Forex Weekly Forecast & FX Analysis March 16 - 20

S&P 500: Bearish

The S&P 500 index is officially in bear market conditions since last Wednesday as the benchmark value declined by more than 20% counting from the recent peak registered in February. Besides, exceptionally high volatility is affecting the market sentiment nowadays. The last time such a panic was seen for US equities was the financial crisis in 2008. For instance, Thursday’s loss exceeded -10% for one of the most liquid stock indices worldwide. The New York stock exchange used to halt the trading several times due to the panic sell-off. Although Friday’s bullish rally allowed the index to recover almost a half of the weekly loss, the uncertainty and negative sentiment remained, promising more volatile action in the week ahead.

The technical outlook turned bearish, according to the weekly chart below. Williams Alligator went into the bearish eating mode after the three lines performed the bearish crossover. The MACD indicator dropped into the negative territory with an extremely large value of the histogram in the red and the bearish crossover of its lines, which erased all of the positive sentiment gained in recent months. The Relative Strength Index with a period of 13 days played out the bearish divergence occurred in the overbought zone, crossed the middle line from above, changing the momentum to bearish, and slid into the oversold territory in three weeks. The S&P 500 index tested the bottom of the bearish retracement in December 2018 and had found demand around that level. So if the bears were able to absorb the flow of demand in the upcoming days, then the price action would turn back bearish with a possible acceleration. Therefore, it is too early to conclude the bullish reversal, despite long downside shadow on the weekly candlestick. So Forex traders should consider having short positions for stock indices in their portfolios.

DXY: Neutral

Since February 20, the US dollar index had a 17-days bearish rally after testing the ascending resistance trendline. However, this past week’s price action had a dramatic U-turn from the local bottom, which allowed technical analysts to draw the second trendline (support) of the large widening formation (see the daily chart setup below). The bullish bounce was even faster than the bearish decline, and DXY crossed the long-term 233-days simple moving average from below. It is notable that 233 MA coincides with the middle line of the Bollinger Band indicator with an extended period of 55 days. The recent volatility requires a wider outlook at the things happening in the market, thus traditional periods of technical indicators show too much noise and too many fake breakouts. Nonetheless, 55-days BB has also spread its lines, underlining the spike in the volatility.

The chart setup below also has a second Bollinger Bands indicator with deviation multiplier lowered to 1 instead of 2 (yellow background). Although the dollar index did not notice two lower bands in the recent reversal and even went through the middle line rapidly, the upside action was limited by the upper band of the Bollinger Bands indicator with the decreased deviation. According to the technical analysis, that is a bearish sign as the bulls failed to proceed with the buying pressure and did not lift the rate into the upper range between the two lines of the BB indicator. In other words, forex traders should expect a short-term bearish bounce towards the former resistance now support curve coming at around 97.78/82, and a sideways consolidation after that. If the support was breached by the daily close price, then the greenback would turn back to the bearish conditions with a possible acceleration of the freefall. A similar situation happened on March 2, when DXY breached the middle line and the SMA. On the other side of the equation, a potential breakout of the resistance coming at around 98.84, would open the road to the top range of the formation in the range of 99.69/86. Given all of the factors mentioned above, the technical outlook is mixed with both bullish and bearish scenarios possible for the week ahead. Traders should monitor intraday reversal signals for short-term trading as the long-term positioning is unclear so far.

USD/CHF: Bearish

The Swiss Franc has a similar chart pattern on the daily timeframe as per the US dollar index. However, the USD/CHF currency pair has always been a leading indicator for the greenback across the board and several technical signs point to a likelihood of a bearish continuation in the near future. Although the pair bounced more than 300 pips from the multi-months bottom at 0.9200 Francs per dollar, the bullish retracement is not strong enough to reverse the recent downtrend, which reflected the flight to safe-havens across all of the financial markets. Here are several technical signals, promising further weakness for USD/CHF in the week ahead.

First of all, the Average Directional Index is still bearish as the red line (-DI) is still above the green one (+DI). On top of that, the mainline of the indicator remained at exceptionally high levels, signalling the strong momentum and high level of volatility in the market. Second, USD/CHF did not even reach the mid-term exponential moving average with a period of 34 days, while moving averages with longer periods are far above that level. Third, the rate did not cross the recent horizontal support line, which acts as the resistance now. The sequence of lower lows and lower highs is still in play, so the bearish trend should continue.

Fast and sensitive Stochastic RSI oscillator breached the middle level and both lines are headed north, we could expect further strength for USD/CHF with a limited distance and short-term perspective. The rate could keep rising towards the resistance range of 0.9618/34 where a large volume of supply is expected to weigh on the bullish momentum. Whipsaws and shadows above that target are possible, but the daily close rate would stay below it, according to the bearish scenario. If that is confirmed, traders should consider short positions, targeting the bottom of the previous week. Stop-loss orders are quite wide, given the recent volatility. So traders should be ready to add more volume to short deals in the range of 0.9735/60 if the market gets there. This is why small accounts and nervous traders should avoid deals with USD/CHF. Despite the possible risk involved, this trading strategy follows the current trend, and it is based on the mean-reversion approach, which is one of the most reasonable trading methods in such an environment.

USD/CAD: Bullish

In contrast to Swiss Franc, the Canadian dollar is extremely weak nowadays. The USD/CAD currency pair reflected the opposite relation to the price of oil, which kept plunging this past week. As a result, USD/CAD jumped to 1.4000 for the first time since February 2016. The rate bounced almost 200 pips on Friday, which was rather predictable as the psychological round-figure level represents a strong resistance with lots of postponed orders placed there, especially from the side of real-money accounts. However, the overall technical sentiment is extremely bullish for the pair on all timeframes, and Forex traders should expect further strengthening of the pair in the week ahead.

The only important question now is how deep the bearish rebound could push the rate before reversing and going north again. The Ichimoku Cloud trend indicator is extremely bullish as the leading span had a bullish crossover and all of the lines are placed in the correct order to proceed with the uptrend. The nearest support curve - Conversion line - is coming quite far from the current rate but it’s ascending. It is not so hard to imagine USD/CAD retracing back to 1.3660/80 before the uptrend renewed, especially in the light of the recent volatility. However, the panic sell-off of emerging markets and high-risk currencies suggests that the market would not give such a depth for fresh long positions, and we should expect a bullish reversal higher than that. For instance, Williams %R oscillator has already gone off the overbought zone and started reloading the bullish momentum. It’s crucial for the bulls to keep an eye on the level of -50% for the oscillator, trying to find the reversal around there. On top of that, Chaikin oscillator points to an extremely high bullish momentum as it is still in the accumulation zone, although the bounce was significant. Therefore, we’d consider placing postponed buy-orders in the support range of 1.3714/35 with a forecast that the bullish rally towards 1.4000 will continue next week. Stop-loss orders should be placed in the zone of 1.3580/90 in that case.