent level to become new resistance. The downside targets would then change to 1.2340 to 1.2334. This scenario could take place if the Bank of Japan decides to get more aggressive on the weakness and perhaps perform an intervention.

The swing chart which is also known as the trend indicator turned down on Thursday when the Euro pierced the last swing bottom at 1.3027. The subsequent late session rally did not change the trend back to up, but the upside momentum was strong enough to suggest that the short-covering rally is likely to continue on Friday. Despite the strong close, the main trend will remain down unless the swing top at 1.3325 is violated.

Shortly after its main trend turned down, the Euro reached the 50 percent level of the major range created by the January bottom and the February top. This range is 1.2627 to 1.3325. The 50 percent level is 1.2976 and Thursday’s low was 1.2975. Whether it was bullish news regarding Greece’s debt crisis or huge buyers waiting to cover their short positions and reverse to the long side, the Euro embarked on an impressive retracement.

The strong close helped form a minor closing price reversal bottom which is often a sign that a major bottom may be forming. The only issue I have is that this type of bottom often occurs following a prolonged move down in terms of price and time. In this case, the market did reach a 50 percent level, but a 5 day break is hardly a “prolonged move”.

If you believe that Thursday’s reversal was enough to knock the short-traders out of the market and that sentiment is shifting back to the upside, then the first sign you should be looking for is a follow-through rally. This will occur if the Euro breaks through Thursday’s high at 1.3161. If this confirmation takes place then one has to call 1.2975 a valid bottom.

A valid closing price reversal bottom often retraces at least 50 percent of the last break within 2 to 3 days of its formation. The strength of the retracement has already reached this level at 1.3150. This makes the 61.8 percent level at 1.3191 the next likely target. Finally Gann angle resistance drops in at 1.3205, creating a resistance cluster between 1.3191 and 1.3205.

In my opinion, the daily Euro chart is still suggesting trader uncertainty. And what better to confirm this assessment then to have the market trade in between a pair of retracement levels at 1.3150 and 1.3191. This area seems to be the pivot zone that traders will use to decide whether to take the market back up or resume the newly initiated downtrend.

Thin trading conditions may also be contributing to the uncertainty since big money is unsure about which direction to take and may be on the sidelines. This gives me the opportunity to lay the blame for the choppy price action on sloppy, undercapitalized traders who caved in when the market broke, but then chased it higher when a positive news story leaked about Greece. Traders should expect more of the same trade on Friday since there is nothing fundamentally available to allow investors to position themselves with clarity and conviction.

The daily chart suggests the Euro has reached a critical decision point for traders. The short-term range is 1.3027 to 1.3325 with the mid-point of this range at 1.3176. Combined with an uptrending Gann angle from the 1.3027 bottom at 1.3167, this cluster stopped the break on Friday. You can find it on the chart too. Just look where the 50 percent level crossed the uptrending Gann angle.

On Monday the 50 percent level will remain the same, but the Gann angle will move up to 1.3187. The Euro will have to hold this angle to maintain its upside momentum. If you break it down further, the market has formed a new range that is probably better seen on the intraday charts. This range is 1.3325 to 1.3157. The mid-point of this range is 1.3241. Look for this price to act as a pivot today: Bullish Above and Bearish Below.

Until something concrete comes out of Greece regarding its debt resolution package, the Euro may be locked inside of a tight range. This isn’t necessarily a bad thing since it often leads to volatility. So while the market sits inside of a tight range, perhaps forming a non-trending pattern like a triangle on the intra-day charts, traders should brace for upcoming volatility.

After closing near its low on Friday, the Euro rebounded with a higher opening Sunday night. This strength didn’t hold as the market has given back much of its early gains. The primary reason for the early session “euphoria” was the news that Greece’s parliament approved a package of austerity measures over the week-end. This move proved to be unpopular with the Greek citizens, but traders seemed to approve although the early “pop” was probably short-covering rather than new buying.

While some traders feel that the approval of the austerity measures provides a straight path toward getting the bailout money to avoid default, the key concern remains implementation of the programs. So for the time being, traders are going to factor in the possibility of a Greek default and the remote possibility that it will be booted out of the Euro Zone. The price action doesn’t suggest the latter, but over the near-term traders should keep an eye on the news to see if any EU politicians, in an effort to express frustration, begin to suggest that this idea is on the table.

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Steady growth and an optimistic outlook for inflation were the key contributing factors to the decision. The monetary policy statement included the line, “with growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment.”

Bucking the trend it created when it made quarter-point rate cuts at its last two meetings of 2011, the Australian central bank decided at its first meeting of 2012 to leave interest rates unchanged. The market was swift to react as it pushed futures prices to their highest levels since the nearby futures contract reached a top at 1.0789 on July 27, 2011.

Besides growth and inflation, the RBA also mentioned the financial pressures on European banks. After expressing worries about the European banking situation in 2011, the central bank said “Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made.”

By reducing the fear of a global economic meltdown, the RBA was able to concentrate its analysis on factors directly affecting the Australian economy. “Information on the Australian economy continues to suggest growth close to trend, with differences between sectors, according to RBA Governor Glenn Stevens. He also added that over the next one to two years, underlying inflation is expected to fall within the bank’s 2.00 percent to 3.00 percent target range.

Although Stevens believes that the key to futures rate cuts depends on whether inflation has been tamed or not, he knows that he now has room to adjust the monetary policy in the future as he sees fit. He also acknowledges that he must continue monitor the financial and economic landscape and “adjust the cash rate as necessary to foster sustainable growth and low inflation.”

Some analysts are interpreting the above statement to mean that the RBA board has adopted a dovish bias and that Tuesday’s decision to keep rates unchanged was merely a short-term pause to gauge the situation in Europe. This is most likely because since its last meeting, the Euro has bottomed, the European Central Bank has held interest rates steady and the outlook for a solution to the Greek debt crisis has improved.

Although the U.S., Japan and the U.K. are all holding interest rates at near zero, the RBA feels it needs more time to assess the situation. Based on the surge in prices, Australian Dollar traders do not seem to be too concerned that interest rates will decline over the near-term despite forecasts of a 3.50 percent cash rate by mid-year.
Technically, the March Australian Dollar is in the midst of a powerful uptrend. Since bottoming at 1.0065 on January 9, the Aussie has not had two-consecutive lower-lows. Although this indicates strength, it should also serve as a key topping indicator should the pattern begin to change. Traders should also begin to monitor short-term momentum indicators for signs of a slowdown in the rally.

The longer the Euro stays inside this tight range, the more anxious traders will become and the more likely there is going to be a volatile breakout. The direction cannot be determined at this time. Although the main trend is up on the daily chart, today’s action suggests there is a growing bias to the downside. Traders should refer to the pivot price mentioned earlier to gauge trader sentiment.

Two other important ranges are currently controlling the short-term direction of the market. The first is the main range created by the December 2 top at 1.3561 to the January 13 bottom at 1.2627. The retracement zone created by this range is 1.3094 to 1.3204. The upper level of this range stopped the market 6 out of the last 7 days. Today’s action has taken out the lower end of the retracement zone, putting a bearish spin on the Euro.

The next important range was formed by the January 13 bottom at 1.2627 and the January 27 top at 1.3237. The retracement zone of this range is 1.2932 to 1.2860. This 50 percent to 61.8 percent zone is the next major downside target.

Accompanying these two retracement zones is downtrending Gann angle resistance at 1.3121 and uptrending Gann angle support at 1.2947.

Fundamentally, uncertainty over a resolution to the Greece debt crisis has re-entered the minds of traders, threatening to unravel January’s entire rally. Traders fear that Greece will not accept the strict terms of a new bailout deal needed to avoid a potential sovereign debt default. With debt repayments due in March, the Greek government is under tremendous pressure to agree to the new austerity terms that include wage cuts.

The slow progress is encouraging long traders to pare their positions. In addition, a few members of the European Union are starting to worry that the inability to reach a decision will undermine investor confidence, leading to similar financial market turmoil seen throughout the fall.

The severity of the situation should be judged by how fast traders have been able to erase from their memories the good news generated by Friday’s bullish U.S. jobs data. Today’s weakness suggests that Euro traders are more likely to act first and ask questions later.

Technically, the main trend is up with no threat of a change in trend to down although there is room for a sizable correction. Based on the short-term range of .9711 to 1.0026, the nearest 50 percent to 61.8 retracement zone is identified as .9868 to .9831. This is the next possible downside target should the U.S. jobs number prove to be bullish for the Greenback.

This morning, the Canadian Dollar is currently straddling an uptrending Gann angle at .9966. This angle should act as a pivot price. The old top from December comes in at .9923. This may be minor support as old tops tend to become new bottoms. Another uptrending angle from the .9675 bottom is at .9865 today. This angle is not likely to be tested today unless there is an extremely volatile break. For the record, this Gann angle combined with the 50 percent level form a possible support cluster at .9868 to .9865.

On the upside, taking out the recent high at 1.0026 could launch another move to the upside with the October 27, 2011 level top at 1.0075 the next target. The uptrending angle at .9966 today should serve as a guide.

Like most higher-yielding currencies, the March Canadian Dollar is enjoying the benefit of the “risk-on” trading scenario. The recent surge to the upside is directly related to its favorable interest rate differential. With the U.S. Federal Reserve recently saying interest rates would remain at ultra-low levels until late 2014, investors flocked to the higher-yielding Canadian Dollar, sending it to multi-month highs. As long as liquidity is free-flowing, sentiment should favor the Canadian Dollar over the U.S. Dollar.

If financial conditions in Europe turn bad and this fresh liquidity is used to put out fires rather than encourage growth then sentiment may shift back to a “risk-off” scenario. This would lead to a liquidation break in the Canadian Dollar.

Although this morning’s Canadian jobs data showed employers added fewer jobs last month than economists forecast and the unemployment rate unexpectedly increased, the Canadian Dollar’s strength is likely to be related to the U.S. Dollar’s weakness.

The EUR USD closed February by posting a monthly closing price reversal bottom. This chart pattern has the potential to launch the start of a 2 to 3 month rally equal to at least 50 percent of the last break. The key is the follow-through rally this month. Without it, the pattern will not be confirmed and the market will likely retest the January low.

In order to start the launch sequence the Euro has to trade through last month’s high at 1.3233. A trade through this level is expected to trigger further short-covering and additional buying as traders will gain confidence that a major bottom has been formed. In January the Euro bottomed on an uptrending Gann angle at 1.2636. This month the angle moves up to 1.2676. This angle is the key support this month.

Even if the market does confirm the closing price reversal bottom, the market will not have a clear shot at the 50 percent retracement level. It will first have to take out a resistance cluster formed by an uptrending Gann angle and a downtrending Gann angle. These angles form an “x” this month at 1.3476 and 1.3500 respectively.

If upside momentum builds as expected and the previously mentioned resistance cluster can be overcome then traders should look for a test of 50 percent of the main range 1.4940 to 1.2623. This key price level is 1.3781. Further buying power may even drive the market into a Fibonacci price level at 1.4055.

The bottom was formed in the Euro in January after a series of events encouraged bearish traders to curtail their selling pressure and weak shorts to cover their positions. As the rally progressed, larger traders most likely pared their open short positions, but for the most part they maintained their bearish posture. The recent Commodity Futures Trading Commission Commitment of Traders Report showed that shorts still maintain a large position and appear to be in control of the Euro’s long-term direction.

One event that helped form the bottom in the Euro was the European Central Bank’s decision to leave interest rates unchanged at 1.00 percent. This was against most analyst forecasts and helped trigger the start of a strong short-covering rally. Most of the selling pressure witnessed earlier in the month can be attributed to the notion that traders believed the Euro Zone was headed toward a recession and perhaps a financial calamity.

The fact that the central bank held rates steady and ECB President Draghi was able to stabilize the market with his positive rhetoric also contributed heavily to the bottoming action in the Euro.

Also taking place while the ECB was busy stabilizing the European financial markets was an important Italian bond auction. Demand was better than expected which was a sign that investor sentiment may be turning a little more optimistic. With interest rates stabilizing for the time being, short Euro traders seized the opportunity to take profits, helping the market to bottom.

For the first few weeks of the month, rumors swirled that the major debt rating services were poised to announce downgrades of several European sovereign nations. This was also a major contributor to the rapid decline the Euro experienced in early January. When the news came out on January 13 that France was downgraded, traders reacted by selling the Euro. When the dust cleared that day, the market had recovered from the breakdown as traders seemed to realize that this event had already been priced into the market. This proved to be the final contributing factor to Euro’s bottom.

