USDHKD is on the verge of an impending reversal to the downside

THE USDHKD pair had been caught in a range trap of about 100 pips since the end of March 2018, with prices bouncing back and forth the 7.8499 and 8.8400 levels, until late August where the key support was broken to signal a change in market conditions. In a single day, prices took a nosedive and plummeted by approximately 400 pips, although the move did not sustain as a wave of buying was ushered in shortly after.

Once again, as we approach the end of March 2019, prices are hovering around the key level of resistance, unable to break above it. We hold the view that USDHKD is on the verge of an impending reversal to the downside and might be subjected to a free fall if it breaks out of the range trap.

There were three main catalysts that triggered the first sharp spike to the downside in August 2018. The first was the bulls losing momentum as it approached the resistance level at 7.8500, which was signified by the smaller-bodied candles hovering near the resistance.

Second, the stochastic oscillator at the time surpassed 80 which was indicative of an overbought condition for the currency pair.

Lastly, there was a rally above the average ATR level which was held steady at 0.055 points prior; this signified an increase in volatility.

In this case, the daily stochastic oscillator seems to work extremely well in spotting a mean reversion to the low when the oscillator rises above 80. The stochastic oscillator is a directional indicator as well as a measure of momentum. A reading above 80 signifies an overbought condition, while a reading below 20 represents an oversold condition. Do note that it is not meant to be used in isolation but in tandem with other factors to attain confluence, thereby adding confirmation to a forecast.

Presently, some of the catalysts which had triggered the earlier sell-down seem to have resurfaced again. The smaller-bodied candle hovering at the strong resistance level at 7.8500 is reflective of the slowing momentum from the buyers. Coincidentally, the stochastic oscillator is piercing past the 80 level again, pointing towards the possibility of an impending sell-down of the USDHKD.

Based on the span of the range, we can expect USDHKD to ease off slightly and test the first support level at 7.8426 (bottom of range). Should prices continue to slide further, it may decline towards the 7.8266 level. If the fall in prices is accompanied by a surge in the level of volatility, above 0.0043 points where it is currently sitting, we could expect prices to free fall till the August 2018 low of 7.7972.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.