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Pairs to Range Trade

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The Last Chance For A AUDCAD Range Setup?

Mon, Dec 1 2008, 06:07 GMT
by John Kicklighter

FXCM

Thin liquidity over these past two trading sessions hasn’t generated much volatility, nor has it produced the necessary drive for breakouts. This is fortunate for AUDCAD, which continues to cut one of the most clearly defined ranges that we have seen in some time.

Why Would AUDCAD Stay in a Range?

• Levels to Watch:
  -Range Top: 0.8125 (Trend, Fibs, SMA)
  -Range Bottom: 0.7850 (Trend, Fib)

• This has been one of our favorite range trades from a technical point of view for weeks; however, the fundamentals underlying this pair are certainly making it harder and harder to justify such a consistent channel. Looking ahead to next week, the greatest threat to the survival of the trading band may not be the uncertainty in risk trends but event risk on the economic docket. Rate decisions, GDP and employment numbers are highlights.

• Congestion is clear through both the short and long-time frames; but that doesn’t mean we should ignore the momentum behind the November bull run. A rising trendline from the Nov 4th bullish reversal now coincides with a notable 50% Fib and developed pivot around 1.97. For resistance, a falling trend has capped 2.05 with the promise of a broad wedge.

Suggested Strategy

• Long: Entry orders at 0.8125 right at the range high, but within the intraday peaks.

• Stop: An initial stop at 0.8175 should be sufficient as long as this range holds. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (75) at 0.8075. The second target will be 0.7975.

Trading Tip – Thin liquidity over these past two trading sessions hasn’t generated much volatility, nor has it produced the necessary drive for breakouts. This is fortunate for AUDCAD, which continues to cut one of the most clearly defined ranges that we have seen in some time. Nonetheless, there is little doubt that this pair will force a breakout eventually – especially if the high level event risk due tomorrow comes across the wires with some surprises. Therefore, it is important as ever to clearly define a setup. The strategy laid out above has a very aggressive entry (that still lies below today and yesterday’s intraday highs), a relatively tight stop and target on the onset and a mind towards timing. We will hold orders open only for the rest of today’s session and over the first few hours of Monday morning’s Asian session. After that, we run the risk of a breakout driven by major event risk; so it is best to avoid that in such a tight range.

Event Risk Australia And Canada

Australia – Calm markets will certainly be disturbed by the Australian economic docket over the coming week should there be even modest surprises to speculators’ forecasts. Things start off innocuously enough with a 3Q read on profits fro Australian companies. This will be an interest gauge to see how the business sector is faring with export demand essentially evaporating and domestic orders struggling to keep up during a global recession. The real event risk begins Tuesday morning with retail sales for October and the RBA rate decision. Both are known market movers, but the latter has the greater market potential. Forecasts for the rate decision are very spread out, so a good part of the market may be caught off guard regardless. If a break doesn’t occur for the Australian dollar with the policy decision, 3Q GDP may have its way with the currency. Expectations are still very bullish for the economy; but the international slowdown no doubt had its influence on the island continent.

Canada – After a few weeks of relative quiet, the Canadian calendar will once again have a significant impact on the loonie’s price action. Kicking things off with a volatile start, the September GDP report rounds out the 3Q reading. In the past, the quarterly forecast has proven completely off-target with a substantial shift in the final monthly reading. This may be the case once again for the September quarter. The rest of the risk to calm seas comes in the latter half of the week. The Ivey business activity gauge is a second tier indicator; but it may be boosted up to top priority depending on how bad the read on growth happens to be. Finally, Friday’s employment figure will present the greatest event risk for the week. Expectations for US job losses are climbing higher and higher. Will Canadian firms begin to trail their neighbors pace to cut costs? This figure could redefine recession expectations for Canada.

Published on  Mon, Dec 1 2008, 06:13 GMT