Chart Of The Day: Yuan Setting Up for Another Leg Higher As Rally Continues

The USD/CNY seems set to add another leg to its rally as the U.S. and China agree to continue phase one talks, according to Xinhua, the country’s official state-run press agency.

Financial markets in Europe looked to open higher after Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer, with Secretary Steven Mnuchin held a phone call. The report said both sides talked about “resolving core issues” and agreed to keep discussing remaining issues to sign on the first phase of a trade deal.

However, the yuan retreated from daily gains, European shares were flat and U.S. futures gave back most of their advances. While the market narrative blames “trade news fatigue” as a theme that doesn’t seem to get resolved, here’s what to look for as far as the USD/CNY trade goes.

CNY Daily Chart

The USD/CNY pair fell below its uptrend line since April in the same time that it broke below a range since the Sept. 3 top. Since then the dollar has been edging higher, retesting the former lower boundary of a falling channel, now a presumed resistance. Sure enough, the price has been stuck there, and remains there now, for the fifth consecutive session.

However, this price level may be considered a redline for bears if additional technical signals are taken into account. First, the upward crawl formed a rising flag, bearish following the eighth straight daily drop from Oct. 28 to Nov. 27. The divergent volume to the advance in prices supports the view that demand is drying out as it's being absorbed by the pair’s supply. Second, the 100 DMA retracing the flag top lends credence to its being a supply-demand pressure-point.

Putting it all together offers a meaningful view that risk is to the downside.

1. The break below the uptrend line since April.
2. The drop below the falling channel.
3. The rising flag, after a sharp drop, on rising volume, while drying volume on the rebound.
4. The 100 DMA retracing with the flag top.

Trading Strategies

Conservative traders should wait for a new low below the November trough to extend the new downtrend.

Moderate traders may wait for a close below the psychological 7.00 level.

Aggressive traders may risk a short now, provided they realize the risk and deem it appropriate to their risk aversion and account capacity.

Trade Sample – Short Position

Note: This is just a sample. It is not a prophecy. We are simply pointing out what basic elements to include in a trade, and each trader must find his or her risk aversion and personal trading style, accordingly.