12 November 2007

Massive upside gaps on the daily charts across the board for the USD!

A ‘gap’ in the market basically occurs when price closes at say GBPUSD 2.09 on Friday, and opens this morning at 2.08 (100 pips lower). This is a USD strengthening move and is this type of pattern occurring after a substantial USD weakening move is indicative of a very sharp reversal, and a potential reversal within the medium term trend. What basically happens is that traders who were happily selling USD at 2.09, 2.10 and 2.11 on Friday suddenly wake up on Monday morning to find the market trading at 2.08 and below. Normally there is an orderly, continuous movement down to 2.08 but in this case the market has just ‘gapped’ lower (ie. the USD has gapped higher). So some poor guy who sold $100 Million on Friday at 2.10 is now finding himself down $2Million down and all that he has done is made himself a very expensive cup of coffee on a Monday. So a short squeeze occurs where these guys have to start buying back USD this morning which serves to strengthen it even more.

So we’re seeing a similar type of story on USDZAR this morning with a few interesting technical patterns sneaking into the picture. On Oct 29 a low was put in place at 6.44 with price subsequently bouncing to 6.63.

Last week the price dropped back towards the 6.44 level forming a low in overnight trade at 6.42. It is always very important to watch the market as it tests a former low as there are generally buyers looking to protect these levels. As it turned out, very aggressive buyers stepped in at this level and have subsequently pushed price up to 6.69.

So what we have is a ‘double bottom’ at 6.42-44 with an upside break of the neckline at 6.63.

This probably doesn’t mean anything to anyone but the point is that this a key technical reversal pattern indicating that USDZAR (as well as GBPZAR and EURZAR) should move higher in the near term.

The technical target is around 6.83 which means that we could move towards this level during the course of this week.

Keep an eye on the below levels:

6.83 – Upside target for double bottom
6.70 – Former low now resistance. Need to see price move above this level which should send us towards 6.83
6.68 – Current price
6.63 – Neckline of double bottom. Price must hold and close above this level this week to confirm the double bottom. If it does, then we should go higher.
6.42 – 2007 low. Price must not break below this level if we are to go higher. This is our key level within the medium term trend.

Our opinion is that we could see USDZAR, GBPZAR and EURZAR all move higher this week.

Good luck and all the best for the week ahead.

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