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Strategy Video: Yen, Gold, Oil, Pound Breakouts Against the Odds?

Strategy Video: Yen, Gold, Oil, Pound Breakouts Against the Odds?

2016-10-04 03:40:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Tentative breakouts from USD/JPY, GBP/USD, Gold and Oil among others has parched traders calling true breakouts
  • Market conditions is a broader analysis that may offer more important guidelines than techs or fundamentals
  • A greater number of breakouts in key areas could signal a general shift in conditions if market sentiment shifts

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

There are more than a few technical red flags going up with tentative breaks for key FX crosses and commodities. Yet, how much opportunity do these moves represent to traders? Trade potential in clearing technical boundaries depends wholly on the degree of follow through. Even a move through the most obvious and storied of trendlines or support/resistance levels means little if the follow is so modest it doesn't compensate for the risk that accompanies it. None of the high profile technical breaches that have drawn the market's attention presents an overwhelming drive. That means it will fall to conviction to fall in line after the event to generate traction and thereby profit potential. That represents a high bar given the broader financial markets are showing a greater frequency of congestion with fundamentals that support complacency rather than motivated trend.

Among the high profile FX moves that have active traders on the edge of their seats is the sharp Pound drop to start the week. GBP/USD has cleared a rising trend channel floor, EUR/GBP has closed at a three year high and GBP/AUD an equivalent low. Fanned Brexit 'hard-landing' fears were the source of the volatility, but they may struggle to keep the fire burning. Meanwhile, USD/JPY has broken a trend channel that has developed over the past 12 months. Yet, other yen crosses are not as definitive in their levels; and the motivation isn't elemental like risk trends but rather dubious monetary policy expectations for the BoJ. Then there are commodities with Gold breaking channel support but not the past months of congestion. Backed by supply constraint stories, oil has also climbed above a trendline to dating back to May 2015. Here too raises the question of motivations.

While it is possible to develop a trend when the broader market is holding to congestion, it is a lower probability scenario. Overcoming the current constraints on speculative positioning, would require either an overriding development (difficult to supersede monetary-borne complacency) or a steady stream of fundamental motivation. In trading, the primary interest is to seek the best combination of probability with potential for return considering our individual risk tolerance. We evaluate the breakouts that are showing up on trade radars for more than just their technical milestones in today's Strategy Video.

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