Nothing builds the tension in the forex market like a range trade.
And at the moment, EUR/USD continues to show all the characteristics of a great range trade. It has flirted with the top and bottom of the range several times, including a handful of false breakouts and headfakes.
Take a look at this chart and envision yourself selling near the top line and buying at the bottom line.
It looks like a 200 pip machine. Of course, it hasn’t been without some scary moments. Last week was a big one as the market bounced 90 pips at 1.4850 only to fall through the bottom of the range in a false breakout.
Discipline is the only way to fight headfakes but false breakouts can be contended with by using wide stops.
Another way to limit risk is by taking only one side of the range trade. If you have a bias toward an eventual breakout, sell two or more units on that side of the trade and book a profit on half when it nears the edge of the range.
Of course, playing the breakout trade is the big, sexy trade. The interesting thing at the moment is that it is very difficult anticipate a breakout on either side of the range in the next few days.
On the topside, resistance runs up to 1.5060. A daily close above this level would probably assure a significant test of the 1.61 all-time high.
On the downside, we are now seeing significant support at 1.4800 followed by less important support at 1.4686 and 1.4627. if the range breaks on the downside, it may just open up a wider range trade. At this point, the technical picture for a full-on reversal just isn’t strong enough.
There are a few charts to watch in relation to the range. The first is the S&P 500. Today, we saw a big jump in U.S. stocks that narrowly failed to take out the 2009 high of 1113. We don’t see this as a failure … yet. If there is a meaninful reversal below 1100 in the next two days, it could serve as a double top. If we see a break above 1113, the bias is certainly toward a rally in the euro.
A second chart is gold, which hit a record 1171 today. For years, the euro and gold have been correllated. This time, it seems the euro was way out in front of gold. Gold should start to encounter resistance leading up to $1200. A break paves the way for a euro test of 1.60.
The third chart to watch is EUR/JPY. This chart is THE measure of risk appetite in markets. Unlike stocks and gold, this chart is flashing some definite red flags.
The downtrend is obvious on the three-month chart. What’s especially worrisome is that we are appearing to turn lower after bouncing off major support at 131.70. If we don’t see a move higher and break of 133.60 in the next day or two, we expect to see a swift fall toward 130.00.
In the day ahead, the preliminary report on third quarter GDP is expected at 2.8% from 3.5%. Unless we see something close to a half-point from the consensus, we don’t expect a large impact from this report. The market is more concerned about the final quarter of this year and Q1 2010. Also, keep a close eye on the Ifo and U.S. home sales data.