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Surge in Volatility Reveals New Scalps- EUR/CAD, GBP/USD Setups

By , Currency Strategist
27 October 2011 21:52 GMT

In Tuesday’s Scalp Report we offered setups that are were contingent on shifts in market sentiment with the recent surge in risk appetite triggering all our topside targets on the aussie and the sterling, and all the downside targets on the loonie. Today’s massive rally in risk fueled by optimism regarding the European rescue plan and stronger than expected US economic data has been broad based with a surge in volatility in FX markets pushing some pairs through key levels. As noted in today’s Scalping Strategies Webinar, the recent volatility has presented new setups with today’s report focusing on the EUR/CAD and the GBP/USD.

EUR/CAD Scalp Setup

Surge_in_Volatility_Reveals_New_Scalps-_EURCAD_GBPUSD_Setups_body_Picture_2.png, Surge in Volatility Reveals New Scalps- EUR/CAD, GBP/USD Setups

The EUR/CAD pair saw a sudden spike on Tuesday after the Bank of Canada rate decision, where dovish remarks from the central bank weighed on the loonie. We noted yesterday that the cautious outlook from the BoC was partly predicated upon the risk posed by the European crisis with Finance Minister Jim Flaherty noting that, “Canada is not immune to those recent global pressures and they will continue to limit growth in Canada for the remainder of this year and in 2012.”Increased concerns that a “brief” recession in Europe and a slowdown in the US and China had the BoC warning of external factors that could weigh on the domestic economy. Although far from a sustainable long-term solution for Europe, the rescue package does avert an imminent default out of the region and with a string of positive data out of the US, pressure on the loonie may start to subside. Coupled with an expected short-term pullback in the euro, our short-term outlook on the pair will be weighted to the downside. Note that longer term forecasts do call for the pair to move higher and accordingly our topside limit remains very tight.

The EUR/CAD pair seems to be consolidating into the apex of a wedge formation and is likely to hold this range in the interim. A break below the 38.2% Fibonacci extension taken from the September 30th and October 25th crests at 1.4055 eyes support targets at the 50% extension at 1.4020, the 61.8% extension at 1.3985, and 1.3940. A break below our bottom limit at 1.3910 puts the bottom limit break-target at 1.3870 into view. Topside resistance holds at the 23.6% extension at the 1.41-handle with subsequent ceilings eyed at 1.4135 and 1.4170. A breach of this level negates our bias with topside targets held at the 1.42-figure and 1.4230. An hourly ATR of 37.50 yields profit targets of 28-32 pips depending on entry.

*Note that short-scalps will not be active until a break below 1.4055 or a rebound off the 1.41figure with RSI conviction. We will remain flexible with our bias on the back of this recent run-up with a move passed 1.4170 eyeing topside targets.

Key Thresholds

Entry/Exit Targets

Timeframe

Level

Significance

Resistance 1 Target

30min

1.4100

23.6% Fibonacci Ext

Resistance 2 Target

30min

1.4135

Soft Resistance

Topside Limit

30min

1.4170

7 Week High

Topside Limit Break-Target

30min

1.4200

Soft Resistance

Support 1 Target

30min

1.4020

50% Fibonacci Ext

Support 2 Target

30min

1.3985

61.8% Fibonacci Ext

Support 3 Target

30min

1.3940

76.4% Fibonacci Ext

Bottom Limit

30min

1.3910

Basic Support

Bottom Limit Break-Target

30min

1.3870

100% Fibonacci Ext

Average True Range

1hour

37.50

Profit Target 28-32 pips

GBP/USD Scalp Setup

Surge_in_Volatility_Reveals_New_Scalps-_EURCAD_GBPUSD_Setups_body_Picture_3.png, Surge in Volatility Reveals New Scalps- EUR/CAD, GBP/USD Setups

Recent price action has offered fresh reference levels from which to take our extensions. Aside from a brief false break in the US session, price action continues to hold within the confines of an Andrew’s pitchfork taken from price action from October 13th through the 18th. As noted in today’s Winners/Losers Report, the sterling has been the laggard among the majors despite a sharp and substantial sell-off in the greenback. With the Bank of England recently increasing the size of its asset purchases to £275 billion and increasing concerns of undershooting the 2% target for inflation, the pound is likely to remain under pressure here. Having said that, we cannot rule out further topside moves as the dollar sinks further and accordingly we leave room for long scalps with a breach above 1.6145.

Initial support holds at the 50% Fibonacci extension taken from the October 20th and 26th crests at 1.6075. A break here eyes subsequent support targets at the 38.2% extension at 1.6033, the 23.6% extension at 1.5980 and 1.5950. A move below this level risks further losses for the pond with break-targets held at the 1.59-handle. Topside resistance holds at the key 61.8% extension at 1.6115 backed by 1.6145. In the event of a topside breach, we will attempt long scalps targeting the 76.4% extension at 1.6170 and 1.6230.An hourly average true range of 36.89 yields profit targets of 27-31pips depending on entry.

*Note that short-scalps will not be active until a break below 1.6075 or a rebound off 1.6115 with RSI conviction. We will remain flexible with our bias on the back of this recent run-up with a move passed 1.6170 eyeing topside targets.

Key Thresholds

Entry/Exit Targets

Timeframe

Level

Significance

Resistance 1 Target

30min

1.6115

61.8% Fibonacci Ext

Topside Limit

30min

1.6145

Soft Resistance

Topside Limit Break-Target

30min

1.6170

76.4% Fibonacci Ext

Topside Limit Break-Extended Target

30min

1.6230

Basic Support

Support 1 Target

30min

1.6075

50% Fibonacci Ext

Support 2 Target

30min

1.6033

38.2% Fibonacci Ext

Support 3 Target

30min

1.5980

23.6% Fibonacci Ext

Bottom Limit

30min

1.5950

Soft Support

Bottom Limit Break-Target

30min

1.5900

Weekly Low

Average True Range

1hour

36.89

Profit Targets 27-31 pips

---Written by Michael Boutros, Currency Analyst with DailyFX.com

To contact Michael emailmboutros@dailyfx.comor follow him on Twitter @MBForex for updates on this scalp and other trades.

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27 October 2011 21:52 GMT