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December 30th, 2012 at 8:12 am

These Gaps Look Tempting.

With the New Year celebration fast approaching, currency trading could be sluggish for the next two days. Outside of unpredictable geopolitical events, there are very few reasons for markets to move. One of them is the HSBC Manufacturing PMI from China, which is projected to come in at 51.00, slightly better from the previous reading of 50.60. If the result is significantly different, we could see a reaction, although it should be limited to the commodity currencies.

Another possibility is development of opening gaps and they could offer some opportunities. With immediate options in short supply, perhaps it is time to look at earlier gaps, predominantly in the Yen pairs. They formed after Christmas and remain unfilled until now. They present tempting targets, if one believes that these crosses are ready for a correction. After all, they all experienced sizeable rallies, so pullbacks would not be out of order. In addition, most of them show signs of topping/reversals even if those vary in shape and form, depending on the pair.

The EUR-JPY, for example is building a head and shoulders reversal pattern on the hourly chart. It will be confirmed on a move under 113.25 and I have a sell order just below there. In order to fill the gap, the price would have to drop to the 112 handle. I do not think this will translate into a major selloff but the falling to the gap level is certainly possible, perhaps even likely.

In case of the USD-JPY, the daily chart provides another possible shorting set up. Here we can see clearly that this rally may have become overextended and the gap from few days ago could a sign of exhaustion. In addition, the USD-JPY assumed parabolic properties and created a strong shooting star, meaning potential temporary top. From here, the price could easily pull back to the gap without affecting the underlying main uptrend. I will be perfectly happy to see a decline to 85.00, not trying to squeeze out each and every pip. If the opening is volatile, however, with large gaps in either direction, I will cancel this trade and wait for another set up to the downside.

Mike K.

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