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Breakout Opportunities Highly Risky, Trends Unstable as EU Stress Test Countdown Continues

Breakout Opportunities Highly Risky, Trends Unstable as EU Stress Test Countdown Continues

2010-07-21 15:36:00
John Kicklighter, Chief Currency Strategist
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We have entered another day of chop as the economic docket has hollowed out and unexpected event risk feeds the short-term volatility that draws in the uninitiated traders. For those that are fundamentally savvy; it is common knowledge that there is major data and risk over the final 48 hours of the week; and things could become especially complicated in this period. We could very well see a tentative breakout with the collective wave scheduled for tomorrow (European PMI figures, Canadian retail sales, US leading indicators and existing home sales); but given the influence of the data points due on the following day, any substantial move will be tempered by the fear of a possible sharp reversal. Therefore, I need to tread lightly with my existing positions; and my pending positions are for watching until very specific conditions are met.

For my active positions, AUDCHF seems to have stalled in its bounce with a loose overhead at 0.9325 that wouldn't hold up very well to a strong drive in risk appetite trends. The yen is still causing my CHFJPY short some problems. Not surprising, this pair's reversal following its break of a 8 week rising trend channel is quickly falling into the gravity of Friday's event risk. I may have to reduce size ahead of this event as this is now just above my entry point. At the same time, my long-term USDJPY is still relatively light and the fundamentals line up when the short-term volatility of immediate uncertainties pass.

Like the siren's song, there seems to be a ton of very appealing trading setups in the FX market right now; but most are attractive because they are short-term and potential breakouts (or reversals on range boundaries depending on how things develop). These are exactly the conditions you do not want to dive into considering the volatility that we face heading into the end of the week. On the other hand, we can keep an eye on them and gauge whether they are optimal setups after we get clear bearings to work with. EURUSD seems to be calling me now with a tentative reversal from 1.30 that works within a loose rising trend channel. The lack of technical acuity though makes it pretty easy for me to hold off. Can't say the same for GBPUSD. This pair is at the floor of a rising trend channel and I am once again interested in its performance. I will keep an eye on this one with Friday's UK GDP report as well. A potential positive outcome to the EU Stress Test would make a 113.35/50 break from EURJPY a good opportunity. Alternative risk aversion would work well for a AUDUSD reversal from 0.8850, AUDCAD drop below 0.91, AUDNZD collapse below 1.21 and my long awaited CADJPY drop below 82. So enticing; but patience is a virtue with trading as it is with life.

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