The “trend is your friend” is an often quoted saying among traders, but the ability to trade a ranging market is also an important skill. Below is an excerpt of a recent article on DailyFX.com that will help you identify and trade a ranging market using a recent trade setup in AUD/JPY as an example:
[B]FIND YOUR SET UP
Markets trend. They trend up, they trend down and they trend sideways. Yes, sideways action is a tradable trend. Some analysts advise traders to stay away from sideways markets and some technical indicators do become less effective during neutral trends. But…
WHAT’S YOUR TIMEFRAME?
It all depends on your timeframe. For shorter-term forex traders, sideways trends can offer well defined support and resistance points and tradable opportunities. A range trading play might be boring, but it can offer clear risk levels and entry and exit points—everything a trader is looking for.
CARVING OUT RANGE
Take for example, recent action in the Aussie dollar/yen (AUD/JPY). Since mid-summer, the pair has shifted into a sideways pattern, seen below in Figure 1. Well defined range top resistance is seen at the 83.50/83.00 region, with range bottom support seen in the 79.60/79.40 range.
SELL THE HIGHS, BUY THE LOWS
A range trading strategy is very simple—sell the highs and buy the lows, and vice versa. Traders can play the range from the long side and then the short side for days or weeks, until…
My pleasure, Kurt Let me know if there is a particular currency or strategy you’d like me to cover in future posts
So far this morning the US dollar has gained strength as a risk aversion play as traders have sold other major currencies against it. Chris Vecchio of DailyFX.com discusses this further his report below:
[B]Investor sentiment deteriorated throughout the night, dragging the S&P 500 futures lower and pushing the US Dollar higher. In fact, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has risen back to its highest level since September 7, the day the US Dollar was crushed following the European Central Bank’s official unveiling of its bond-buying scheme, the OMTs.
The news overnight leading to this downside was Moody’s Investors Service downgrading five Spanish regions, including the increasingly separatist and economically strong Catalonia region. Moody’s said that the cuts were “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves.” Furthermore, Spanish newspaper El Confidencial said Prime Minister Mariano Rajoy’s government told the European Union it will miss its budget deficit target this year. While the latter is discouraging, it does add fuel to the ‘Spain needs outside help’ (a bailout) fire. As such, the Euro is heavy today and testing the psychologically significant 1.3000 level again.
Below is David’s Song’s preview of this afternoon’s FOMC Rate Decision:
[B]The greenback is struggling to hold its ground ahead of the FOMC interest rate decision, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,937, and the reserve currency may continue to give back the advance from earlier this week should the central bank keep the door open to expand its balance sheet further.
[I]US Dollar Index, 1 Hour Chart[/I]
As Chairman Ben Bernanke looks to encourage a stronger recovery, the central bank head may preserve a dovish tone for monetary policy, but market participants may slowly scale back speculation for more easing should the Fed raise its fundamental assessment for the world’s largest economy. As growth and inflation gradually picks up, we may see a growing number of Fed officials scale back their willingness to implement more quantitative easing, and the committee should start to move away from its easing cycle as the very accommodative policy stance heightens the long-term risk for inflation.
As the FOMC rate decision highlights the biggest event risk for the next 24-hours of trading, the fresh batch of central bank rhetoric will heavily influence the greenback over the remainder of the week, and we may see the USDOLLAR threaten the bullish trend from earlier this month should the Fed show a greater willingness to expand its asset purchases.
Retail forex trading crowds continue to sell the US Dollar (ticker: USDOLLAR) and Japanese Yen against major counterparts. We forecast further USD and JPY declines.
Indeed, we believe that forex market conditions continue to favor selling US Dollar and Japanese Yen strength. There was a modest pullback in USD-long interest since last week, but as long as the majority of retail traders remain long US Dollars versus the Euro and other counterparts we remain in favor of USD weakness.
Thanks for the feedback. Today I wanted to share a video in which DailyFX Chief Strategist John Kicklighter discusses the top fundamental themes for this week of trading. Hurricane Sandy threatens to take the US market offline for the first 48 hours of trade this week. How will this influence underlying risk trends with EURUSD and the S&P 500 so close to support (1.2825 and 1,400 respectively)?
The New York Stock Exchange and other US financial markets will reopen for trading tomorrow, and it will be critical to watch how the US Dollar and S&P 500 react to key forex economic event risk. The US Dollar (ticker: USDOLLAR) is likely to see significant volatility tomorrow as the New York Stock Exchange reopens for trading and key forex event risk promises sharp moves on any surprises.
[B]Dow Jones FXCM Dollar Index Trades Near Key Technical Support[/B]
The Dow Jones FXCM Dollar Index continues to hold key support at 9900, which likewise represents the 50% Fibonacci retracement of the rally from October lows. Yet forex traders will put the Greenback to the test on tomorrow’s highly-anticipated US ISM Manufacturing, Chicago PMI, and ADP Employment change results…
Retail forex traders remain broadly long the US Dollar (ticker: USDOLLAR) against major counterparts, but a sharp pullback in positioning warns of potential reversals in key USD pairs.
It will be important to watch US Dollar reactions to tomorrow’s highly-anticipated US Nonfarm Payrolls data release. Current forex sentiment warn that the Greenback may be near a significant turning point against major counterparts.
Watch the DailyFX team (and me :D) on live streaming video from the FXCM Expo in Las Vegas. Send us your questions on Twitter using the hashtag #FXCMExpo, and we’ll try to answer as many as we can during the live broadcast.
“The US Dollar is likely to face selling pressure if the US general election yields a decisive outcome, opening the door for a re-focus on resolving the ‘fiscal cliff’ fiasco” according to Ilya Spivak, DailyFX Currency Strategist.