Shortly after bottoming, the Euro began to rally on the news that the European Union and Greece were getting close to finalizing its debt structure plan. As the two parties negotiated, optimism increased that a solution would be found soon. As of the end of the month, however, nothing concrete was in place, but the parties were still talking. Since talks between the EU and Greece have been ongoing for several months, it’s a coin-toss as to whether the market will react positively to the announcement of a deal. If anything, there is likely to be a fast short-covering rally and traders will move on to the problems in Italy and Spain.

The final leg in the Euro’s rally in January was triggered by the U.S. Federal Reserve’s announcement that interest rates would remain at historically low levels until late 2014. This greenlit demand for higher risk assets and crushed the U.S. Dollar. At month’s end the Euro rally was showing signs of running out of steam on the heels of weaker U.S. economic data.

The uptrending Gann angle at 1.3187 today also seems to be attracting some trading activity. This angle held as support for almost two weeks but now the Euro is trading on its weakside. Until it pulls away from this angle, continue to look for it to act like a pivot price. This angle combined with the Fibonacci level form an important resistance cluster at 1.3204 to 1.3227 on Friday.

A downtrending Gann angle at 1.3141 is also in the picture today. A break under this level will be a sign that the market is turning bearish. If short traders begin to press the market under this level then the next downside target will be an uptrending Gann angle at 1.2907.

Based on the short-term range of 1.2627 to 1.3237, the 50 to 61.8 percent retracement zone at 1.2932 to 1.2860 is a potential downside target. This 50 percent level of this range combined with the previously mentioned uptrending Gann angle forms an important support cluster at 1.2927 to 1.2932 on Friday.

On the upside, a breakout above the most recent swing top at 1.3237 will reaffirm the uptrend on the daily chart and confirm the closing price reversal top on the monthly chart. This could trigger an acceleration to the upside with a downtrending Gann angle at 1.3351 the potential target.

Fundamentally, the Euro is down versus the U.S. Dollar because the European Union is struggling to reach an agreement with Greece. EU officials are trying to negotiate a deal with Greek bondholders on cutting the nation’s debt burden. The long process has triggered some concern among Euro traders who feel the Euro Zone economy is at risk if a deal isn’t passed soon.

Traders appear to be growing weary over the Greek deal. The process has been going on for weeks and the optimism that was built early seems to be waning. Traders seem poised to put risk back on, but are becoming more tentative with each test of the recent high. Adding to the indecision is Friday’s U.S. Non-Farm Payrolls report. Traders may not want to pick a side in the market going into this report. This may lead to a choppy two-sided trade today.

Like most interventions, the October intervention was destined to fail. Depending on its size, it just takes time for the market to absorb the move. In 2011 the Japanese government made two major interventions. The first occurred in March 2011 shortly after the Tsunami. This was absorbed by July 2011, or after four months. The last intervention was on October 31, 2011. If it follows the same four month cycle then by the end of February the Japanese Yen may be challenging the October top at 1.3279.

Long speculators should be aware that although the technical picture on the charts suggests no visible resistance, the Japanese government is most likely preparing a series of “verbal” interventions in order to scare weaker longs out of the market.

Besides moving to the Yen for safety, overnight traders bought the currency after the Small Business Confidence Index in Japan moved from 45.6 in December to 45.7 in January. Gains may have been trimmed by the news that Japanese housing starts fell 7.3% (YoY) in December. Finally, Japanese Finance Minister, Jun Azumi warned that he would take “decisive steps” if the movement in the Yen becomes too volatile or if prices rise too rapidly over a short-term time period.

Technically, the former main top at 1.3101 is now the new support. If this price level fails, then the next support level is 1.3023.

Technically, after three days of sideways trading, the March British Pound succumbed to the threat of impending volatility and surged above a key 50 percent price level at 1.5671. The upside momentum was so strong that the market continued the rally until it tested the 61.8 percent retracement level at 1.5777. Not only is the market breaking out over the Fibonacci retracement level, but it is also taking out a pair of former swing tops from November and December at 1.5758 and 1.5761. This move further supports the idea that the main trend has turned to up on the daily chart.

Now that a firm uptrend has been established for the day, traders should watch for at test of the downtrending Gann angle at 1.5805. If the market can maintain its strong upside momentum, then traders should start to plan for a possible attack of the slow-moving downtrending Gann angle at 1.5963.

Since the market is trading on the bullish side of a key 50 percent price, then traders should look for support to form at 1.5671. In addition, the market has also been walking up a steep uptrending Gann angle since bottoming at 1.5222. This angle moves to 1.5702 today. As long as the British Pound can maintain its current upside pace of about .004 pips per day then traders should consider it to be in a position to move higher. The first break of this Gann angle will be a sign that momentum is shifting to the downside.

Traders are also watching the upcoming Italian bond auction. The last auction was well-received but this one is coming after a downgrade by Fitch Ratings. The issues regarding Greece surround the need for a bigger rescue package and the possibility of a direct intervention by the European Union into Greek budget decisions. Weaker global equity markets are also encouraging traders to pare long risky asset positions.

Following last week’s dovish tone by the U.S. Federal Reserve in its monetary policy statement, the U.S. Dollar fell sharply against most major currencies. This likely means that after a short-term set-back, the March Swiss Franc will renew its uptrend.

Technically speaking, the March Swiss Franc turned its main trend up on the daily chart following a trade through the former swing top at 1.0762 on January 23. On Friday, the strong rally stalled at 1.0979. This means the rally fell short of a resistance cluster of Gann angles and retracement levels at 1.0991 to 1.1070. Based on the main range of 1.1700 to 1.0431, a key retracement zone was created between 1.1066 and 1.1215. Downtrending Gann angle resistance is at 1.1070 while an uptrending Gann angle arrives at 1.0991.

Now that a short-term range has been formed between 1.0431 – 1.0979, traders should anticipate a possible retracement into 50 to 61.8 percent of this range to 1.0705 – 1.0640. In addition, uptrending Gann angle support can be found at 1.0711 today, making 1.0711 to 1.0705 an important support cluster.

With the main trend up and the market set-up for a near-term retracement, traders should look for a fresh buying opportunity if the currency corrects into 1.0705 to 1.0640 as expected.

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At this time, aggressive buyers may be able to catch a quick rally into the first retracement zone, but do to the bearish nature of the fundamentals; it is a bit premature to be thinking about a change in trend. The first sign that the trend is turning up on the daily chart will be a move through the most recent swing top at 3.7410. Even if this occurs over the short-run, it is far more important that this market form a “W” bottom or support base, or the rally is likely to fail somewhere down the road.

Besides the 50 percent price level target, upside momentum may drive this market into the Fibonacci or 61.8 retracement level at 3.1860. Furthermore, although the market appears to be shedding a pair of long-term downtrending Gann angles at 2.5550 and 2.6720 this week, it may still run into fresh selling pressure at another downtrending Gann angle at 3.0210. Based on all of these potential scenarios, traders should recognize that any rally is likely to be labored.

Traders should also keep in mind that the formation of a closing price reversal bottom does not mean that a major bottom has been formed or even that the trend has changed to up. The key is the follow-through rally the next week through the previous week’s high. Markets make lower-lows and higher-closes all of the time without ever following through on the pattern. Traders should keep this in mind to prevent random buying that ultimately ends in failure.

This being said, March Natural Gas has to trade through 2.8380 to confirm the pattern and set it on course for the first objective at 3.0150. Increased volume and volatility will also be needed to create the upside momentum needed to complete the objective of the pattern.

Fundamentally, a short-covering rally was triggered last week by President Obama during his State of the Union address after he threw his support behind developing the natural gas industry. This made natural gas producers happy, but in reality they still face a tough road ahead because consumption still lags grossly behind production. Last week Chesapeake Energy announced it would be curtailing production, but unless other producers follow suit, crude oil storage capacity could reach 100% by May.

Keep this in mind before committing 100% to the long side. Let the market news play out and let the market form the necessary support base. Typically, the first leg of a good rally is triggered by massive short-covering. This is followed by a re-test of the main bottom and then a drive higher. If traders don’t buy the retest, then the pattern will fail. Remember that big money does not pick bottoms but usually help form the secondary-higher bottom. Until a secondary higher-bottom is formed, consider any rally short-covering or profit-taking.

Technically the market is overbought by some oscillators which is giving a few traders an excuse to pare their existing open long positions. Furthermore, the market is testing the October 27 top at 1.0584. Since this top was made during a tumultuous time period, long traders are respecting the strength of this price level. In addition, big money may be defending this level so it may take a few attempts to finally pierce it.

The current up leg from the October 9 bottom at 1.0065 has been moving up an impressive .004 per day since it was formed. This places the uptrending Gann angle guiding the market at 1.0585 today which squares almost precisely with the old top at 1.0584. You can call it a pivot zone or a resistance cluster depending on which side of the market you are favoring at this time.

If you are a trend trader then you would like to see the market trade on the bullish side of this angle. This would make 1.0585 a key support level. If you have a counter-trend opinion or are looking for a reason to exit some profitable long positions then this is a logical price zone.

One caution that traders should be aware of is the possibility of a correction into the next uptrending Gann angle at 1.0325. You can see from the current chart set up that a failure to regain 1.0585 will make the market vulnerable to a near-term correction. Besides the Gann angle, traders have to be aware of a possible retracement of the current rally from 1.0065 to 1.0628. This zone has been identified as 1.0347 to 1.0280.

On the upside, if the market can breakout above the old top at 1.0584 with conviction then the July 24, 2011 top at 1.0789 will be deemed the next potential upside target. As long as the interest rate differential continues to favor the higher yielding assets, there is no strong reason why the Australian Dollar should lose ground to the U.S. Dollar over the near-term.

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Now that the Euro is trading on the bullish side of a 50 percent price at 1.3094, this level is new support. This is followed by an uptrending Gann angle at 1.2987. Slow and steady can best describe this nine day rally so any volatile or spiky action is likely to indicate a developing short-term shift in sentiment. Since this can be described as a prolonged move in terms of price and time, traders should also watch for a closing price reversal top to signal the end of the move and perhaps the start of a short-term correction.

Fundamentally, the rally started when financial peace broke out in Europe in the form of serious talks with Greece regarding its refinancing. The fact that Germany’s economy is not falling apart contributed to the rally.

While the calm in Europe may have helped halt the decline and trigger the short-covering rally, yesterday’s news that the U.S. Federal Reserve may keep interest rates at extremely low-levels into late 2014 is fueling today’s rally. Apparently the Asian traders liked it based on their overnight support. Who’s to blame them, it is basically an announcement of free money and this is the fuel that drives up demand for risky assets.

With U.S. rates at near zero and likely to stay their for another two years, money is once again seeking its highest level and that is in the higher yielding currencies such as the Euro, Canadian Dollar and Australian Dollar. Interest rate deferential trading is back in vogue today, forcing the situation in Europe to take a back seat. How long this will last is the question, but today it is the catalyst behind the move.

This doesn’t mean you can take your eye off of the debt situation in Europe, but what it does say is that there is a relative calmness in the markets right now and institutions and banks are being allowed to do what they do best and that is move money around, even if it means chasing an ultra-low yield. Just keep in mind that they are making plenty off of the lending spread so don’t feel sorry for them. It’s not like they are getting paid the same yields to lend money as the middle-class investor in the U.S.

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Monday’s early upside action suggests that bullish traders are ready to give it another go at an upside breakout since there appears to be overnight demand for risky assets such as commodities and stocks. Bullish traders may be licking their chops at the current formation because of the huge amount of room to the upside over .9923. If there is upside momentum on the breakout with above average volume, we could be looking at the possibility of an acceleration to the upside once the resistance is cleared.

If the market breakouts, but there is a pull-back then traders should watch for the old top to become a new bottom. If it fails to provide support then we can conclude the breakout was triggered by buy stops rather than fresh buyers. There is a strong possibility of this occurring since volatility has been dropping and volume has been relatively light.

Besides the resistance levels, traders should also be watching the support levels. After zigzagging several times over the uptrending Gann angle, it looks as if traders may be establishing support at .9875. The first sign of weakness will be a break under .9827; however the main trend will not turn down until the main bottom at .9711 is violated.

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In the meantime, traders should be focusing on today’s developing closing price reversal top. Typically when a market forms a higher-top, lower-close, there is a 2 to 3 day correction back to 50 to 61.8 percent of the last rally. In this case, the rally from 1.0431 to 1.0755 should trigger a near-term correction back to 1.0593 to 1.0555.

Trend traders may want to press the short side today since the daily chart appears to have a downside bias. Aggressive counter-trend traders are likely to wait for the pull-back into the retracement zone before even considering the long side. Of course, a decision will have to be made whether to chase the market if it breaks out over 1.0568. Longer-term traders would like to see a secondary higher bottom formed between 1.0593 to 1.0555 to give them the confidence to trade the long side for a prolonged move.

