pairs to range trade

Low Liquidity And A Short Time Frame Shape A Strong EURUSD Range

Friday, 21 November 2008 22:37:56 GMT  |  John Kicklighter, Currency Strategist

Looking for a range trade in any one pair at this point is essentially a call on overall currency market conditions over the coming week. EURUSD has the most conducive setup for congestion; but at the same time, it also offers the best terms for a breakout.

Why Would EURUSD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.2680 (Trend, Fibs, SMA) -Range Bottom: 1.2680 (Trend)   ·         The currency market has closed with the dominant theme of congestion still intact. However, many pairs have shown the initial signs of breakouts as risk aversion is once against emanating from the credit markets. For EURUSD, volatility and market position make a very strong case for a impending breakout. However, risk appetite has less influence with this pair, though a fully stocked economic calendar may force the final break.   ·         Few pairs have as clear a range setup as EURUSD. A descending wedge formation has presented moving targets for extremes. Our primary interest is with resistance. The falling trendline from the Oct 15th (1st?) high is backed up by the 20-day SMA, a 61.8% fib around 1.2675/725. Support is merely a short-lived, but obvious, rising trendline. Suggested Strategy   ·         Short: Entry orders will be set at 1.2660 – close to the trend and technical resistance confluence.   ·         Stop: An initial stop at 1.2730 would not protect against false breaks like Wednesday’s move. To secure profit, move the stop on the second lot to breakeven when the first target hits. ·         Target: The first objective equals risk (70) at 1.2590. The second target will be 1.2485.

Trading Tip – Looking for a range trade in any one pair at this point is essentially a call on overall currency market conditions over the coming week. EURUSD has the most conducive setup for congestion; but at the same time, it also offers the best terms for a breakout. Therefore, we are approaching this pair very cautiously. While there are clear entry points for both a long and a short position in this developed wedge; we will stick only to the dominant trend (bearish) in case of a breakout. Furthermore, the apex of the traditional wedge formation is fast approaching; so we must limit our viable time frame for open orders. Therefore, we will close any floating orders by Monday’s close or should EURUSD drop below 1.24 before triggering our entry. What’s more, a lot can change during a weekend. Therefore, it is best to monitor price action when liquidity returns in the Asian session Monday morning to ensure that a range trade is not taken when a breakout is clearly developing.

Event Risk Euro Zone And US

Euro Zone – Euro-related event risk is substantial over the coming week; but is it potent enough to drive a major breakout? Our proposed setup is for one day only; so for entry, our concern is German business confidence. The IFO sentiment gauge for November will give a reading for managers expectations for consumption trends heading into the holiday, which will in turn shape their production and hiring plans going forward – a key driver for growth going forward. Should our orders execute and we are carrying a trade later into the week, there will be a steady stream of data that could influence price action. Tuesday’s GfK Consumer confidence report offers expectations for consumption trends going forward (while the trend of past spending habits will be gauged by the German 3Q GDP final numbers due the same day. In the second half of the week, the German CPI and unemployment change numbers for November will give the last few adjustments for interest rate expectations before the ECB meets on December 4th.

US – There is a significant amount of scheduled event risk on deck for the US dollar next week; but the most important fundamental angle for the market next week is the Thanksgiving market holiday on Thursday. This will no doubt drain liquidity for the entire week and potentially generate excess volatility which creates an unstable environment for a currency that is already on the edge of major breakouts across the board. As for the indicators populating the calendar, the first revision of 3Q GDP will be particularly interesting as the personal consumption component of expansion is prone to major changes from one measure to the next. Consumer confidence, durable goods orders and home sales activity is all important but largely priced into the already dour outlook that has set in for the US.

Data for November 24 – November 28			Data for November 24 – November 28
Date	Euro Zone Economic Data		Date	US Economic Data
Nov 24	German IFO – Expectations (NOV)		Nov 24	Existing Home Sales (OCT)
Nov 25	GfK Consumer Confidence		Nov 25	GDP (3Q P)
Nov 27	German CPI (NOV P)		Nov 25	Consumer Confidence (NOV)
Nov 27	German Unemployment Change (NOV)		Nov 26	Durable Goods Orders (OCT)
Nov 28	Euro Zone CPI Estimate (NOV)		Nov 26	New Home Sales (OCT)

 

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

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