The Dow Jones Industrial Average is down by more than 170 points from yesterday’s close and I think this is the very beginning of a major correction in stocks, commodities and higher yielding currencies.  Moreover, I expect the US dollar, which had been under heavy selling pressure for most of 2009, to be the biggest gainer in 2010. That said, I have been holding a long position in the US dollar against the Japanese yen since the beginning of December when the USDJPY was trading at 86. Currently, I’m up by more than 500 pips. Please make an intelligent use of leverage and always use protective stops.

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Stay short the EURUSD and long the USDCAD.

EURUSD: The break of 14216 confirms my suspicions that the decline from 14583 is indeed the next bear leg of the decline from 15144.  A soft target is 13655-13750, which is the 161.8% extension of 15144-14216/14583 and the former 4th wave extreme (and former resistance as well).  Notice also that parallel channel support has been definitively broken as has the 200 day SMA.  There is a lot of air under prices.  14000 could provide short term support.  Risk can be moved to 14340.

USDCAD:  The USDCAD has soared but remains near the lower end of its recent range.  Still, if the rally extends into 5 waves, then we’ll be able to more confidently pronounce that a bottom is in place.  The daily count conveys the bullishness of the current situation.  10580 is potential resistance. but I am targeting a break above 10875.

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Last week, EURGBP broke below a rising trendline connecting the 10/2008, 8/2009, and 1/2010 lows, and after the pair dropped below the 200 SMA at 0.8843, I went short on Monday from 0.8817. EURGBP has already broken through a number of key support levels, and the next potential level of support looms at 0.8650. With daily RSI now at oversold levels, I will likely look to take profit at that point.

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Yesterday I covered the New Zealand CPI report and spoke of fairly substantial support for the New Zealand Dollar. Today’s breakdown takes it below the confluence of the 20-day, 50-day, and 100-day Simple Moving Averages. The next key support is at the 61.8% Fibonacci retracement of the 0.6980-0.7440 advance at 0.7160, but I think a hold of the moving average support is enough reason to sell into short-term bounces. Specific levels may have to wait, but ideally I’d wait for a short bounce , setting stops above recent reaction highs.

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The markets are on the move. The dollar has posted an exceptional rally and risk appetite has taken a clear hit. This was too be expected considering the discomforting quiet that has blanketed the markets over the past few months and the tight congestion patterns of recent weeks. However, we still have to qualifty the momentum behind this drive and the potential for a new and decisive trend for the broader markets. For the dollar itself, the breakout has cleared substantial technical barriers and will likely be able to gradually drift higher even if the rest of the market settles. To truly instigate the next phase for the market though; we need to see sentiment collapse under its own weight. This would hammer those risk-friendly assets that built up premium throughout 2009 and guide capital back into the arms of safe havens like the US dollar and Japanese yen. to qualify such an incredible move, I will look for reversals in the Dow, commodities and bonds as well as those currencies that are take their bearings from risk appetite.

As for positions, I was short a few crosses heading into today’s volatility. Having been short in CHFJPY from the break of 89; I though it time to take profit at 87. Theoretically, the pair can move down to 85.25 or event 84.25; but it is prone to stalling at technical pivot levels and it may simply take too much time to play out. I have also been short NZDJPY since the break of 67; and this pair has recently stalled at the combination of the 50-day and 100-day SMAs (with further backing at the 65 pivot); but I will trail my stop on this position and wait to see if this net of support will give way to a bigger move. There are opportunities in nearly all of the yen crosses; but USDJPY is at the top of that list. Despite all the volatility this morning, this pair has essentially moved nowhere. That is because both the dollar and yen are low-yield, safe haven currencies. Stabalizing this effect, I think true fundamentals and the outlook for benchmark market rates will shine through; and in that case, USDJPY will likely appreciate. Therefore, I have taken a long position just below 91 with a stop below yesterday’s low. A first target will be well below the 200-day SMA; but the ultimate objective will follow a true break beyond this technical barrier.

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The USD/JPY has continued to trade sideways as rising risk aversion has generated support for both the funding currencies. The horizon for a Fed rate hike continues to be extended which has perpetuated the greenback backs funding status. Yet, each passing month increases the chances of U.S. tightening and the prospect of a USD/JPY rally. The 100-Day SMA at 90.41 continues to provide staunch support, which has started to form a base that may lead to the expected breakout. I will wait for a break above the 20-Day SMA at 91.80 for a long position with the 20-Day SMA at 93.15 as my target.

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The CAD/JPY broke below the 20-Day SMA (88.35) and extended the overnight decline following the bigger-than-expected drop in the Canadian CPI, and I shorted the pair at 87.45 as the pair slipped below the overnight range. As the Japanese Yen benefits from the rise in risk aversion, I look to maintain the position throughout the week as investors curb their appetite for risk. I have set the target to 85.81, the 50-Day SMA, and have place the stop at 88.35, the 20-Day SMA.

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