With the market showing a higher-top and higher-bottom, there is a slight bias to the upside. The fact that the market has been trading in a compressed range is a strong indication of impending volatility. Upside momentum is needed to drive this market higher. If this occurs then the first objective is 50 percent of the 28.25 to 22.62 range at 25.49.

Traders should watch for a technical bounce at this level, but not necessarily the start of a change in trend. It is a natural selling point or profit target for short-term bulls, but a test of this level may not attract fresh shorting pressure which is necessary to turn the main trend back down.

With the main trend down on the daily chart and as the single currency enters a key retracement zone, traders should be looking for opportunities to re-enter on the short side. Besides the 50 percent retracement level, traders should pay particular attention to the 61.8% retracement level at 1.2911.

In addition, traders should also be watching for a reaction if the downtrending Gann angle at 1.2921 is tested. This price combined with the Fibonacci retracement level at 1.2911 could form a tight resistance cluster today.

Gann angle analysis suggests the market is trading inside of a triangle chart pattern with support being provided by an uptrending Gann angle from the main bottom at .9233 at .9803. Resistance is the downtrending Gann angle from the 1.0569 top at 1.0169. Following these angles into the future, one can see that an apex has been formed where the angles cross at .9986 on or about January 18 or 19. It is possible the market will ping-pong inside of this triangular formation until then. However, during the time until then volatility will be building inside of the triangle to produce a tremendous breakout.

Finally, horizontal support and resistance suggest the single currency is trading in between a pair of retracement zones. Based on the main range of .9233 to 1.0569, the first retracement zone is .9901 to .9744. Although this zone was penetrated in late November on the move to .9548, the lower boundary was quickly regained and the market was able to hold a retest at .9761 on December 15. Another resistance zone has been formed inside of the 1.0569 to .9548 range. This 50 to 61.8 percent retracement zone is bounded by 1.0059 and 1.0179. The upper end of this zone was broken when the market rallied to 1.0268 on December 8, but the market fell quickly back below it. Currently, it is straddling the 50 percent price at 1.0059.

In summary, the March Australian Dollar is in an uptrend. The Gann angles are indicating the market is trading inside of a triangle chart pattern which is a non-trending pattern. This, however, suggests impending volatility. Finally, the single currency is trading on the bullish side of a major retracement zone which is giving it an upward bias. If trader demand for higher risk assets, the Australian Dollar may receive the boost it needs to continue its rally.

When GRPN turned its main trend turned down in late November after it crossed the swing bottom at $22.76, the market accelerated to the downside. When it reached the all-time low at $14.95, it was also oversold on the short-term charts. In addition, it bottomed almost simultaneously with the S&P 500 Index.

The subsequent rally was impressive, but it was basically just a greater than normal retracement of the sell-off from $26.90 to $14.85. From the top at $31.14 to the bottom at $14.85, GRPN formed a retracement zone at $22.99 to $24.92. The recent surge to $25.15 took the market slightly beyond the Fibonacci retracement, but the stock has subsequently broken back below this level as well as the 50 percent level at $24.92. This is the first sign of impending weakness.

In addition to the decline below the retracement zone, GRPN also formed a closing price reversal top at $25.15. This pattern typically indicates a 2 to 3 day break of equal to at least 50 percent of the last rally. The key is the confirmation and this will occur when $21.50 is penetrated. If this takes place then look for a possible break to 50 percent to 61.8 percent of the rally from $14.85 to $25.15 or $20.00 to $18.98 respectively.

Another sign of weakness is the breaking of the uptrending Gann angle at $22.85 today. As long as GRPN remains on the bearish side of this angle, the market is likely to feel downside pressure. The Rule of All Angles suggests that when one angle is broken, the market moves to the next angle. In this case, the market may break to the next uptrending Gann angle at $18.85 on Tuesday.

The combination of the retracement level and the uptrending Gann angle creates a potential support cluster over the next 1 to 2 days at $18.98 to $18.85. There may be a technical bounce in this cluster because short-traders may decide to take profits or bottom-pickers may choose to trade counter-trend. Remember that this scenario is not likely to take place until the closing price reversal top is confirmed.

Contact Market Analyst James A. Hyerczyk at patternpricetime.com.

The short-term range of 1983 to 2274 suggests the market may be forming a bottom. The market made a daily closing price reversal when it created the potential final bottom. This reversal bottom was confirmed, but the market failed to follow-through to the upside. The range created a minor retracement zone at 2129 to 2094. This zone along with the uptrending Gann angle at 2103 may provide some “cluster” support.

The formation of a secondary higher bottom will be a strong sign that the market is getting ready to turn higher. Although 1983 was a better price to buy in hindsight, the odds are that it was produced by short-covering rather than new buying. Now that traders have a price to “lean” on in the form of the low at 1983, buyers may begin to step up to drive this market higher.

Another sign that a bottom may be in place will be crossing to the bullish side of the retracement zone at 2129 to 2094. This will be followed by a penetration of the downtrending Gann angle at 2164. Finally a breakout over the last swing top at 2764 will turn the main trend up on the daily chart and could trigger an acceleration to the upside into the major retracement zone at 2373 to 2466.

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In addition to this retracement zone, an uptrending Gann angle from the .9223 main bottom is providing support at .9773. Currently the currency is walking down a downtrending Gann angle from the 1.0569 top at .9829.

These two angles cross within the next 1 to 2 days. A break under this cluster could put some serious downside pressure on the market. Crossing to the bullish side of the downtrending angle doesn’t necessarily mean the market will rally, but given the current volatility, it is likely to continue straddling the slower moving uptrending Gann angle. I can’t see any sign of a rally until the 50 percent level at .9901 is crossed.

Overnight, the Australian Dollar is showing some strength on the heels of the minutes of the Reserve Bank of Australia’s last meeting. This report showed that central bank policymakers saw continued expansion in the domestic economy despite the turmoil in Europe due to the sovereign debt crisis. The RBA’s main concern is that the European debt crisis will lead to a slowdown in global growth.

Contact market analyst James A. Hyerczyk at patternpricetime.com

On Tuesday the U.S. Federal Reserve sounded the alarm that could be helping to weaken the Canadian Dollar. The central bank cited the turmoil in Europe as one of the reasons why the U.S. economy is vulnerable to an economic slowdown. In addition, it passed on a chance to increase its commitment to additional quantitative easing and stimulus. The statement implies that other nations including Canada are also subject to the problems in Europe. Furthermore, the U.S. Dollar was not weakened since the Fed passed on additional stimulus.

Technically, the March Canadian Dollar broke through the Fibonacci retracement level of the .9485 to .9923 range at .9652. This level is expected to become new short-term support. The next level of support is the uptrending Gann angle at .9615, followed by .9550. Of course, oversold conditions could lead to a short-covering rally; however, with sentiment so decisively bearish, traders can expect a rally of this sort to be met with fresh shorting pressure. Other than technical analysis factors, there doesn’t seem to be much that could help put in a bottom or trigger a change in trend over the near-term.

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Last week’s interest rate cut by the European Central Bank weakened the Euro against other foreign currencies since it took away the interest rate differential edge it had on these countries. Although technical factors suggest the market is oversold, the fact that the last bottom at 1.3212 has been violated means that the main down trend has been reaffirmed. This doesn’t mean the Euro cannot have a rebound in the form of a short-covering rally, but what it most likely suggests is that the single-currency is headed to and perhaps likely to penetrate the October 4 bottom at 1.3142 over the near-term.

Besides the monetary policy easing, pressure on the Euro is also mounting because of an expected lower growth outlook. Economists are predicting the Euro Zone’s economy will expand 0.5 percent next year. Compared to the U.S. expected growth rate of 2.19 percent, the Euro is definitely at a disadvantage. With growth prospects expected to continue to decline, the ECB will probably be encouraged to continue to slash interest rates. This should keep the pressure on the Euro which could accelerate a decline into 1.20 over the intermediate term.

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Traders appear to be a little confused about what this means to the overall debt crisis picture. The recent Italian and Spanish bond purchases by the ECB have served as a way to control interest rates in these two countries. It also may have prevented interest rate spikes like those which took place in Greece. Although at times it seemed like the purchases weren’t working because auction rates were still rising, most traders agree that without them interest rates would have moved dramatically higher.

Daily December Euro Pattern. Price & Time

Since European banks were burned buying Greek bonds as encouraged by the central bank, all have shied away from the purchase of Italian and Spanish bonds. This created fear of an impending credit crisis until the ECB stepped in. The ECB is likely to continue to buy the bonds but this morning’s report doesn’t make it clear as to whether it will step up purchases or gradually step aside.

By backing away from increased debt purchases the ECB could be sending out two signals. The first signal is bearish since it would imply that it may be running low on funds. This would be especially true if it meant that the ECB was implying that it would not have the money to also bailout other sovereign nations such as Portugal or Ireland.

The second reason for curtailing the bond purchases could be that the action will be deemed unnecessary if the European Finance Ministers hammer out a long-term solution by Friday to solve the sovereign debt crisis. This is a real possibility since it is the last meeting of the year and they have received sufficient warning that something must be done now.

Realistically, traders are fed up with the way the EU policymakers have been conducting business this year. This is the main reason for this morning’s sell-off. Traders would rather err on the side of caution than get trapped on the long-side of the Euro if nothing is accomplished by the end of the week.

Technically, the short-term range is 1.3212 to 1.3550 with a retracement zone at 1.3381 to 1.3341. Since the market is on the weakside of this retracement zone, it has a bearish bias. The longer the market spends inside of this range, the greater the breakout potential. A breakout over 1.3550 is likely to mean a near-term test of 1.3772. A move through 1.3212 is likely to trigger an acceleration to the downside into the upper 1.2000 area.

Daily December Euro Pattern, Price & Time Analysis

A rally through the reversal top at 1.3550 negates the pattern and could trigger an acceleration to the upside with 1.3727 a potential upside target. A trade through 1.3362 will confirm Friday’s closing price reversal top. A move to the downside is likely to be labored since a Fibonacci level at 1.3341 and an uptrending Gann angle at 1.3332 has formed a support cluster. Regaining a steeper uptrending Gann angle at 1.3452 will be a sign of strength especially on a closing basis.

Over the week-end, Italy’s cabinet approved a plan to cut its deficit. The new plan calls for 30 billion Euros of austerity and growth measures. This translates into delayed retirements and more taxes. Both houses of parliament will debate this proposal today.

Late last week, Euro Zone finance ministers gave their approval for work on a plan to recycle national central bank funds through the International Monetary Fund. The fund is expected to be used to underwrite loans to Italy or Spain. Keep an eye on this plan since it is too early to assess its impact on the market at this time. This plan could provide stability to the Euro Zone and will likely have a positive impact on the Euro.

On December 8, the European Central Bank is expected to cut its benchmark interest rate to 1 percent from 1.25 percent. Typically a rate cut weakens a currency, but in the case of the Euro, this action will be seen as a positive because it will serve as an attempt to promote growth in order to soften the anticipated recession. After an initial rally the Euro may begin to sell-off until something more concrete is agreed upon by Euro Zone officials.

Later this week, the Euro Zone’s gross domestic product will be released. The report is expected to show that the region grew 0.2 percent in the third quarter. This is unchanged from the previous quarter. A negative report will mean the recession is beginning.

Overall, pressure should continue on the Euro following the current price “adjustment” triggered by central bank liquidity measures last week. Besides the inability to come up with a concrete solution to contain the sovereign debt crisis, Europe faces a potential recession. In addition, a loose monetary policy and a tight fiscal policy are likely to lead to a weak growth outlook over the near-term and into next year.

Another reason for the timing of this move could be that the European Central Bank felt overwhelmed by the massive amount of sovereign debt it would have to cover should several countries default at the same time. At this time the resources of the ECB are being taxed because of its purchases of Spanish and Italian debt. If it had continued on this course of buying up sovereign debt, it probably would’ve ended up as the lender of last resort which is something it wants to avoid being.

Based on the size of the rallies in the foreign currency, commodity and equity markets, it looks as if the central banks’ move restored some confidence to the financial markets. Despite the rally, the consensus among traders is that this is a short-term solution that gives the politicians and finance ministers time to work out more sophisticated longer-term solutions. How long the euphoria lasts has yet to be determined. Overnight there was very little movement in the foreign currency and equity markets. Traders may have had time to crunch the numbers and may have concluded that the move was enough to change the playing field, but not enough to change the trend.

Yesterday’s rallies may have been enough to buy some time, but trading theory says there has to be a retracement since a major portion of the rally was triggered by short-covering rather than fresh buying. There has to be a pull-back to allow the value-based buyers in the market. Given the huge amount of negative news at this time and the strength of the downtrends, it’s hard to believe that anyone would want to pay up for currencies or stocks. In my opinion, the traders that were caught short on Wednesday, after licking their wounds are likely to come back with a vengeance on the first sign of bad news.

