I have been involved in the commodity markets for 17 years, and I have never seen anything like the action on Thursday, May 6, 2010. When the terrorist tragedy of September 11, 2001 unfolded in the United States, I can honestly say that for the hour or two that markets remained open that morning, trading was calm in contrast.

The “fat finger” explanation being proposed (a significant trading error) for a near 1,000-point plunge in the Dow Jones Industrial Average seems to me to be a valid possibility to explain the action, but there’s so much more going on around the world it’s hard to be sure that’s all there is to it. I’ve said before that I felt there was a much higher probability of a global double-dip recession than most economists and analysts seem to think, but my timing may have been off. Then again I’m still not sure I’m right at all.

Europe’s growth will be tediously slow, at best and I still don’t buy into China’s economic numbers. The action on May 6, if nothing else, serves to warn just how fragile the global economic recovery is. But let’s also look at the bright side: both Canada and the U.S. reported some pretty decent employment figures for April. Let’s hope this is a sign that we can still use the term “global recovery.”

U.S. Dollar
There’s no question now in my mind that the U.S. dollar is firmly into an uptrend, but it’s impossible not to take the extraordinary volatility of the May 6 session into consideration. I have never seen anything like what we saw that afternoon. But enough of that for the moment, let’s focus on the charts. That, after all, is the purest interpretation of what’s happening. Obviously, the U.S. dollar index futures contract has reached new highs.

The Relative Strength Index (RSI) has risen with trading levels, but is now approaching overbought levels just below 80. The moving averages have curled sharply up, but not so much that they are rising at any unsustainable rates. All things considered, I think we are likely to see a correction (or at least a slowing of the rally) as we’re now looking at trading levels that are 200 points above trendline support. The action is entirely bullish, however, without any divergent factors or non-confirmation.

I recommend traders continue with long exposure to the dollar, buying weakness when given the opportunity. Solid support is found at 82.70 in the June dollar index futures contract. The next overhead objective is 87.00.

Euro Currency
I had thought the euro currency would see 1.1700, but a few weeks ago, I considered it a distant objective, perhaps something we’d see toward the end of summer. Although the market is still quite some distance away from that level at the moment, that it now looks ominously more possible over the short-term.

All chart factors are decidedly bearish, with the only near-term roadblock I see being moderately oversold RSI readings. A significant trendline that goes back to the December high has acted as resistance for the month of April, then support, and now resistance again as we’ve dropped precipitously below1.3000. I can’t identify any glaring divergence issues or non-confirmation issues, so I can only continue to recommend traders stay short the euro futures, selling rallies where possible. Trendline resistance is at 1.3020, with additional resistance above that at 1.3200. I suspect volatility will continue to be much higher than normal, so be cautious. I would justify this initial risk based on a substantial profit target.

Canada Dollar
The Canadian dollar had also been warning the more bullish traders to prepare for a pullback. Moving averages had begun curling lower two weeks ago, and a protracted period of non-confirmation by the RSI added weight to concerns. Now admittedly two weeks ago I would not have been in any way shape or form expecting a decline as low as 0.9300, but that said, traders should have been flat well before any significant downside began in earnest, and in should in fact have been short from 0.9950 or later, coincidental with the first break below 0.9800.

In the interim, I have to put the CAD into a confirmed downtrend. The 10-day moving average crossed below the 20-day roughly a week ago, and has done so at an appropriate angle of intersect. The RSI has continued to trend lower with both trading levels and the moving averages. Overhead resistance is encountered at 0.9700 and 0.9800. I advise traders to stay short and sell rallies, risking moderately above resistance levels.

Australian Dollar
The technical picture for the Aussie dollar is very much like that of the CAD. Moving averages have crossed down and are beginning to trend with RSI. Traders should stay short and sell rallies, risking to levels just above resistance at 0.9100.

British Pound
There should be no surprise that the trend has reversed to down in the British pound, but there is a trendline just below Thursday’s low that may act as near-term support at 1.4390. Like most of the other majors, I suggest traders might look to sell rallies, in this case toward 1.5000, with a risk to 1.5200.

Japanese Yen
The carry trade has buffeted trading action in the Japanese yen in both directions. All things considered, I would much prefer to stand aside in the yen, as technical indicators have been so dramatically skewed by Thursday’s extraordinary rally that I can’t rightly put any short-term faith in them. With trading levels holding above 1.0500, I have to give a nominal bias to upside anyhow, but I say this strictly as an observation and not a recommendation.

Feel free to contact me with any questions you might have about these markets or others, and to develop an appropriate trading strategy given your unique situation.

Gord Weisemann is a Senior Market Strategist based in Toronto, and is accepting Canadian clients. He can be reached locally in Canada at 416-369-7909 or via email at gwiesemann@lind-waldock.com. This article is based on an excerpt from his weekly “Weisemann Report,” which covers not only currencies but a variety of global commodity and financial futures markets.

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