Article Summary: Price Action is the study of technical analysis using the most important indicator available to traders: Price. This article will walk through a current trade setup as outlined in The Forex Traders Guide to Price Action.
One word to summarize the past seven days of price action in the FX Market: WOW.
While seeing price movements this large isn’t necessarily out of the ordinary, such quick and strong reversals in risk accumulation/aversion have certainly been notable.
After the Fed Minutes from last week sparked massive US Dollar Strength, markets looked as though they may be in for a near-term correction. The big fear that permeated the markets with the release of the minutes report was that traders began to grow concerned that Fed easing may end sooner than initially had hoped. And just like we had looked at in Fuel of a Currency War, Part 3 – markets have appeared to become dependent on these intervention efforts… so the very fear of their removal sparked massive movements across markets.
EURUSD price action last week told a great story
Created with Marketscope/Trading Station II
Friday appeared as though the market may get a respite, as commentary from John Williams, head of the San Francisco Fed reminded the market that bond buying programs will likely be active until at least the end of the year. The S&P 500 got a much needed boost going into the weekend, and investors closed the week with the expectation for the up-trend to continue.
That all changed on Monday, or at least – gave the appearances that a change was in place. Three large issues hung over the market coming into the week: Bernanke testimony in front of the Senate (which was much awaited given the concerns sparked by last week’s minutes release), the upcoming ‘Sequester,’ in the United States, and the Italian elections that were essentially expected to be won by anyone not named Silvio Berlusconi.
As the initial results of Italian elections came to fruition on Monday, it looked as though the market’s expectation would be met and Berlusconi would not win. However, those initial reports of a non-Berlusconi win proved to be invalid and incorrect –as a stalemate prevented the results of the election from being immediately known.
Markets don’t like uncertainty, and markets probably dislike Silvio Berlusconi at least as much as it dislikes uncertainty. After multiple scandals and allegations against the former Italian Prime Minister, Berlusconi resigned from office while Italy was embroiled in the initial throes of the European Debt Crisis. At the time, Berlusconi said that he was leaving office because of his love for Italian politics. He was replaced by Mr. Mario Monti who, for most intents and purposes, did a fantastic job to get Italian finances back on track. At the very least, he helped slow down the meltdown that was taking place in the Euro Zone, and further – in Italian debt.
While Berlusconi did not win the Italian elections, he did receive enough votes to keep his opposition from gaining a majority in the Italian Parliament. This means the government will likely need to take additional steps to find stability; either through additional elections (such as Greece), or some type of power-sharing agreement.
The one thing that appeared to be cemented by Monday’s news was that Silvio Berlusconi is back in a prominent, decision-making role within Italian politics. He appears steadfast to deny the European Central Bank’s Austerity demands. This could amount to a standoff between Italy and Germany.
Once again, markets do not like Berlusconi, and they abhor uncertainty. Monday’s news adds considerable uncertainty to the environment.
The upcoming Sequester is another potential price driver that can add considerable volatility to markets. As The United States approached the Fiscal cliff at the end of 2012, strong sell-offs in risk preceded a blow-out move to the upside when a deal was struck at the 25th hour. The market started 2013 with fireworks as huge gaps accompanied many of the major pairings.
We’re in a similar pattern now, heading towards the end of cliff without a deal in place. On March the 1st massive spending programs are set to be cut without any replacement or alternative program in place.
This is even more uncertainty, and this could spell a fantastic week of volatility for FX Traders. In these environments, Breakouts can be an attractive mannerism of entering trades as the additional volatility in markets can allow for more aggressive profit targets. We outlined this style of trading in the article, The Ballistics of Breakouts.
For traders looking to catch a strong short-term reversal, EURJPY may offer the most bang for the buck given the amount of volatility over the past week.
EURJPY could offer compelling short-side breakout
Created with Marketscope/Trading Station
If the Sequester does create additional volatility in markets, this will likely be felt in EURJPY. The fact that the pair has trended up so high on a relative basis means that it could have much further to fall should a reversal play out.
Short EURJPY Breakout Entry at 118.65; Stop at 120.15, Profit Target 1 at 117.00 (1-to-1.1 risk-reward), Profit Target 2 at 115.00 (1-to-2 risk-reward)
--- Written by James Stanley
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