Daily December Canadian Dollar Pattern, Price & Time Chart

Technically, the December Canadian Dollar is still in a down trend despite the current 4-day rally. As long as the market maintains its lower-top, lower-bottom formation, all of the rallies are going to be considered corrective in nature. Based on the 1.0097 to .9497 main range, the 50 percent to 61.8 percent retracement zone at .9797 to .9868 respectively is the current resistance. A downtrending Gann angle at .9847 is also a resistance point, making .9847 to .9868 a major resistance cluster to overcome if this market is going to continue to move higher.

From a support perspective, the single currency is trying to overcome a steep uptrending Gann angle at .9817. If the market can regain this angle and hold above it then consider this to be a sign of strength. If this can’t be accomplished then look for a possible retracement to .9657.

The key to today’s action is the follow-through rally. If traders don’t take the financial markets sharply higher today then yesterday’s action was just a shot of insulin. In other words, it is going to have to be replenished soon. If this was a pre-emptive strike against a future bad event then expect to see the bad news shortly. It may be a French bank downgrade or even rumors of a Euro Zone breakup. The bottom line is something has happened or is happening that made the Fed take the money from the U.S. piggy-bank and put it into Europe. It has to be something monumental. I don’t think it was done as a show of power or to allow the central banks’ to flex their muscles.

On Tuesday, the EU Finance Ministers approved the release of Europe’s contribution to Greece’s 8 billion Euro ($10.7 billion) aid tranche. This seems to have been already priced into the market. They also agreed on a plan to leverage the funds of the 440 billion Euro European Financial Stability Facility (EFSF). This move was designed to give the fund more firepower. This was also probably priced into the market since it was originally proposed in late October. Although it is not expected to be operational until mid-January, critics are already saying that the EFSF will be underfunded.

Daily December Euro Pattern, Price & Time Analysis

On the agenda today is more speculation regarding the EU’s plan to speed up the process of providing funding for sovereign debt bailouts without the need of a change in the entire EU treaty. The official announcement of this plan is not expected until next week’s EU summit on December 9. Traders will also be speculating on whether the EU Finance Ministers will invite the International Monetary Fund to have a greater role in helping to stabilize Europe. This comes in the wake of the failure by the European Central Bank to quell the rise in interest rates in Spain and Italy with its bond buying campaign.

Technically, the December Euro is trading both sides of a downtrending Gann angle from the 1.4241 top at 1.3281 today. This price may act as a pivot price. Based on the short-term range of 1.3212 to 1.3444, it looks as if the retracement zone at 1.3328 to 1.3301 could be the key to the market’s short-term direction. Traders have to watch how the market behaves in this area because holding this zone could mean the formation of a secondary higher bottom and the start of the next leg up.

The size of the recent decline indicates that short-traders were in control so it makes sense to deduce that short-covering is driving the current rally. Without economic reports to guide traders and no one on record hinting at what the EU summit expects to accomplish, the Euro is likely to be headline driven until the summit takes place on December 9. Because of this scenario, traders have to be careful not to get caught up in the volatility. Headline risk is high and traders should make adjustments accordingly.

Daily December Euro Pattern, Price & Time Analysis

The 2-day rally from last week’s low at 1.3212 has been impressive, but not trend changing. The main trend still remains decisively down so the move we are witnessing is simply a rally in a bear market. Since it is being driven mainly by short-covering and position squaring, it remains vulnerable to a fast turnaround and headline risk. With the main trend down, the best way to approach this market remains on the short-side.

The penetration of the downtrending Gann angle at 1.3321 is a sign of developing strength since it controlled the market’s direction for 23 trading sessions. If the December Euro can maintain the pace of its current rally it could reach a key retracement zone over the near-term. Based on the range of 1.4241 to 1.3212, the main objective of the current rally is the 50 percent to 61.8 percent retracement zone at 1.3727 to 1.3848 respectively. This is the area that is likely to attract a fresh round of selling pressure.

Weekly EUR USD Pattern, Price & Time Analysis

The EUR USD begins the week under pressure and in a position to smash through the October bottom at 1.3145 on its way to a test of the low for the year at 1.2873. The only thing standing in the way of this event occurring seems to be the small army of bottom-pickers out there trading the market using oversold indicators. Fundamentally, it appears that the European Union finance ministers have lost all credibility due to their inaction and inability to come up with a manageable plan to stop the spread of the sovereign debt crisis throughout the Euro Zone and other core European nations.

The close near the low for the week suggests this trend is likely to continue next week unless some major development occurs over the week-end. What did break over the week-end was the news that Euro Zone nations are considering a plan to accelerate the integration of their fiscal policies. This plan includes creating treaties between individual countries rather than create one treaty with the EU. This will speed up the process in which European leaders gain new powers to enforce fiscal discipline or financial austerity.

The plan being considered by the Euro Zone governments is based on the Schengen agreement. It was used before when a small group of EU countries decided to scrap passport controls. According to the agreement EU members are allowed to engage in “enhanced cooperation”. This will allow Euro Zone members to make treaties with other members, cutting out the process of having the entire Euro Zone approve changes to its treaty.

This pact could be announced before the EU summit on December 9, but will the market pay any attention to this announcement? Given the track record of the EU in reaching actionable agreements, many traders may choose to ignore this proposal unless it results in a short-term manageable plan to stem the spread of bad debt across the Euro Region. If implemented this plan will not negate the need for a longer-term agreement, but it will allow the EU to enforce a few of the changes it needs now to implement short-term austerity actions such as the stricter enforcement of budget rules.

This plan, in my opinion, is not going to stem the crisis of confidence taking place in the financial markets at this time. It may put in a short-term bottom in the EUR USD, but that may also occur simply because of oversold conditions. Euro Zone officials are hoping that the change in the European Central Bank leadership along with this new plan will encourage the ECB to step up its buying of government bonds in countries with sovereign debt issues.

Interest rates continue to rise in Italy despite efforts by the ECB to support the bond market. With investors leaving these debt markets in droves, continual central bank intervention is needed to prevent interest rates from sky-rocketing. Last week’s spike in interest rates following a debt auction in Italy was proof that unless the ECB steps up its intervention, the situation will continue to spiral out of control. Current conditions suggest that Italy has been lost.

Although the ECB has been doing what it can to stem the flow of sovereign debt with its bond purchases, the call for greater intervention couldn’t be greater. Increasing its influence in these markets runs the risk that it breaches its charter and ruins its credibility. After all, the role of the ECB is to control inflation not rescue debt-laden countries or troubled banks.

Daily GBP USD Pattern, Price & Time Analysis

The GBP USD main trend is down on the daily chart. Because of the prolonged move in terms of price and time from the last main top at 1.6130 on November 8, the market could be setting up this morning for a short-term closing price reversal bottom at 1.5422.

Although this pattern can produce a 2 to 3 rally back to at least 50% of the previous down move, it does not mean the trend is changing to up. Based on the swing from 1.6130 to 1.5422, if a closing price reversal bottom is formed then traders should look for a possible counter-trend rally to 1.5776 by November 29 – 30.

The key word is “if” because we haven’t seen the reversal bottom yet. Trading conditions are ripe for the reversal but the market has to close higher at a minimum. Furthermore, there must be a follow-through rally on Monday for the projected retracement to take place. Otherwise, traders should use the slow-moving, uptrending Gann angle at 1.5451 for guidance.

Daily December Euro Pattern, Price & Time Analysis

The financial markets are screaming for concrete action by the European leaders instead of just talk. Without any short-term or long-term plans in place, fear and hope are the driving forces. It looks as if it is going to take capitulation in the financial markets before the European leaders take their task at hand seriously.

The Euro reached a seven-week low overnight against the U.S. Dollar. Trading activity has been firm following the U.S. holiday. The overnight weakness was triggered by a drop in French consumer confidence. Traders interpreted this report to mean that the Euro Zone is moving closer to a recession.

Short-term interest rates also rose in Italy indicating that despite efforts to stem runaway rates by the European Central Bank, market forces seem to be stronger than the central bank at this time. Italy appears to be a lost cause as the market has been unable to respond to ECB bond purchases as well as the new government in Italy.

Portuguese debt was downgraded to junk on Thursday. The situation is beginning to unravel fast as bearish traders are beginning to increase bets that the debt crisis will soon expand to a few core Euro Zone nations. Hungary’s Forint currency was also under pressure after Moody’s downgraded the country’s credit rating to junk status.

German Chancellor Angela Merkel rejected a proposal to put new demands on the European Central Bank to become the lender of last resort. This is a clear signal that the region is likely to see a major sovereign debt default or a major bank failure. Merkel also rejected proposals for Euro bonds. Germany is definitely digging in to protect itself.

Bearish risk sentiment is likely to continue to drive equities and commodity markets lower as traders continue to shed risk. Without clarity and conviction from European leaders, pressure will continue to drive these markets lower as well as the major foreign currencies. Downside momentum is building in the Euro, setting up the potential for a hard drive into a four-month low.

Technically the December Euro is clearly in a downtrend. It is currently walking down a Gann angle from the 1.4241 top at 1.3401 today. Continue to look for lower markets as long as this downtrending angle remains resistance. Momentum is very strong to the downside. Look for volatility to rise, driving this market into the October 4 bottom at 1.3142 over the near-term.

Daily December British Pound Pattern, Price & Time Analysis

The December British Pound is trading weaker this morning. An early morning release of the minutes of the most recent Bank of England’s policy meeting showed some monetary policy committee members leaning toward an increase in stimulus. The announcement triggered a break to a six-week low against the Dollar.

Technically the market is straddling the 61.8 percent retracement level of the 1.5179 to 1.6158 range at 1.5553. A break through this Fibonacci level could trigger an acceleration to the downside. On the upside, the 50 percent price is the new resistance. Because of the possibility of thin pre-holiday trading in the U.S., traders have to be careful not to get caught in a bear trap. In other words, avoid building too big of a short position at current price levels because of the chance of a late session short-covering rally.

This morning’s BoE minutes revealed that the MPC voted unanimously to keep its benchmark interest rate at a record low 0.5 percent and hold its target for quantitative easing at 275 billion pounds ($428 billion). Further analysis revealed a very dovish tone as some voting members preferred to accelerate quantitative easing to stimulate economic growth.

Speeding up QE at this time is not likely since the existing program is still in the process of purchasing assets. The BoE has to take into consideration market capacity. Trying to expedite the existing program that is likely to take three months to complete will probably not be attempted.

Although a fresh stimulus effort is not expected over the short-run, the BoE left open the possibility that another round could occur perhaps early next year. Because inflation is expected to decline, the central bank said “The balance of risks to inflation meant that a further expansion of the asset-purchase program might well become warranted in due course”. If you recall, last week the BoE cut its growth and inflation forecast. Since the official forecast calls for inflation to slow below its 2 percent target in two years, an increase in stimulus may be warranted over time.

In addition, the European debt crisis is also weighing on the U.K. economy. It seemed to be on its way to recovery throughout 2010 and into early 2011, but the recovery began to stall once it became clear that the Euro Zone debt issues would create a tough economic situation.

The fundamentals suggest a long, drawn out downtrend is likely as long as economic stimulus remains the main option of the central bank. More stimulus remains a real option as growth and inflation are expected to continue to decline. As long as the Euro crisis continues to threaten to expand beyond Italy and Spain, look for the U.K. economy to remain stagnant-to-weaker. Technically, oversold conditions may slow down the rate of descent, but it is not likely to trigger a change in trend.

Daily December Euro Pattern, Price & Time Analysis

The December Euro is showing a little strength this morning. Technically the market has pierced a downtrending Gann angle from the 1.4241 top at 1.3520. Although this does not mean the trend is turning to up, coupled with the support base that has been building since the single currency bottomed at 1.3420, one can build a case for the start of a possible short-covering rally

Economic news may take a backseat today as the focus seems to be shifting toward sovereign debt ratings. After it was announced that the U.S. congressional super committee failed to reach a debt solution, credit agencies maintained their opinions on the sovereign debt of the U.S. Fitch Ratings, Standard & Poor’s and Moody’s all held their ratings unchanged.

Even though a sigh of relief was expressed on the news from the rating services, earlier in the day traders gave their opinions of the whole mess by selling off equity and commodity markets. Traders had been concerned that a failure by the debt committee would have meant another debt downgrade similar to the one the S&P Corp. expressed in August after the U.S. debt ceiling was raised.

Although the Euro is trading a little better this morning, conditions could shift back to bearish rather quickly. The sovereign debt crisis is still a major concern. In addition, Moody’s on Monday warned that French debt could lose its triple-A rating. Increased borrowing costs and slowing growth are the main concerns. Since the U.S., Spain and Italy have already faced downgrades in the past, a cut of France’s rating, while it wouldn’t be a surprise, could create turmoil.

