Monday, June 22, 2009

Insights for Traders on the Coming Week: Will "Range-Trader's Delight" Continue?

Introduction: A Range Trader's Market
As the week opens, perhaps the biggest question is whether Forex, Commodities, and World Stock Indices will continue to trade in relatively tight, well defined trading ranges/channels/tunnels (whatever term you prefer), as all markets await further news to clarify whether the purported world economic recovery really exists, and if so, when will it begin to show itself in employment, spending, housing, banking etc.

The coming week is relatively light on economic and earnings news, with little potential for big surprises. Of course, by definition, big surprises are always unexpected.

If there is market moving news in the coming week, it may come from possible downgrades of banks or the State of California, or from unanticipated geopolitical disturbance spilling over from current tensions with North Korea or Iran.

Meanwhile, the range bound markets have provided range traders with ample opportunities to open trades at well defined support or resistance and then close out trades when prices bounce up or down to the opposite side of the channel or tunnel, which has typically been between 1% with major currencies, to over 4% with crude oil.

Many traders, especially beginners, love these situations because the clear channels not only provide clear entry and exit points, they also allow cautious, risk-averse traders to place stop losses just outside these levels so that if they were wrong and these levels don't hold, the trader exits with only a small loss. Also, clear trading ranges or channels make it easy to spot profit targets at which the position should be closed or at which trailing sell stops should be tightened in order to maximize profits.


For example, look at hourly charts of the EUR/GBP or USD/JPY. Note how both currency pairs established trading ranges early in the week, allowing alert, disciplined traders to enter trades later in the week for quick low risk gains if they used stop losses and sell limit orders placed just beyond the trading ranges. See our daily market summary for Friday June 19 or Monday June 22 for details (

Unless some market moving news comes out, traders are likely to find similar opportunities. Futures traders have been favoring the commodity currencies, the CAD and AUD, suggesting a belief in a possible technical bounce in commodities may be in the cards. Regarding the CAD, however, Bank of Canada Governor Carney has repeatedly expressed concern that the CAD's recent strength could hurt Canada's export-driven economy, and that "intervention" from the BOC beyond this anti-CAD talk was possible. Moreover, any additional pessimism and /or stock declines could pressure commodities and their related currencies.

The GBP is also near it's 7 month high against a number of majors, and thus may be vulnerable to a pullback to test support.

While the USD has still held some of its gains from all the G8 happy talk, those gains have been eroding. However, as discussed below, further declines in stocks could well give the USD and Yen a lift as traders seek safer currencies.

On the one hand, commodities may be due for at least a technical bounce, given their recent pullbacks. On the other, any additional pessimism and / or stock market declines, even just a technical test of deeper support, could pressure commodities too. Weak economies use less crude, and they don't tend to worry about inflation, thus pressuring precious metals prices.

For the early part of the week at least, both Gold and Crude Oil may provide profitable trading opportunities. As of this writing both are at or very close to multi-week support, thus possibly either setting up for a bounce up or a break to new lows. This close to support, traders can take positions long or short. If wrong, they can get out quickly with small losses, If right, they can just pick a price level near the other side of the range as an exit point.

Again, however, renewed pessimism and stock market declines could cause commodities to slice right through their support levels.

World Stocks
Given that world stock markets have risen 20%-30% since March without strong evidence that earnings or jobs will match that kind of growth within the next year, equity markets may be vulnerable to further pullbacks unless we see some positive surprises.
Even if news remains neutral, the bias is more likely to be towards profit taking or at least a technical test of lower support levels.

Forget Godot, We're Waiting for the Banks
Perhaps the biggest black cloud hanging over world stocks is doubt about the health of the financial sector. A destabilized financial sector (caused by irresponsible mortgage lending) ignited the current economic crisis, and unexpected announcements of bank profits in March sparked the current stock rally. Second Quarter earnings announcements from the big banks will be out within the month, which means whisper numbers and rumors will be coming within a few weeks.
If the news is positive, it could come even sooner, as both banks and governments seek to keep financial markets positive, if for no other reason than to allow the banks a chance to sell more stock into a rally to help them recapitalize. Decisively positive or negative news could well set economic expectations in the near future and be the catalyst for the next big market moves. In the U.S., unemployment is already approaching 10%, well beyond the bank stress tests worst case scenario of 8.9% for 2009.

We look to the coming week for additional clues. As this article goes to press, the week is opening on a negative note, with stocks and commodities falling,

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