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March 3rd, 2013 at 10:33 am

A Repeat of Last Monday?

The opening last week was very volatile, with large gaps in the majority of currency pairs, followed by strong moves in the Yen crosses. While things quieted down later in the week, we could face a similar situation this Monday. Not necessarily with the Japanese Yen, but with increased volatility in Forex. Chances are good, that currencies as a group will gap again, on the account of spending cuts in Washington.

Even though the so-called “sequestration” was widely expected, the final word did not come down until after the markets were already closed for the week. There was still hope for some kind of “deal”, although that would simply mean kicking the proverbial can down the road and so solving the problem. Perhaps this forced austerity, as small as it is ($85 billion compared to a $1+ trillion annually) will finally force Washington to come up with a balance budget. However, from the immediate perspective it is not important what politicians do in a long-term, but how market participants respond to what has already happened. Having had time to digest the news and chart the course of action, traders may very well create very active opening, good or bad for the Dollar. I am not even going to “strategize” (or guess) which way currencies will move, but simply wait for the opening.

Among the currency pairs on my list of possible trades in the EUR-CAD. Its 4H chart shows a well-developed support at 1.3320. It has been forming for about a month now and could give way soon. If the price moves through this obstacle, I want to sell it at 1.3320, with the objective at 1.3100 or so. The problem is that the breakout could happen at the opening, in which case I will postpone the trade. Of course, that might mean missing the opportunity, but so be it – I will simply use the next low entry.

From a much shorter perspective, I am considering a short in the GBP-CHF. It is based on the 15M chart, on a bearish move below 1.4160. Here the target is 50 pips. The same caveat as before applies here – not trade in the initial price action breaches the support. Openings are very tricky and often produce fake moves, especially if gaps also show.

Meanwhile, the EUR-JPY may have completed its rebound from 118.70. On Friday, it reached 122.30, which corresponds with couple of resistance levels. The first is previous minor support, now possibly a resistance on change of polarity principle. The other one is more subtle – the middle of the largest single candlestick line in recent history. We can see it best on the daily chart, where this candlestick stands out.

Of course, in order to trade the daily chart, we would have to see a bearish reversal pattern either on Monday or on Tuesday. Even if it happens (there is no guarantee), it should be easier to wait for a reversal chart pattern on the hourly, or even the 15 chart. So far, none is evident, but my intention is to short the EUR-JPY again on first signs of the downside. Have a great trading week!

Mike K.

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