As it stands this morning, Europe is still facing a debt crisis and the December Euro is trading higher. Relief that the U.S. didn’t get its credit rating cut could mean that Monday’s sell-off in the Euro, equity and commodity markets may have been overdone. The only conclusions I can reach for this morning’s rally are the risky markets are oversold on a short-term basis or traders have decided to start the Thanksgiving break early by squaring their short positions.

Japanese Yen traders continue to absorb the latest round of intervention by the government that took place on October 31. With prices holding above an uptrending Gann angle at 1.2957 and a key 50 percent level at 1.2923, traders are demonstrating that they are not afraid of the government’s threats to weaken its own currency. The next obstacle to overcome is a downtrending Gann angle at 1.3077, followed by 1.3170.

As long as the market holds above the uptrending Gann angle while moving at the steady pace of .0025 per day, the December Japanese Yen appears to be poised to reach the top of the range at 1.3264 by December 7 or 8.

With traders apparently poised to make another run at the top, the question appears to be whether the Japanese government has the firepower to take on the steady buying that is currently taking place. This decision is going to have to be made soon based on the release of this morning’s worse-than-expected exports report. The figures suggest the Japanese government may have to take a more preemptive approach to weakening the Yen.

This morning’s report showed Japan’s exports fell at the fastest pace in five months. The trend suggests a strong Yen and weakening global economy may continue to exert pressure on the fragile economy still trying to recover from the effects of the earthquake and tsunami in March. After posting a 1.5 percent increase in GDP during the third quarter, today’s weak exports report suggests the rebound in the economy is likely to stop cold in its tracks.

In addition to the problems in Europe, the floods in Thailand are also having a negative impact on Japanese exports. This problem could linger for months meaning the Japanese economy could face negative exposure well into 2012. The question that arises is how the government can continue to afford to take on the speculators when the reason for the weakness in the economy may be from more troubling outside forces like Europe or the floods rather than the strong Yen as it claims.

If the economy continues to weaken then this condition may force the Bank of Japan to actually begin to ease its monetary policy. This opens the door to a huge rise in the Japanese Yen if demand for liquidity continues due to the major problems in Europe. It looks at this time the BoJ and the government has their hands tied. Eventually most interventions fail because the central bank runs out of bullets and caves in to stronger market forces. This appears to be the case now.

Daily December Canadian Dollar Pattern, Price & Time Analysis

The December Canadian Dollar is stabilizing after a week long decline. Investor concerns over possible debt contagion in Europe has trumped the impact of positive economic data in the U.S. for most of the week. Technical factors and week-ending profit taking are most likely the reasons for this morning’s turnaround. The developing move isn’t likely to lead to a change in trend, but could produce a near-term short-covering rally.

With the Canadian Dollar hovering around a five week low, traders looked for a silver-lining despite lingering sovereign debt turmoil in Europe and weakness in higher-yielding stocks and commodities. They may have found it in the news that foreigners bought a net $7.15 billion of Canadian securities in September. The area of interest for investors was federal government short-term debt.

While traders may be embracing this news as a positive development, it is after all, old news. The primary focus for traders at this time is Europe and the fear of contagion. With the European Central Bank fanning the contagion fan because of its split purchase of Italian and Spanish bonds, commodity-linked currencies such as the Canadian Dollar, Australian Dollar and New Zealand Dollar are all suffering big losses this week as investors continue to shed riskier assets.

Technically the main trend for the Canadian Dollar is down on the daily chart. This trend will not turn to up until the swing top at .9903 is broken. Additional resistance is being provided by a downtrending Gann angle at .9777.

Based on the main range of .9367 to 1.0097, the major retracement zone is .9732 to .9646. Currently the December Canadian Dollar is testing this range. Often after a prolonged move down in terms of price and time, a market turns around on profit-taking when this zone is tested. After testing uptrending Gann angle support at .9697 this morning, the technical bounce to the upside suggests the market may be forming a daily closing price reversal bottom.

If this pattern is formed, then traders should watch for the start of a possible 2 to 3 day rally equal to at least 50% of the last down move. Based on the short-term range of .9903 to .9699, traders should watch for a minimum retracement back to .9801.

Daily December British Pound Pattern, Price & Time Analysis

A slew of negative fundamental data this week helped turn the December British Pound down on Wednesday. The selling pressure continued overnight but subsided a bit as the market neared a key 50 percent price level.

Based on the short-term range of 1.5179 to 1.6158, the first downside objective is the 50 percent level at 1.5669. A close under this level could trigger a rapid acceleration to the 61.8 percent level at 1.5553.

Depending on whether the market has reached an oversold level, could determine whether there is a technical bounce or not. Since the contract is clearly in a downtrend, any short-covering rally is likely to set up another shorting opportunity.

Earlier in the week, the Bank of England said that a severe economic downturn in the U.K. will push inflation below 2%. This sent a strong signal to investors that the central bank will need to pump more stimulus into the economy.

The central bank also warned that growth could stagnate until the middle of 2012 and was likely to reach only 1% for the year as a whole. This statement basically cut in half the BoE’s previous forecast.

The primary reason for the revised inflation and growth figures was the uncertainty in the Euro Zone. With forecasts calling for the sovereign debt situation to linger for several more months and fears of contagion mounting, a global recession triggered by the weakness in the Euro Zone is coming closer to reality.

Traders should continue to look for downside pressure to mount over the near-term. Short-term oversold conditions may trigger a fast short-covering rally; however, this is likely to set-up fresh shorting opportunities. There doesn’t appear to be anything in the economic pipeline at this time that indicates a major bottom is even close to forming.

Based on the current round of selling pressure it appears that the market is already over the news about the new governments in Italy and Greece. For a short time last week and on the opening this week, it appeared that the Euro was poised to move higher because the new government leaders were committed to fulfilling the obligations set forth by the other Euro Zone nations. This included making financial austerity the major issue.

Everything seemed to be going well, but then Italian bond yields began to rise, indicating that fear and uncertainty was once again rearing its ugly head. This changed trader sentiment and investors began to dump riskier assets. This trend is continuing throughout the week as yields rise across Europe. Even core Euro Zone nations are not immune from rising yields this time around.

Economic news doesn’t seem to matter to traders at this time since the focus is on containing the spread of toxic debt across the Euro region. Last month’s three prong proposal to restructure Greece’s debt, recapitalize the banks, and strengthen a bailout fund looked good on paper, but doesn’t seem to be a factor as investors have adopted an “everyman for himself attitude”.

While the Euro continues to weaken, traders should watch for the following sign that conditions are getting worse in the Euro Zone. For several months the European Central Bank has been buying risky sovereign debt in Italy. This has helped stabilize the region. If the ECB starts to buy the debt of Spain and Portugal then this will be a sign that conditions are worsening and that debt problems are spreading.

Although the Euro may initially rise on the news that the ECB is buying more sovereign debt, this is likely to be a short-term move. Bearish traders are on to the actions of the ECB and are not likely to let up on the pressure to break the Euro lower. There may be some volatile short-covering rallies; however, these will continue to be treated as shorting opportunities.

Daily December British Pound Pattern, Price & Time Chart

The December British Pound is trading slightly higher this morning after a report showed U.K. factory output prices were unchanged in October. The cost of goods sold at U.K. factories grew at its slowest annual pace since May as the annual rate of manufacturing inflation eased to 5.7 percent from 6.3 percent in September. The news helped to ease fears of runaway inflation. This may not necessarily be a good thing because a drop in inflation may be a sign of a slumping economy.

On the Thursday, the Bank of England left interest rates unchanged at historically low levels. It also maintained the same level of quantitative easing established last month. Traders may begin to pressure the British Pound on the notion that the central bank may have to inject additional stimulus into the economy over the near-term. Upcoming data may show that inflation has fallen well below the target over the medium term. On Wednesday, November 16, the BoE will release its quarterly Inflation Report.

Technically, the December British Pound is in an up trend on the daily chart, but coming dangerously close to turning the main trend down. A move through the swing bottom at 1.5867 will change the trend to down. This would set up a break into an uptrending Gann angle at 1.5699. Based on the main range of 1.5179 to 1.6158, the retracement zone at 1.5669 to 1.5553 is also a potential downside target. A support cluster has formed at 1.5699 to 1.5669, but this price zone is unlikely to be reached today.

Daily December Euro Pattern, Price & Time Analysis

Delaying the vote on austerity measures and economic reforms means that further debate is likely. This should produce more uncertainty when the market opens early Sunday/Monday and uncertainty is likely to keep the downside pressure on the Euro. Growing concerns about the possibility of the need for a bailout of Italy is the bearish factor hanging over the market at this time. Traders want a fast solution because they’ve seen what a lingering problem can do based on what has transpired in Greece.

Technically the nearest support is an uptrending Gann angle at 1.3412. Based on the short-term range of 1.3142 to 1.4241, its Fibonacci retracement level at 1.3562 was the main downside target. This price was penetrated then regained early this morning, sending shorts scurrying and setting up a potential closing price reversal bottom. This reversal is not likely to indicate a major bottom is forming, but is likely to trigger only a 50% retracement of the weekly range to 1.3671.

Daily December British Pound Pattern, Price & Time Analysis

The December British Pound has been trading steady to higher since bottoming on Thursday at 1.5867. Since this contract is based on theSterling’s relationship to the Greenback, this movement must be related to the fundamental forces affecting both currencies. In my opinion, the link between the two currencies is related to quantitative easing.

If you recall, in early October the Bank of England’s Monetary Policy Committee extended its 200 billion pound quantitative easing in October by announcing plans to buy 75 billion pounds of gilts over the next four months. Prior to this action, the BoE was considering raising interest rates so something must have happened to encourage them not to pursue this path. This was most likely the lingering debt situation in Europe although renewed risk of recession also played a major part in the decision process.

On the Thursday, the MPC meets again and this time is faced with the same situation. Traders have priced in virtually no chance it will raise interest rates at this time so the issue will remain additional quantitative easing.  Although not able to shake the Euro Zone crisis, motions have been put in place that suggest the problems may be less of an issue than they were just a few weeks ago. With the MPC likely to take a wait and see attitude while Europe sorts out its issues, expectations are that additional quantitative easing will be kept on hold at this time. This is most likely the reason why the British Pound is trading firm at this time.

The day before the MPC meets, Fed Chairman Ben Bernanke is going to give a speech at the Federal Reserve Conference inWashington. Although he is expected to talk about the U.S.labor market and the E.U. debt crisis, traders will be listening for hints of additional quantitative easing. Based on last week’s Fed monetary policy statement, it expects the economy to remain weak highlighted by slow growth. Bernanke may mention the effects of the EU crisis on U.S. growth. This may open the door to a comment such as “an acceleration of the debt crisis in Europe could weaken the U.S.economy to a point where additional stimulus may be warranted”. This is the type of statement that is likely to move the market.

Technically, the December British Pound is in an uptrend on the daily chart. The tight range between 1.6158 to 1.5867 is forcing the market to straddle the .618 level at 1.6049. While traders await the events later in the week, continue to look for this rangebound trading. A breakout above 1.6158 is likely to trigger an acceleration to the upside. A move through the main bottom at 1.5867 will turn the main trend down and signal a shift in sentiment. This is likely to occur if BoE applies additional QE or if the Euro Zone crisis worsens.

In summary, look for the Bank of England to leave interest rates unchanged as well as the current level of quantitative easing. These factors are helping to boost the Sterling. Additional upside pressure could come from a statement from Fed Chairman Bernanke in a speech he is scheduled to give the day before. If he mentions additional stimulus then look for the Dollar to weaken. This will give the December British Pound an additional boost. All bets are off, however, if the Euro Zone debt crisis worsens to the point that triggers another flight to safety rally into the Dollar.

Daily December Euro Pattern, Price & Time Analysis

Following a 2 percent decline on Monday, the December Euro continued its slide overnight paring another 1.0%. The sharp break is being triggered by renewed concerns that Greecewill default and that the European Central Bank was considering an interest rate cut.

The news that Greek Prime Minister Papandreau pledged to put the European Union’s decision on how to deal with his nation’s finances to a referendum is not sitting well with the global markets. Many see this as a stall tactic and another sign that last week’s EU resolution to fix Europe’s debt woes is doomed to unravel. The fear and uncertainty created by the situation is driving investors to the safety of U.S. Dollar and Japanese Yen. Worldwide liquidation of equities is another sign that sentiment is shifting toward a risk off scenario.

The size and speed of the break in the Euro is a sign that the market is currently in the hands of the bearish traders. This triggering of renewed fears and risk aversion are the key reasons why bullish confidence is waning and that last week’s rally is beginning to look more like a blow-off rally. Indeed, traders are now looking at last Thursday’s tremendous run-up and appear to be asking European leaders, “What have you done for me lately”.