[B]A busy European economic calendar is likely to be overshadowed as traders await the outcome of the US general election. Financial markets appear broadly chipper, which likely reflects hopes for an easing to the deadlock in Washington DC in the months leading up to today’s ballot.
Indeed, a decisive victory by either candidate that opens the door for the current President and legislature to shift their focus toward addressing the fast-approaching “fiscal cliff” – a set of automatic spending cuts and tax hikes slated to trigger at the turn of the calendar year that may tip the US back into recession – is likely to be seen as broadly supportive for risk appetite. Indeed, S&P 500 index futures are pointing higher, warning the safe-haven US Dollar is vulnerable.[/B]
[B]Upcoming News Event: Chinese CPI
Time: 8:30 pm EST (01:30 am GMT)
Currency Pair to Watch: AUD/USD[/B]
Below is a chart that illustrates the correlation between Chinese CPI and the AUD/USD exchange rate.
As you can see, Chinese CPI is currently at 3 year lows. Song Guoqing an advisor to the PBOC, China’s central bank, has suggested that CPI could fall even further with growth expected be “relatively slow” in the fourth quarter of this year and the first quarter of next year.
If CPI comes in lower than expected, look for the Aussie dollar to sell off as the market will expect further rate cuts from Australia’s central bank, the RBA.
Over the last 4 years, we’ve found ourselves in a crisis management environment that continues to drag EURUSD lower. This weekly chart shows a down trend that started with the Global Credit crisis in 2008 only to be followed by the sovereign debt crises coming to head with many key European economies.
With more bad news coming out and the dark cloud of the US fiscal cliff looming overheard, more traders could make a run for US treasuries and out of the European economy which could bring us down another leg. One thing is for sure, when fear rises the EURUSD drops.
A strongly negative correlation between AUD/USD and the implied volatility prices of AUD/USD options warns that Aussie Dollar strength may ultimately prove unsustainable on a shift in forex market conditions. A bearish short-term technical forecast and uncertain fundamental outlook likewise warn of potential AUD weakness.
As the US fiscal cliff approaches, and it becomes a center of media attention, we’re left wondering what currency pairs may be impacted and which way to trade. The Globe and Mail, a newspaper in Toronto, had an interested article today about how the Canadian dollar could be affected by the US fiscal cliff.
They say the fiscal cliff “would take a huge chunk out of U.S. gross domestic product and likely push the economy back into recession, taking other countries’ economies with it. Such a scenario is bad news for a resource-based currency like Canada’s as slowing economies will slash demand for oil and metals.”
The Speculative Sentiment Index (SSI) on DailyFX PLUS is currently net short USD/CAD at -1.24 giving a bulling signal for the pair.
USD/CAD Monthly Chart
From a technical standpoint, if you look at the monthly chart of USD/CAD above, it’s trading right around parity and is near the bottom of its historical range. Ilya Spivak of DailyFX.com is also bullish on the USD/CAD and sees 1.0140 as the next target level.
[I]“Today’s dramatic drop in the Japanese Yen has nothing to do with a rebound in risk-appetite, or new prospects for a stronger US Dollar. Instead, the surprise call for elections in December by current Japanese Prime Minister Yoshihiko Noda on Wednesday, coupled with calls for unlimited easing by the Bank of Japan from opposition leader, and most likely the next leader of Japan, have dropped the Yen to its lowest value against the US Dollar since late-April.”[/I]
The USDJPY has moved to the top of trend resistance near 81.15 and has broken above our key 80.50/70 level, leaving the mid-April swing high at 81.75/80 as the next major resistance level. Support comes in at 80.50/70 (former November high) and 79.10/30.
The latest SSI report on DailyFX PLUS for USD/JPY is currently giving mixed signals. The index value remains net long at 2.21 which has been the case for a long time. This is normally a bearish signal, but…
the daily change in long and short open interest indicate that a lot of traders closed out their long positions after today’s up move in USD/JPY while short positions increased. This could indicate further gains in USD/JPY are possible on easing concerns.
The trend continues to move in the US Dollar’s favor at the moment. The Dow Jones FXCM US Dollar Index broke through the significant 10,000 level earlier this week and the next major resistance level is the 10,175-10,200 level previous reached in July of this year.
[B]Dow Jones FXCM US Dollar Index[/B]
The DJ FXCM USDOLLAR Index is comprised of a basket of 4 currencies against the USD including: EUR, GBP, AUD, JPY. The US fiscal cliff has been a negative for the USD, but other fundamental events this week have been a bigger drag on the other currencies such as 1) EU debt crisis, 2) surprise Japanese elections and more aggressive easing from the BOJ, and 3) Bank of England lowering UK economic forecast.
This week’s economic calendar is light on US releases due to the US Thanksgiving holiday on Thursday. Despite the US holiday, there are still plenty of non-US events to keep the forex market interesting. Here’s a look at the economic events on the calendar ranked HIGH in importance this week:
The Bank of Japan is set to meet later today, but this Bloomberg article mentions that “All 22 economists surveyed by Bloomberg News expect the BOJ to take no action at the end of a two-day meeting today…”. The article also goes on to mention that the government taking office after the December 16 election will appoint the BOJ’s top 3 positions which should give them the needed majority to push through the monetary easing everyone has been talking about. The next BOJ meeting after today is on December 20th.
Moving on to technicals, here is a chart that John Kicklighter posted on his Twitter account displaying long term trend shifts that look to be occurring with the USD/JPY.
USD/JPY
I have also been watching the AUD/JPY myself waiting for a breakout to the upside. The pair was trading in a range from July through October. It looked like a breakout earlier in November before pulling back, but it has now pushed through again.
Let me know if there is a particular currency or strategy you’d like me to cover in future posts
