No Brainer Trades'  Instablog

Spike base pattern caused by the SNB intervention:

When we look at the range of opportunities as traders, one world typically comes to mind: volatility. Today provided us with perhaps some of the biggest string of events we have perhaps seen a several weeks, despite the ongoing, consolidated patterns across the breadth of majors.

If you follow my updates, I’ve been mentioning the 1.5000 SNB ‘tolerance’ level on EUR/CHF for the past week. Close to getting hit yet again yesterday, the SNB reacted, this time in a very aggressive manner. Though they declined comments regarding any action, reports were coming through of ‘direct buys’ from the Bank and one particular UK clearer that spiked EUR/CHF from a low of 1.5013 to a high of 1.5381, for a daily range of approximately +368 pips. USD/CHF created a daily range of +390 pips. The pair currently trades towards the high of the initial spike, and consolidation is to be expected at this point. The luster seems to be over for the time being, and I currently don’t see a clear conviction to either buy or sell either of these pairs for the time being.

Particularly in the low 3800’s (1.3825 or so), there have been reports of sovereign interest buying into EUR/USD. This ‘interest’ was able to prop up the pair last week and bring it to new highs at 1.4138, doubling on top of rumors of European central banks dipping in and buying it over the past couple of days.

Typically, ‘sovereign’ interest is in it for the longer haul, and the pair is likely to meet a string of buyers again should it drop below its current trading range. From a technical perspective, it has broken the down-sloping trendline originally created by a head and shoulders pattern, and did not close below it today. So whilst a string of FOMC reactions, among other intraday events, might have caused the pair to drop lower, bias is still generally geared to the upside. Bank research notes seem to agree. As I scan my arsenal of IB research, ‘Long’ still appears to be the consensus for the time being.

Our major levels of interest below on the pair are 1.3904, 1.3928, 1.3793, 1.3722, and 1.3668, should we see any further declines from here.

The ongoing strength of GBP/USD seems to confirm these thoughts regarding recent dollar weakness. Yesterday, reported Asian sellers in the 1.6600 area helped cap buy orders on the pair ahead of BOE Governor King’s address before the Treasury Select Committee. The intraday decline hit a low of 1.6368, in line with seemingly perfect technical support. Looking at daily charts, the downward sloping diagonal trendline from June 3rd has now been penetrated, and these initial highs are yet again at risk of being taken out. 1.6200 buying pressure never let go of the pair in the last week, with a hard line of institutional interest protecting the pair from lower lows.

Lower levels for cable include 1.6368, 1.6241, 1.6200, 1.6150 (channel low), 1.6090

USD/JPY has been steadily propped up over the course of the past several days, due to the aid of FOMC speculation and a lower than expected trade surplus from Japan. The downward-sloping diagonal trendline has now been penetrated, and we’re seeing a backwards-bounce off of this line recorded yesterday. Regardless, the ‘main events’ are now over for the short term and a correction could be due. Technical analysts still seem to be ultimately targeting lower lows in the weeks ahead. Short term, I prefer looking for sells out of ‘exhaustion’ from the recent speculative rally. In the week ahead, we could continue to see buying pressure matriculate, though it is likely to me met by sellers along the path, looking for broader-term trend continuation.

Levels ahead of USD/JPY include 96.88 (50% ret.), 97.27, and 97.94 (76.4 ret.).

Despite the recent decline of world equity markets, the dollar remains weak, creating a short term out-of-synch correlation with risk.

When world markets decline, analysts begin shouting outrageous price targets lower, when no more than two weeks ago we were listening to similar outrageous claims of 1200 getting hit on the S&P in the very near term, etc. But markets don’t simply traverse up or down, and in fact most of the time they remain consolidated. Regardless, this downside risk to the world equity markets is still very much a concern, with more and more reports of long equity baskets getting stopped out and recommendations to go long US treasuries trickling in just about every day now. With this deflection-to-risk scenario developing with the dollar against “English speaking” currency pairs in recent weeks, we have reason to believe that any further increase in world equity markets would accelerate the pairs higher (against the dollar), while any moves lower in world equity markets would simply be muted.

Last week, I was asked about the best times to fade double zeros.