With Greece nearing default, the Euro is in a position to lose one of the three main reasons for last week’s euphoric rise. Default activity byGreeceis putting the global financial markets on a path of disorder and destruction that threatens the Euro Zone economy. This is the main reason why the European Central Bank has to consider lowering interest rates at this time.

For weeks the EU was told that it only had a short-time to get its house in order. It now appears that they may have acted too slowly as the world seems to be bracing for another economic meldown.

Technically, the December Euro has retraced 50% of its rally from 1.3142 to 1.4241. Traders should watch for a possible technical bounce to the upside following this first test of 1.3692. Further downside pressure could drive the market into the 61.8% retracement zone at 1.3562. Uptrending Gann angle support comes in at 1.3542, making 1.3562 to 1.3542 the next downside target zone and potentially important support cluster.

Bloomberg said that Japanese Finance Minister Jun Azumi ordered the intervention because “speculative moves” in the Yen failed to reflectJapan’s true economic fundamentals.

Although the move against the Yen was aggressive, traders doubt the intervention will have a lasting effect because of failures in the past. Previously, following an intervention, it was just a matter of time before traders regrouped and regained the losses created by the intervention. Because of uncertainty in today’s financial markets, the strength in the demand for safe-haven currencies like the Japanese Yen is too much to overcome. Even though the intervention appears to have done the job in the short-run, there is no sign the move will have a lasting effect.

Technically, after reaching a postwar high at 1.3264, the December Japanese Yen plunged sharply lower. The fast move to 1.2582 represented nearly a 50% correction of the April to October range. Based on the range of 1.1732 to 1.3264, a major retracement zone was created at 1.2498 to 1.2317 with the former number representing the major 50% level.

Following an intervention, a market becomes oversold rather quickly and reverses at least 50% of its massive break. In this case, based on today’s range of 1.3264 to 1.2582, traders should watch for a “snap-back” back rally to at least 1.2923 to 1.3003. Fresh selling pressure may reemerge in this zone, setting up a possible test of the low. However, it may take another shot of intervention to drive it through 1.2582. In addition, sellers may try to push the market lower into the 50% to 61.8% zone to complete the major retracement.

Traders should look at today’s activity as an event rather than a change in trend. This means look for a volatile two-sided trade.

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This weekly chart shows it trading inside of a Channel Down chart pattern created by a pair of downtrending Gann angles from a pair of main tops. The upper boundary or downtrending resistance line is at $5.49. The lower boundary or downtrending support line is at $1.08.

A close at or near the low for the week is going to be a strong indication of lower prices to follow. A trade through $1.08 could trigger an acceleration to the downside. On the upside, even though a trade through $5.49 will be a sign of strength, it will not mean that the trend has turned up. This will only occur if the swing top at $8.09 is taken out.

Fundamentally, MF Global is rumored to have too much exposure to sovereign debt. Moody’s also cut its debt status to junk. Some customers have moved their business elsewhere while others are being courted by competitors. The firm has reportedly hired an investment firm to find a buyer, but who would want to take on a firm with so much sovereign debt exposure? Goldman Sachs?  There is a connection since the current CEO Jon Corzine used to work for them.

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Downtrending Gann angle resistance from the $101.83 main top is at $93.58. Uptrending Gann angle support from the $75.15 main bottom is at $92.15. The triangle formed by these angles is indicating impending volatility. With the main trend up on the daily chart, there is a bias to the upside, but rather than guess at the next move, traders should go with the action following the next breakout.

This is going to be a momentum move so volatility is going to be necessary to sustain it. Since the market has been up for a prolonged period of time, long traders will have to watch for a possible bull trap. This can be avoided with tight stops or a quick exit if intraday volatility collapses after the breakout.

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Based on the main range of 44.30 to 26.15, expectations are for a minimum retracement into the 50% level at 35.22. If the rally can be sustained then the 61.8% level would be the next upside target.

Downtrending Gann angle resistance drops in at 37.42 today. Coupled with the 61.8% level at 37.37, forms an important resistance cluster and possibly the next upside target at 37.37 to 37.42. This configuration suggests there may be an attempt to reach this level within the next two days.

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Private Greek bondholders will take a “50% haircut” on the debt they hold. This will help Greece reduce its debt-to-GDP ratio somewhat but it will remain over 100%. Second, the EFSF will be leveraged four to five times its current size. This will increase the support for sovereign debt markets to close to $1 trillion Euros ($1.4 trillion). Finally, the third agreement declares that banks need to raise over $1.48 billion in order to bring their core Tier 1 capital rations to 9% by the middle of 2012.

The currency markets have been very receptive to the plan. This is not necessarily a vote of confidence that the plan will succeed, but may be because the veil of uncertainty encouraging traders to keep their assets on the sidelines has been lifted. The plan seems big enough to alleviate trader fears in the short run. It addresses the bank capital issue and it gives more fire power to the EFSF to combat contagion. It may not solve all the problems now because cash has to be raised and the new systems implemented, but if there are no unexpected debt flare-ups over the next few months, this plan could be sufficient enough to contain the sovereign debt crisis.

The U.S. Dollar is trading weaker this morning after investor sentiment shifted to a risk on scenario. The December Euro broke out to the upside through the 61.8% retracement level at 1.4017. This price represents a retracement of the break from August to October or 1.4558 to 1.3142. The chart indicates the next upside is a downtrending Gann angle at 1.4138.

This bullish initial reaction to the news in the Euro was expected. Some say the news may have already been priced in also. This makes the market vulnerable to a possible “buy the rumor, sell the fact” top. This usually occurs after buy stops have been triggered and the last trader to get long begins to enter. This means a bull trap could be setting up. Traders should watch for an intraday closing price reversal to be the first sign that a top is forming.

While the market rallies today, keep in mind that this may not have anything to do with the viability or success of the Euro Zone plan. It may just mean that traders can act with confidence today because they have clarity and conviction. While the plan seems to be a good short-term fix, over the long-run the redistribution of money may lead to a slow down in the Euro Zone economy since banks will be forced to deleverage many of their assets to raise the money needed to meet their cap needs.

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In my opinion the Euro is setting up a bull trap triggered by a “buy the rumor, sell the fact” situation. Traders know an agreement will be struck so the bet is on how big of a commitment the Euro Zone officials make toward resolving the debt crisis now. Traders will be looking at this deal with a fine-toothed comb, poking holes wherever they can. At issue is total funding for the bank rescue, an increase in the lending limit for the European Financial Stability Fund and the write-off that lenders have to take on their Greek debt. Traders know a deal is coming, but are not willing to speculate at this time on whether the deal will be bold enough to have a lasting effect.

Technically the December Euro is trading inside of a major 50 percent to 61.8 percent range. Based on the range of 1.3142 to 1.4558, the retracement zone is bounded by 1.3850 to 1.4017. A breakout above the upper level is likely to trigger a further rally to the downtrending Gann angle at 1.4148. On the downside, the uptrending Gann angle at 1.3782 is a potential target.

Once again the fanfare leading up to the release of the European rescue plan may be overblown. While most traders agree there will be a positive development, it may already be priced into the market. This means that short-traders will be waiting for a euphoric rise to pounce on. Traders have to be careful about buying strength unless the actual rescue figures are spectacular. Otherwise, investors are going to be asking “what have you done for me lately” and move on to lingering issues in Italy, Spain and Portugal.

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Further evidence that this market is gaining strength is the penetration of the downtrending Gann angle at 31.98. Regaining the uptrending Gann angle at 37.74 will be another sign that buyers have renewed their interest in the long side of the market.

Once the trend turns up, the market should have room to rally to at least 50% of the main range of 43.50 to 26.15. This price level is 32.22. If upside momentum continues then traders should look for a possible test of the 61.8% retracement level at 37.37 within the next 1 to 2 days. The downtrending Gann angle and the 61.8% level form a resistance cluster.

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While the BoC monetary policy announcement may have triggered the break in the December Canadian Dollar, a report that the European finance ministers canceled Wednesday’s scheduled summit helped fuel an even sharper decline. Commodity and equity markets fell sharply lower as jitters hit the risky asset markets. Traders aren’t necessarily afraid of the risk, but the lack of clarity. It’s the uncertainty of the situation that is causing them to pull out of the market and into the safety of the U.S. Dollar. The BoC seems to feel the same way as caution seems to be the theme expressed in this morning’s report.

Technically, the December Canadian Dollar is poised to form a daily closing price reversal top. Based on the short-term range of .9367 to .9996, expectations are for a 2 to 3 day correction into at least .9682. Further selling pressure could trigger a decline into a 61.8% retracement level at .9607. Uptrending Gann angle support makes .9682 to .9667 a possible support cluster. Looking at the way the market reacted as the Loonie approached parity; it looks as if traders have made $1.00 the line in the sand.

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In tight trading ahead of Wednesday’s key European Summit, the U.S. Dollar is trading weaker across the board. This pressure is expected to continue after a funding agreement is announced, however, it may turn into a “buy the rumor, sell the fact” situation so traders should watch for a possible reversal.

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Following a move through 2703 traders have to be careful about buying strength since downtrending Gann angle resistance comes in at 2720 today. This angle is likely to provide a short-term technical bounce following the first test. Since the angle is dropping 10 points per day, based on current upside momentum, the market may just pass over this angle over the next few days.

Following a change in trend to up, December Cocoa should have room to rally since the next upside target is the retracement zone of the 3150 to 3523 main range at 2837 to 2910.

All of the upside action taking place is technically based since the fundamentals remain bearish. Earlier in the month cocoa futures fell on speculation that supplies from theIvory Coast and Ghana would exceed demand for the second straight year.

Although there is plenty of supply available on expectations of large crops in Ghana and the Ivory Coast, short-traders may be forced to cover if the swing top at 2703 is taken out. Short-term oversold conditions may also be contributing to the bottoming action.

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Short-traders and profit-takers seem to have jumped on the chance to refresh their positions and exit longs respectively shortly after the market pierced the 50% price level of a major range. Based on the break from 1.6618 to 1.5271, a key 50% retracement level was created at 1.5973. This morning’s breakout above this level to 1.5999 and subsequent break back under the 50% price has put the market in a position to form a daily closing price reversal top.

A closing price reversal top doesn’t mean the trend has changed, but it often indicates the start of a 50% retracement of the last rally. This corrective move often lasts 2 to 3 days. Given the current rally from 1.5271 to 1.5999, a closing price reversal top could trigger a retracement back to 1.5635 to 1.5549 by Wednesday. In addition to this retracement zone target, traders should watch for a possible technical bounce following the first test of an uptrending Gann angle at 1.5751.

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After consolidating for several months between 1.3180 and 1.2860, the Japanese Yen spiked up last week against the U.S. Dollar to its highest level since World War II in the Forex markets. The move came as a surprise since many traders were under the impression that the Japanese government was aggressively defending the Yen against any volatile, speculative rallies. Maybe it was buy stops being triggered, or maybe it was traders jumping the gun in anticipation of a resolution to the crisis in the Euro Zone. Whatever it was that triggered the surge brought a rise from the Japanese government who addressed the issue over the week-end.

On Saturday,Japan’s finance minister Jun Azumi said that the Yen’s rapid acceleration amounted to nothing but a speculative move that may warrant the need for another currency intervention. “I would like to take decisive action on excessive and speculative movments,” Azumi said according to Kyodo news agency. Although this was only a verbal intervention, it served its purpose as the Yen has backed down a little from its lofty level.

The real question for traders is will the market take Azumi at his word or will speculators continue to take jabs at the market, hoping to trigger more buy stops and perhaps open the flood gates for additional buying pressure?  Traders are also questioning at what level the Japanese Yen has to trade in order to draw the Japanese government into the market. Last week’s high was 1.3216. Will it take sustained closes over 1.3200 or a drive to a new high to trigger the intervention?

Although the December Japanese Yen has backed down from last week’s high, it doesn’t appear that heavy selling triggered the retreat. The longer the market stays at or near its all-time high, the more likely traders are going to take another shot at the upside. This will especially be apparent if the Euro Zone reaches a solution to its sovereign debt woes and traders decide to bury the U.S. Dollar. There seems to be a lot of pent up energy in the Japanese Yen waiting to be released. It only seems like a matter of time before bullish Yen traders take up the Japanese government on its challenge.

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Technically the British Pound is breaking out to the upside after a relatively sideways week. Based on the main range of 1.6586 to 1.5179, this currency pair is currently poised to overtake a key 50% price level at 1.5883. A close over this level could set up a further rally to the 61.8% level at 1.6049.  An uptrending Gann angle from the 1.5179 bottom is at 1.5619 today. This price is providing both support and direction.

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Monday’s closing price reversal top should’ve put some downside pressure on the Canadian Dollar, but apparently short-traders didn’t see it that way. It now looks as if long traders lightened up their positions based on concerns about the Euro Zone pact getting completed by the October 23 deadline.

