I’ve often advocated that traders remain disciplined to price action– staying aware of but not beholden to the headlines. This year was no different. Covid-19 has been the single largest global pandemic in a lifetime, with hundreds of thousands lost and millions more affected. The entire population went into shutdown and for the first time ever, virtually the entire US economy came to a screeching halt, putting thousands on unemployment and closing countless businesses. A tremendously horrible humanitarian catastrophe on all fronts.
That said – what was the trade? If you follow the headlines, one would think the ONLY thing to do was sell risk, buy havens, and seek shelter. Looking back, the March sell-off turned out to be the buy of the year (maybe multiple years) for risk assets and FX Majors across board. But why is that?
Heading into the start of 2020 the Euro was down more than 11% off the 2018 highs with a multi-year decline taking price into downtrend support near multi-year lows. Despite all the volatility, the Covid sell-off registered the yearly lows just 2.2% below 2019 before reversing trend with positive news on the vaccine front fuelling the rally late in the year. The technicals did not foresee this pandemic – nor the surge in volatility – but a simple look back suggests that from a technical standpoint, the conditions were ripe for a major market reversal in trend.
The point is, markets were primed for a turn as prices tested the trend at multi-year extremes and heading into 2020 the virus was the catalyst needed to fuel the broader washout and reversal trade. The technical structure and positioning suggested that markets were vulnerable in both price and time. Understanding where we are in trend allows you to better capitalize on opportunities that may be counter to the prevailing headlines. So, should we just fade all bad news? By no means! But take it in context to where price is trading – these will tend to be your best calls. As always, let the technicals be your guide, and the headlines be your trigger.
- Written by Michael Boutros, Currency Strategist with DailyFX
Follow Michael on Twitter @MBForex
