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Awaiting Inevitable Breaks

Awaiting Inevitable Breaks

2014-04-24 04:52:00
John Kicklighter, Chief Strategist

There are some pairs that are facing major breakouts due to technical conditions, fundamental circumstances and even a mixture of both. There is opportunity to be found in this picture - but we shouldn't let a glimmer of volatility lead us to act on scenarios that aren't there.

While there is certainly break out opportunity across a number of the majors and crosses through the near future; most of these setups are moves that lack for follow through or are unlikely to trigger until a sizable shove that can feel follow through is realized.

Perhaps the most imminent breakout candidate out there is GBPUSD. The pair is facing a wedge that is less than 70 pips (April's rising trendline confronting the range high at 1.6800/35) while its average daily trading range is greater than that. A breakout here is a necessity, but without a material shift in interest rate expectations from the UK or US, the break is likely to lack for follow through. A break either way is potentially tradable, but I prefer the scenario below 1.6760 with a short-term maximum target at trendline support down at 1.6600.

EURUSD is a similar breakout candidate, but it is less likely to make an errant push without a strong fundamental development. Capital inflows keep the buoyancy towards 1.4000/3900, but traders take the ECB's threat of stimulus should it appreciate seriously. Here, the skew is unnatural, but significant nonetheless. I like fading a move close to (within 50 pips) of 1.4000 or more appropriately a break below 1.3700.

Another interesting candidate that is prone to a break is NZDUSD. This is a more unique case as normal fundamentals would say a break above 0.8750 should have already happened. However, the RBNZ has played the game well to curb bullish progress. Not rallying on bullish news is seriously worrying. If this pair breaks below 0.8550, I like the short side.

For active positions, my long-Aussie trades have lost some traction. Though GBPAUD is still below the neckline of its head-and-shoulders pattern - and still a candidate for a medium-term short bearing - my trailed stop was hit to book the second half of my short for +200. I still have the EURAUD short on and will stick with the medium-term view here. My long-term AUDNZD long meanwhile is retreating from 0.9000 after the Aussie CPI and RBNZ combo. While giving back some gains, this doesn't change my long-term view for the pair and therefore my position.

Finally, my long-term USDCHF long is still in play. The relationship to the euro (capped below 1.4000 by the ECB) and EURCHF (held above 1.2000 by the SNB) is the foundation for my maintaining this position through tumultuous seas.

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