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Pairs to Range Trade

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Will Technicals Hold Out Against GBPCHF Volatility For A Range Setup?

Wed, Nov 26 2008, 06:04 GMT
by John Kicklighter

DailyFX

Market conditions are changing and stifling ranges are beginning to yield to consistently high levels of volatility. GBPCHF is a dangerous choice for a range position; but with solid technical levels, a good strategy and short time frame, it may present a good opportunity.

Why Would GBPCHF Stay in a Range?

• Levels to Watch:
  -Range Top: 1.8400 (Fibs, Trend)
  -Range Bottom: 1.7975 (Trend, Fibs)

• Congestion is still the dominant force in the overall currency market; but the potential for trend development and breakouts has risen significantly over the past few days. A period of low liquidity over the second half of this week has leveraged volatility and the market seems determined to prevent a bigger breakout when many participants are out of the market. UK data presents the greatest event risk beginning on Thursday and going into next week.

• Though GBPCHF is threatening a trend reversal in the medium term, short-term congestion may hold the market back through the immediate future. Through the short-term a wedge formation is developing; but our main concern is the resistance in this pattern. The confluence of the falling trendline and two Fib retracements at 1.84 offers definition.

Suggested Strategy

• Short: Entry orders at 1.8370 - at half the normal position size considering the stop.

• Stop: An initial stop at 1.8470 is necessary to account for frequent tails and high volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (100) at 1.8270. The second target will be 1.8135.

Trading Tip – Market conditions are changing and stifling ranges are beginning to yield to consistently high levels of volatility.
GBPCHF is a dangerous choice for a range position; but with solid technical levels, a good strategy and short time frame, it may present a good opportunity. For full disclosure, this is a particularly dicey congestion trade, so only those with higher levels of risk tolerance should attempt it. Looking at the market, our main concern is what the primary market driver will be for currencies. Risk appetite has bounced back, but the rally in yen and franc denominated crosses has quickly lost momentum. With an expected drop in liquidity through Thursday, this may be an attempt to relieve pressure behind breakout setups so that congestion zones can maintain their borders through the rest of the week. Our suggested strategy attempts to reduce risk by setting an aggressive entry and wider stop, reducing position size, and having a strict time frame for pending and live positions. Open orders will be canceled within 24 hours and we will look to close any open position by the week end.

Event Risk UK And Switzerland

UK – Though the pound is finding much of its drive from the temperament of risk appetite, scheduled event risk will play an increasingly influential part in price action as the week wears on. Tomorrow, the market will focus on the second reading of 3Q GDP and all its components. The greatest measure of speculation has already been set with the advanced reading; but significant revisions to important component readings like personal consumption, investment or trade could fundamentally change the outlook for the UK’s unfolding recession. Later in the week, the leading Nationwide house prices indicator and GfK consumer confidence survey will measure the health of the two worst afflicted sectors of the economy. Outside of the purview for our trade, consumer credit, November PMI readings and a BoE rate decision present major risk – hence our cutting any trades with the week.

Switzerland – The Swiss franc is still considered one of the key safe haven currencies in FX; but its influence has diminished significantly while the dollar and yen’s status has solidified. Regardless, we will have to watch out for any significant shifts in risk appetite over the next few days as the pressure could overwhelm technical barriers with a steady drive. As for event risk, there is economically important data scheduled; but it has little chance at supporting a significant breakout. Thursday’s 3Q employment report will measure the health of the consumer sector and redefine expectations for spending trends ahead. Friday’s KOF offers a good forecast for growth, but its composition of lagging reports shouldn’t offer anything speculation hasn’t already priced in.

Published on  Wed, Nov 26 2008, 06:12 GMT