I argued: Not when price is making recent new highs and new lows, but rather, when price has been 'sloshing around' the zeros for a while and is already in an underlying trend. Today, I caught a good example of this, and thought it was worth mentioning here.

EUR/USD found some uncharacteristic buying pressure early in the US session today (reported as sovereign buyers) and made a quick attempt for the zeros at 1.3900. They worked this time, and priced faded, as we've seen many times before in this kind of situation.

I am not a fan of using double zeros when price is making new highs and new lows. Others might argue, but typically you'll see a stack of retail orders lined up around these areas (eg to sell in an uptrend) ready to get taken out and feasted upon by an eager crowd of overeager buyers.

Unless there is a strong reason around these areas (when price is making new highs and lows that haven't been seen in a long time) in the form of some fierce support and resistance or other major retracements, will I usually look to fade them.

An example when EUR/USD was on its way to new highs:

And from today, EUR/USD:

The S&P 500 has fallen approximately 46 pts from its highs, keeping risk traders at bay and pairs such as GBP/USD, EUR/USD and AUD/USD remain consolidated, with downside support levels under constant pressure.

Throughout this recession we have seen the staunch correlation of these pairs to the world equity markets, where risk trading reigns supreme, and few things have caused them to separate this relationship along the path. The occasional interest rate news and other local events are common among driving what seem to be nonsensical spikes and heavy movements in price, though from a macro perspective, we seem to religiously revert back to this relationship.

The dollar is slightly weaker tonight, after a correction the stock market helped push the pairs higher late in the US trading session. We now sit in the middle of a range that began approximately 2 weeks ago, with lower highs being made across the board.

After 2 weeks of consolidation and indecision among buyers and sellers, the S&P 500 has officially broken through its supportive trendline, and bears are now targeting lower retracement levels. Likewise, the Nikkei, FTSE and FESX are in the same boat, finally falling over from an overheated rally that began in early March.

Because of this, we look to badly needed US dollar strength in the weeks to come on the back of risk leaving world equity markets for the time being, bringing EUR, GBP AUD, etc to lower levels.

A “V” shaped recovery is great for political talk, but reality is another issue. Despite a string of better-than forecast numbers over the course of the past several months, world economic data is still very generally poor and sectors are still in rough shape. What wealth has entered these sectors over the course of the past few months has provided little in terms of sustenance, as more debts need to get paid off from beatings taken over the course of the past year. We had little reason to believe this rally would continue for long; the only question was: “how high before another collapse?”.

But as we all know, markets move up, down and sideways, and this equity market support break could temporarily be the beginning of a head and shoulders pattern or some other mutant of this. When we translate this over to currencies it means we could indeed go higher on GBP, EUR and AUD; it’s still not out of the question, though bias is certainly down.

Particularly for GBP, the currency seems to be resilient to sellers this past week, but downside levels continue to get tested. EUR is weaker; thus, it’s been my weapon of choice to sell when markets are moving lower. Two weeks ago we had strong sentiment leaning to the upside on all of these pairs, and is now vanishing little bit by little bit.

Using GBP/USD as an example, here are our alternatives as I see them now:

For buys:

The downward-sloping diagonal trendline is the first major area of resistance, followed by highs at 1.6618 and 1.6661. A potential move into this area could see a short term retracement, or bounce from the diagonal trendline or highs, followed by a breakout. Ideally, a long position would be taken on confirmation of this momentum , anywhere between the diagonal trendline high and 1.6618. A target on this trade would potentially be as high as the 1.7100 area, if it can clear the 1.6780 area. We would lock ourselves in at breakeven ahead of the local resistance (1.6661) to protect from any failures.

For sells:

Downward pressure on the 1.6239 and 1.6212 area continues. If a failure is truly to occur and in any time soon, we would like to see a day of heavy selling pressure going into this level, ideally selling ahead of this zone to protect ourselves from any false breakouts. The major area of support below this zone comes in at 1.6130 and 1.6114 (retracement confluence) and 1.6089, as well as a slew of rather ambiguous support levels from bumps made on the hourly charts in the most recent uptrend. Because we have a ‘triangular’ pattern taking shape, the likelihood of a big pullback from an area like this (1.6130-1.6089) is possible, though we would prefer to lock our trades in at breakeven and see if we can ‘ride it out’ for lower lows.