The closing price reversal top formed at .9941 was confirmed on Tuesday, but the lack of follow-through to the downside makes it look like the shorts are backing away from refreshing their positions, or there is a large bid out there holding the market up. Usually this type of pattern leads to a 2 to 3 day break equal to 50% of the previous rally. Based on the short-term range of .9367 to .9941, the potential downside target is .9654. In addition, uptrending Gann angle support at .9607 may be another downside target.

On the upside, Gann angle resistance at .9881 appears to be keeping a lid on any noticeable appreciation. In addition, the market is now trading on the bearish side of an uptrending Gann angle at .9847 after holding above this angle for nine consecutive days. Regaining this angle will be a sign of strength. Additionally, a trade through .9941 could trigger an acceleration to the upside.

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The closing price reversal top does not change the trend, but it represents a possible short-term change in direction. In this case, despite the solid rally from .9387, the main trend never turned up so the market remains in a downtrend. Typically this pattern starts a 2 to 3 day break equal to at least 50% of the last rally. Based on the short-term range of .9387 to 1.0371, the 50% target price is .9879.

In addition to the 50% target at .9879, an uptrending Gann angle from the .9387 bottom comes in at .9867 today. This makes .9879 to .9867 an important support cluster. It’s going to take a lot of selling pressure to reach this level today, but stranger things have happened in the past. Since the market is trading well above this support level price and time appear to be out of balance.

At this time, the Australian Dollar/U.S. Dollar is still finding some support inside of a major 50% to 61.8% retracement zone at 1.0075 to 1.0238. It may be trying to establish a support base in this zone. After the market made its reversal top, it also broke to the bearish side of a steep uptrending Gann angle at 1.0347 today. In order to put itself in an extremely bullish position, it must regain this price. Otherwise it may continue to drift sideways. A break under the 50% level at 1.0075 will be a strong sign that the market is headed lower.

Fundamentally, the Aussie like the other higher-yielding currencies is being headline driven. The uncertainty inEuropeis leading to the sideways trade. Traders are worried that European leaders won’t reach a resolution to the region’s debt crisis at the October 23 summit. The inability to break the Australian Dollar after the technical reversal on Monday is a sign that fresh shorts may be shying away from the market or that a large bid is holding up the market.

On Tuesday, the Sterling appeared to be poised to correct back to a retracement zone at 1.5511 to 1.5432 after the British government said annual consumer price inflation accelerated in September at the fastest rate in three years, but the late session news out of the Euro Zone regarding the size of the bailout proposal helped turn it around. One key issue at this time is theU.K.inflation forecast. Yesterday’s report put annual price inflation well above the Bank of England’s 2% target, but the central bank’s Monetary Policy Committee earlier in the month said it expects inflation will fall back sharply in coming months. With new money hitting the economy in the form of quantitative easing, the BoE has to be concerned about the high inflation rate. It seems to me that it would be counter-productive to inject money into the economy then be forced to raise interest rates to take it back out.

This assessment appears to be reflected in charts with the market hovering slightly below a major 50% price level at 1.5883. This is based on the break from 1.6586 to 1.5179. In addition, a major Gann angle at 1.5746 is also causing some of the indecision. This morning the market is starting to breakout above the Gann angle, giving it some strength, but with the 50% level just above this price, one can conclude that traders are shying away from buying at this lofty level. The recent rally from the low at 1.5179 to the high at 1.5842 has been impressive, but it may have been short-covering. What the British Pound needs to do is correct at least 50% of this range to make it more attractive to buyers. Should buying interest increase after a pull-back to 1.5511 to 1.5432 then this would be a strong sign that a solid bottom has been formed. In summary, traders may be asked to buy strength if the market begins to breakout to the upside. In doing so they run the risk of getting caught in a bull-trap. A pull-back into 1.5511 to 1.5432 will be the best scenario, but this requires patience to set-up.

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The driving force in the Canadian Dollar on Monday and so far this morning is the tempering of hopes that a bold plan for solving Europe’s sovereign debt crisis will be reached by this week-end as proposed.  While the finance ministers from the Group of 20 nations talked up their contention that a comprehensive plan to recapitalize European banks as well as restructure Greece’s debt could be achieved within 5 to 7 days, the euphoria created by this belief was deflated when a spokesman for German Chancellor Angela Merkel hinted that a solution was only in the planning stages.

With the Canadian Dollar trading at a level not seen since September 21, the currency quickly reversed direction after spokesman Steffan Seibert said the European Union meeting was only an “important step” on the path to a long-term solution to the bank capitalization and Greek debt restructuring problems. He also said the hopes and wishes of getting these issues resolved within the month “will again not be fulfilled”.

This chatter quickly led to a sell-off in the Euro as well as the commodity-linked currencies as traders abandoned risky long equity and commodity positions in favor of the safe-haven U.S. Dollar. The volatility created by the news and the subsequent trading action threatened to take back at least 50% of the rally from its October 4 bottom.

Technically the December Canadian Dollar formed a daily closing price reversal top on Monday that was confirmed by Tuesday’s weaker trade. Although the daily chart uptrend is not being threatened at this time, the chart pattern suggests the possibility of a near-term break back to a major 50 percent to 61.8 percent retracement zone. Based on the short-term range of .9367 to .9941, traders can anticipate a likely break to .9654 to .9586.

In addition to reaching the retracement zone target, the Canadian Dollar is also threatening to break through Gann angle support at .9767 this morning. A sustained trade through this former support angle could trigger an even steeper decline into another uptrending Gann angle at .9567 today. Combining the forecast of a break into the retracement zone and the Gann angle target creates a short-term bearish picture for the currency.

The dramatic shift in the market triggered by a softer tone regarding a solution to the lingering problems in the Euro Zone is likely to keep the pressure on the Canadian Dollar over the next few days. Traders seem to be exhibiting hyper-sensitivity to the news out of the Euro Zone, but they must realize that it works both ways. This means they should be prepared for increased volatility and the strong possibility of a two-sided trade although the news and the pattern suggest a developing bias to the downside.

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Overnight the Euro picked up where it left off with a move to the upside. Despite somewhat friendly news regarding the Euro Zone bank recapitalization plan, traders must have felt the market was overbought since there didn’t seem to be much interest in the single currency once it crossed the 50% level at 1.3850 and the Gann angle at 1.3878. The combination of these numbers formed a resistance cluster that appears to have been too much for this market to overcome.

The break through the steep Gann angle may have been triggered by stops, but nonetheless, signals a top may be forming. At this time the December Euro is in a position to post a daily closing price reversal top. This could be a potentially short-term bearish signal that could trigger a 2 to 3 day break equal to 50% or more of the last rally.

Based on the rally from 1.3142 to 1.3905, traders should watch for a possible correction into 1.3542 to 1.3433 over the near-term. In addition, uptrending Gann angle support comes in at 1.3502 today. Over the next few days this angle will move up each day, likely forming a support cluster with the 50% price level at 1.3542. Now that the main trend has turned up on the daily chart, this forecasted secondary bottom is likely to attract buyers.

Fundamentally, a top at this time in the Euro will signal doubt that the Euro Zone finance ministers will be able to put together a viable plan to save the banks and restructure Greece’s debt within a week like officials have pledged. The general consensus is the new plans have to be bold with the issues of how much money will be made available to the banks, which banks will get it and how will Greece be restructured to be specifically addressed. At the risk of using clichés, the Euro looks like a “buy the rumor, sell the fact situation” or “what have you done for me lately”.

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The weakness began after an early attempt to rally through a pair of tops at 1.3158 and 1.3180 failed. As the market rallied close to these numbers, the threat of an intervention by the Bank of Japan may have been too much, encouraging selling and triggering a sharp sell-off. Another reason for the sell-off may have been the increase Treasury Bond and Treasury Note yields in the U.S. The current rally in the U.S. equity markets has led to an asset allocation shift that is encouraging the buying of equities and the selling of  Treasury instrument. Because of their inverse relationships, yields rise when Treasury prices fall.

Overnight the Bank of Japan released the minutes from its September 6 and 7 meeting. According to the minutes the central bank said it would consider further monetary easing should conditions warrant it. In addition, members discussed the sovereign debt situation in Europe as well as an economic slow down in the U.S. Member concluded that there was too much uncertainty in Europe to gauge when the threat to global financial stability would end. In addition, member concluded that the U.S. economy’s weakness would be prolonged.

Despite the volatile trading activity, the December Japanese Yen remains rangebound with a top at 1.3180 and a bottom at 1.2860. Despite recent demand for lower-yielding assets, the Yen could not attract enough demand to rally. This was a direct reaction to the threat of an intervention. Should U.S. Treasury yields continue to rise, then look for the Japanese Yen to weaken against the U.S. Dollar as traders will sell the currency in pursuit of the best return on investment.

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The shift in investor sentiment this morning reaffirmed that last week’s lows in the major currencies may become major bottoms. In addition, several of the markets are changing their main trends to up on the daily chart. With the currency futures markets turning short-term bullish, several are now within striking distance of major retracement zone.

The December British Pound turned its main trend to up on the daily chart with a drive through the last swing top at 1.5706. The chart now indicates the market is poised to retrace the break from 1.6586 to 1.5179. This target zone is 1.5951 to 1.6101.

Technically, the December Canadian Dollar is still in a down trend on the swing chart, but its short-term rally has been impressive. The current rally has regained 50% of the break from 1.0204 to .9367 at .9786. The next upside target is the 61.8% level at .9884. A full retracement of the break from 1.0593 to .9367 will take the market back to .9980 to 1.0125.

The main trend turned up on the daily December Euro chart overnight with the breakout over the last swing top at 1.3684. The size of this move has put the Euro within striking position of the major break from 1.4558 to 1.3142. An acceleration through the 50% price at 1.3850 will set up the market for a further rally to the 61.8% level at 1.4017.

The strength in the Euro has also spread to the December Swiss Franc. Following last week’s bullish closing price reversal bottom, this contract is set up for a change in trend to up on a breakout over the swing top at 1.1235. Based on the short-term range of 1.2985 to 1.0749, traders should watch for a potential rally into the retracement zone at 1.1867 to 1.2131.

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The first sign of weakness will be a break through the steep uptrending Gann angle from the 1.3145 bottom at 1.3545 on Tuesday. A failure to hold this angle is likely to trigger further downside pressure to 1.3345.

On the upside what this market needs is buying with conviction rather than short-covering. Given the prolonged move down in terms of price and time, traders are not likely to buy strength, but will wait for a pull-back into a retracement zone/Gann angle support cluster between the 50%/61.8% retracement levels.

Based on the main range of 1.4549 to 1.3145, a new retracement zone has been created at 1.3847 to 1.4013. Should the short-covering continue through the last swing top at 1.3689 then look for an eventual test of this retracement zone. In addition, downtrending Gann angle resistance comes in at 1.3929 on Tuesday.

With the Gann angle from 1.4549 dropping .002 per day, the short-term forecast calls for a test of this Gann angle/50% resistance cluster on October 13 & 14.

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The first upside target following the breakout will be the downtrending Gann angle at 1723.70. A steep uptrending Gann angle comes in at 1711.00 while Gann angle support is at 1623.00.

Based on the main range of 1923.70 to 1535.00, traders should look for a possible rally into the retracement zone at 1729.35 to 1775.22 once the Gann angle resistance is penetrated.

The red arrow indicates a resistance cluster on October 11 at 1711.00 to 1729.35. The market could turn in this zone following the first test. Profit-taking at this cluster could trigger a near-term break.

With the main trend up, traders will be encouraged to trade the long side as long as December Gold continues to make higher tops and higher bottoms.

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Based on the main range of 120’28 to 147’00, traders should expect a minimum retracement back to the 50% level at 133’30. This isn’t expected to be a fast move to this level. The market may make a retracement of the short-term break from 146’13 to 138’19 before resuming the break. This target zone is a combination 50% and 61.8% retracement at 142 ’13 and 143’11. Look for short-traders to show up if this zone is tested.

Currently, an uptrending Gann angle at 138’20 is providing short-term support. This angle is moving up 8/32 per day. Once penetrated with conviction, the market should begin to feel some selling pressure.

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Based on the last swing down from 1190.00 to 1068.00, expectations were for a minimum 50% rally in 2 to 3 days. This objective was reached on Wednesday when the market tested and exceeded 1129.00. The next upside target was the Fibonacci retracement level at 1143.25. This level has also been exceeded, indicating strength, but not enough to turn the main trend to up. Since the main trendwill remain down as long as the top at 1190.00 remains intact, we could still see selling pressure even though both retracement objectives have been exceeded. The first sign of weakness will be a break back under 1143.25 and 1129.00. Should this occur, then it will appear as if the shorts have control of the market once again. This could set up a break back to at least 1112.00 over the near-term.

