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USDSGD to fall back within the range near term

THE USDSGD pair reached the peak of its previous range at the 1.3872 level in Oct 2018, at which point in time, prices were consolidated within a movement of 250 pips. Having sustained the range for a period of 7 months, prices broke the key support level and underwent a shift of range region. The bulls attempted to break the previous support on multiple occasions but were unsuccessful, forming a phenomenon known as "support turned resistance" which is a common occurrence especially in currency pairs with lower volatility such as USDSGD.

On 4th April 2019, the bullish candlestick closed above the resistance level of 1.3615. Although the move seemed to be supported by a rise of bullish momentum, several factors point us to the possibility that it is a false break out of the range trap.

A Fibonacci retracement was created by taking the highest and lowest point in the chart, and dividing the vertical distance by the key Fibonacci ratios of 23.6 per cent, 38.2 per cent, 50 per cent, 61.8 per cent and 100 per cent. These ratios are considered as key support and resistance levels. It may be observed that the three bullish rejections from the resistance seem to occur along the plane where it coincides with the 38.2 per cent Fibonacci level. This further validates the resistance and is indicative of a strong presence of sellers.

In this case, the Daily Slow Stochastics Oscillator (5,3,3) seems to work extremely well in spotting a reversion from the top end of the range when the oscillator rises below 80. It is a directional indicator as well as a measure of momentum.

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A reading above 80 signifies an overbought condition while a reading below 20 represents an oversold condition. Coupled with the fact that the well-supported resistance occurs along the plane of the 38.2 per cent Fibonacci level, it also seems to obtain a reading above 80 on the oscillator which is usually a signal of an impending reversal to the low.

The final key factor which leads us to the postulation of a false break is the use of an Average Directional Index (ADX) indicator which measures the strength of a trend. A reading above 25 reflects a strong trend while a reading below 20 signifies that prices are likely to trade within a range. In this application, the ADX indicator has a reading of 19.53 which conveys to us that the breakout is not supported by a shift in the current trend, and is maintained within the same levels prior to the breakout.

We can expect the USDSGD to fall back within the range in the near term, and based on the span of the range, the first region it will retest is the 23.6 per cent Fibonacci level (1.3554). Should it break this level, it is likely that prices will return to the bottom of the range at 1.3456.

  • The writer is strategist at Phillip Futures.

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