Well, my assumptions for a quiet Friday were certainly off base. Liquidity was excessively thin going off volume indicators on those speculative assets that trade on exchanges. However, as we well know, these conditions are ripe for for volatility. Despite this leverage though, I am still very surprised at the progress made on the day - particularly on the dollar's behalf. Looking at the majors, the enticing technical formations discussed yesterday look like full-blown trading opportunities today. Yet, restraint is essential. Key breakouts (like that seen on GBPUSD, AUDUSD, USDCHF and USDCAD) may look sound at first blush; but if the masses decide it is not a sustainable position, the market will immediately hammer the market back down. I'm not saying these breakouts can't produce a degree of follow through when the new trading year starts; but it isn't worth taking the risk of jumping on a false breakout. I would much rather look for confirmation and get in a little late than simply take the plunge into a false breakout.
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So, looking at the trade potential from the majors, we can split it between those pairs that have made the move and those that are about to. I perfer the later much more; because we can participate on the breakout, get a feel for its stability and stay for a trend. In this group, I am very interested in EURUSD. That trendline break from Wednesday has encouraged some follow through; and now I am establishing 1.3450 and 1.3150 as levels to break or range with. GBPUSD can fall into both categories - though the pivot and medium-term trendline at 1.5650/75 offer an encouraging resistance level. NZDUSD is perhaps my least favorite of the technically bound majors. It could be stopped out by 0.78 or 0.80; but it is more about momentum at this point.
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The rest of the most liquid, dollar-based pairs should be assessed on momentum; because they have been driven through their technical boundaries. One of my favorites is AUDUSD. Now at a post-float high, the pair can generate its own momentum. That said, profit-taking will have to come eventually; and risk trends mark a very prominent risk for this pair specifically. USDCAD is very interesting today after it cleared parity, the range of support around 0.9965/75 and put a little distance on the move. This is a move that could be difficult to simply reset; so I'll be watching for a potential retest of parity from the other side and see where we go from there. USDCHF is in its own class as a fundamental and technical trend that justifies direction. But, it is always difficult to say how far and fast the pair should go when it is at a record extreme. Finally, there is USDJPY. I maintain my long-term bullish outlook; but there has been talk of (UBS) of extreme short positioning on the yen itself. We'll see if that can cause short-term problems.
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And, just to remind us that we shouldn't trade only the dollar; there are a number of crosses to keep in mind. AUDCAD is still a threat as a double top reversal. EURAUD and GBPAUD join GBPJPY as aggressive channel reversal opportunities. EURNZD has a possible double bottom. And, we don't need to concern ourselves with AUDJPY direction just yet becaus this pair promises a big move and sharp increase in volatility regardless of the direction.
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There is a lot to consider out there. Happy New Year!
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