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A move through this level is likely to trigger a further decline into the uptrending Gann angle from the 120’28 main bottom. This angle is currently at 137’28. If this angle fails as support then this should serve as a sign that the market is headed lower.

Based on the main range of 120’28 to 147’00, the main objective of any major correction is 50% of this range. This price target is 133’30. Because of the numerous bottoms at 139’26, 138’22, 135’01 and 134’26, the break may be labored, highlighted by “back-and-fill” trading action unless the news driving the market is so bearish as to encourage liquidation selling.

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Traders should note that while a closing price reversal often leads to a change in trend, it typically only results in a 2 to 3 week rally equal to at least 50% of the last break. On the weekly chart, the short-term range is $90.96 to $75.15. A closing price reversal at this time could trigger a retracement to $83.06 to $84.92 over the next two weeks.

Although the retracement zone is the potential upside target, a downtrending Gann angle from the $90.96 top at $82.96 is the first price that could provide resistance. Once this angle is penetrated, the market will have room to the upside.

The daily December Crude Oil chart also shows a downtrend. The main trend will turn up on this chart if $88.24 is violated. Currently the short-term range is $88.24 to $75.15. This range creates a retracement zone at $81.70 to $83.24. This area is the next short-term retracement zone.

A stronger Dollar weighed on the market earlier in the week, but a reversal up was triggered when the weekly crude oil report showed an unexpected drawdown in oil stockpiles.

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Based on the main range of $1923.70 to $1535.00 the first upside target is a retracement zone at $1729.35 to $1775.22.

Downtrending Gann angle resistance is another possible upside target. On Thursday, this angle comes in at $1747.70. It will drop down to form an important resistance cluster with the 50% price level on October 10 at $1729.35 to $1731.70.

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Shortly before the release of this morning’s BoE monetary policy statement traders seem to be squaring up positions amid speculation the central bank will leave its key interest rate unchanged at 0.5 percent  The wildcard this morning is whether the BoE will revive its quantitative easing program with at least a 50 billion-bound injection of fresh funds.

If this morning’s strength isn’t position squaring, then it is possible that sentiment is shifting toward the BoE not providing the stimulus that speculators are counting on. If traders are backing away from a stimulus move then look for a little strength in the British Pound, but don’t expect it to last too long. With the U.K. economy slowing, look for speculation to increase shortly that the BoE will be ready to provide stimulus at its November meeting. The economy is too weak for the central bank not to provide stimulus over the near-term. At this time it’s not a matter of if, but when.

Technically, the December British Pound is in a downtrend. The main trend will turn up on a move through the last swing top at 1.5706. A breakout through this level will also confirm the double-bottom that is currently forming at 1.5316 and 1.5330. A failure to hold these two bottoms could trigger an acceleration to the downside with 1.5296 the first target.

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This news took the wind out of the sail of Tuesday’s rally that was triggered when European finance ministers tossed around the idea of a European bailout similar to the TARP agreement that rescued U.S.banks during the height of the U.S.banking crisis.

On Tuesday, the idea to recapitalize Europe’s banks was beginning to catch on as the December Euro reversed earlier weakness on the daily chart to finish higher. Although the rally was most likely short-covering, it did show that the market will react positively to any news regarding recapitalization of the banking sector.

The acknowledgement that mistakes were made in the past and the fact that the finance ministers are acknowledging that there needs to be a coordinated effort to recapitalize the European financial institutions are seen as positives, however, a weakening economy may stall any plans because the money may have to be reallocated somewhere else later to stimulate growth. It could be the first sign that the governments are running out of money to same the financial markets.

The trade may begin to slow down today because of tomorrow’s European Central Bank meeting. Traders are speculating that the ECB will cut interest rates by as much as 50 basis points. In addition, there is talk that a liquidity measure may be introduced. This may be a plan to give financial institutions unlimited borrowing power so that they can resume lending to each other.

Technically the December Euro formed a daily closing price reversal on Tuesday. A trade through 1.3368 is needed to confirm the bottom. This could lead to an acceleration to the upside with 1.3413 to 1.3477 the minimum upside targets. The main trend will remain down on the daily chart until the top at 1.3684 is taken out.

Sentiment is shifting to “risk off” this morning as a series of events are weighing on the currency and equity markets. Firstly, Chinese manufacturing shrank for the third month. This is the longest contraction since 2009 and represents a threat to the global economy, putting pressure on commodity-linked currencies.

News that German retail sales fell and European inflation unexpectedly rose at its fastest pace in almost three years is helping to pressure the Euro. The drop in retail sales is a strong indication that the economy is beginning to slowdown. Fear continues to mount that the European sovereign debt crisis will continue to spread.

Over the last week, traders were looking for the European Central Bank to cut its benchmark interest rate by 25 to 50 basis points when it meets on October 6. Now that inflation has been reported higher than expected, traders are backing off from this assessment, instead calling for a cut by the end of the year rather than at the next meeting.

Despite the approval of a plan to beef up the European rescue fund, traders are now concerned that Euro Zone officials may have acted too slowly to avoid a serious banking problem in Euro.

Traders will be focusing on this morning’s U.S. consumer spending report. Early estimates are for a gain of 0.2 percent in August after a 0.8 percent increase in July.

Technically, the main trend is down in the December Euro. A new swing top has been formed at 1.3684. A trade through this price will turn the main trend to up. The main bottom is 1.3357.

The December Canadian Dollar resumed its downtrend on the daily chart. Pressure from lower crude oil and a general decline in commodities is hurting the currency. There is no solid support at this time. The main top is 1.0204 so the downtrend is likely to remain intact for a while.

The December Japanese Yen is trading sideways with a slight bias to the upside. 1.2860 is the main bottom. A trade through this level will turn the main trend to down. 1.3180 remains the main top. Look for increased volatility to draw the attention of the Bank of Japan.

The main trend in the December Swiss Franc is down. A new main top has been formed at 1.1235. A move through this level will turn the main trend higher. 1.0916 is the main bottom.

The short-covering rally in the December British Pound is stalling. A new swing top could be forming at 1.5706. A trade through 1.5532 could trigger an acceleration to the downside.

Overall, it looks like traders are favoring the U.S. Dollar today as sentiment is shifting back to “risk off”.  Too many fears and concerns continue to weigh on investor appetite for risk.

Although passage is assured, how the parliament will vote seems to be a developing concern this morning. Traders apparently are focusing on whether German Chancellor Angela Merkel can get the votes from her own party rather than having to rely on votes from the opposition parties. Rumor are swirling that a rift exists between Merkel and a few members of her ruling party.

Overnight, the December Euro is trading a little better in what appears to be a “bullish-flip” of yesterday’s break.  Technically, there seems to be a slight bias to the upside developing. This is a continuation of the move which began with Monday’s simple closing price reversal bottom.

Based on the short-term range of 1.3925 to 1.3357, the key retracement zone of this range at 1.3641 to 1.3708 continues to be tested. Although this area is acting as resistance at this time, the market can easily turn bullish if the Euro begins to build support over 1.3641.

Additional strength is likely to develop if both Gann angles at 1.3678 and 1.3725 are penetrated. Right now these two angles are still controlling the short-term direction of the market. Further strength will develop if the market breaks through the last swing top at 1.3925. A move through this level will also turn the main trend to up on the daily chart, triggering perhaps an acceleration to the upside.

The technical picture is well laid out at this time. Since the Euro is being headline driven, bullish traders are just going to have to wait for good news to come out Germany before taking the next step. At this time, a cautiously optimistic tone continues to dominate the market.

For all of you planning to buy this IPO some day or even Facebook or Twitter, look at the numbers first. This social media business is the biggest scam going.

I hope this story goes main stream next week but I doubt it. The investing public needs to know about this.

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After piercing a lower level Gann angle the last two sessions while walking down a steeper one since topping at 1.0764, the AUD USD is rebounding today.

Not only did the market regain an uptrending Gann angle at 1.0226, but it is also trading above a downtrending Gann angle at 1.0244 and a Fibonacci level at 1.0246. These are all signs that shorts are beginning to cover and that bottom pickers may be entering the market.

Should the market close higher, a closing price reversal bottom will have formed. The key to sustaining this move will be a follow-through rally on Wednesday. Once the market clears the 50% price level at 1.0345 it has room to the upside with another downtrending Gann angle at 1.0505 today, the next likely target.

Although this pattern has the ability to produce a 2 to 3 day rally equal to at least 50% or more of the previous break, it does not change the trend to up, but may actually offer bearish traders a fresh opportunity to short again after reaching its minimum objective at 1.0456.

Fundamentally, today’s potential reversal bottom is being driven by speculation that the Reserve Bank of Australia will not cut its benchmark interest rate in the short-run. This action was prompted by the RBA’s September monetary policy minutes released on Tuesday.

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The September Japanese Yen is holding steady this morning with a slight bias to the upside after Japanese Finance Minister Yoshihiko Noda was chosen to succeed Prime Minister Naoto Kan. This is Japan’s fifth prime minister in six years and the third premier since the party took power two years ago. This new selection came about after incumbent Naoto Kan announced his resignation last week.

Surprisingly the Yen is trading better despite the fact that Noda has overseen three currency-market interventions in the past year. Given the current economic situation and the price of the Yen, expectations are for this trend to continue during his term. If anything, the election of Noda ensures a smooth transition of leadership because of his link to the interventions.

Since there wasn’t increased volatility or range expansion following the release of Noda’s selection, one has to conclude that the move was expected. This didn’t help trader uncertainty which appears to be gripping the market at this time.

Trader indecision appears to be over whether the new prime minister will be able to address the economic risks facing the nation. The key risk is being able to pay for the reconstruction of the country following the tsunami, earthquake and near-nuclear disaster. The solution to increase demand for exports seems simple, but the high priced Yen is making this difficult. Obviously developing teamwork between the government and the Bank of Japan is going to be a priority.

The BoJ is going to have to increase its efforts to turn the economy around in order to right the ship. At this time, however, the central bank seems to have its hands full intervening to depress the value of the Japanese Yen.

Technically, the September Japanese Yen is trading inside of a tight range defined as 1.3173 to 1.2871. The 50 percent to 61.8 percent retracement zone of this range is providing near-term resistance at 1.3022 to 1.3058. Additional resistance this morning is coming in at Friday’s high at 1.3075, a former top at 1.3113 and the main top at 1.3173.

Market to Watch Today 

The September Japanese Yen rallied sharply during the early part of August when global equity markets firmed. On Friday, the Yen posted a strong gain after Fed Chairman Bernanke provided an optimistic outlook for the economy and hinted that it would consider additional aid at its September meeting. Firmer equity markets overnight may also be providing support for the Yen this morning.

Clearly the new Japanese government is going to try to dampen the Yen’s appreciation since the new Prime Minister is the former Finance Minister who guided the interventions of the past. The key is whether the BoJ has the fire power to fight the Yen’s appreciation which may begin another leg higher if equity markets once again start posting strong gains. Although its threats continue to keep a lid on the Yen, strong demand for higher yielding assets and a weaker Dollar may provide strong support for the Yen today.

This week’s Forex markets have been highlighted by low volume and tight ranges, leading to the formation of consolidation patterns in many of the major currencies. The combination of low volatility and compressed prices is the perfect formula for chart pattern breakouts.

Unfortunately, the direction of the breakout isn’t very clear, leading to the conclusion that many traders are likely to adopt a “go the way of the move” trading strategy. Fortunately, breakouts today will be triggered by one major fundamental event which drastically reduces the possibility of a whip-saw market.

Often when faced with a chart pattern breakout triggered by an economic report, there is a whip-saw. This often occurs when one piece of the report is bullish, for example, and the other is bearish. This may be caused by a report which features a headline number followed by a percentage change such as the U.S. Non-Farm Payroll report. Fortunately today, there is only one indicator to watch and that is Federal Reserve Chairman Ben Bernanke.

Ahead of his speech at Jackson Hole Forex traders are silently hoping Bernanke outlines a plan to jump-start the economy with clarity and conviction. This will be the best scenario for breakout traders because the markets are likely to move in one direction. If Bernanke wavers in his speech and instead offers a candy-coated speech containing words of comfort and support, then the markets are likely to whip-saw.

Simply stated, if Bernanke offers stimuli or goes as far as proposing another round of quantitative easing, then investors should look for most major currencies to move higher versus the U.S. Dollar.

A tricky scenario is likely to develop if Bernanke offers nothing of material value to help traders make a decision. Since the Fed is already committed to lower interest rates until mid-2013, the Dollar is expected to continue to weaken over the long-run. However, if traders react to the Bernanke speech by selling off risky assets, then money may flock to the safe-haven Dollar, leading to a rally.