WORLD MARKETS BRIEF: CURRENCIES, COMMODITIES, & STOCK INDICES IN TRADING RANGES

 

Currencies, Commodities, and Stocks Continue in Horizontal Range Trading Mode. Entering & Exiting Trades at Reliable Support and Resistance Appears to Be the Key for Now

1. Currencies

Potential low risk trading opportunities continue to be common, as major currency pairs continue to trade in clear ranges, mostly in flat, horizontal channels. The chart below illustrates the EUR/GBP trade we discussed on Friday. Note how the EUR/GBP moved up of over 1% up within 90 minutes, then down again over 1% over the next 8 hours. A reasonable 30-pip stop loss outside these support and resistance levels ( or trailing stop loss) would have limited their risk to about 0.33%, giving them a conservative 1:3 risk/reward ratio.

Here's the 1 Hour EUR/GBP Chart

That's why range trading is so great for low risk trading. If there is any major breach of these clear price tunnels or channels, traders can get out with only a small loss. However, if they can catch the full move within the trading range, they can make gains many times what they risked.

Traders who caught either of those moves using just $5000 at 200:1 leverage would have controlled $1million worth of currency and made about $10,000, 200% profit, just by identifying and exploiting the rather clear support and resistance levels. Alert traders who caught both moves could have made $20,000 within under 12 hours!

Note that there was never any mention of complex technical analysis or expensive computerized trading programs. Traders could make 200% profits just by this kind simple buy-low-sell-high (or the opposite) range-bound trading.

In sum, low risk and simple. That's how even new traders can trade profitably. Even if they lose on over half their trades, as long as the losses are small compared to the gains on the winning trades, they can still be profitable.

The EUR/GBP was just one example of many such simple low risk trading opportunities. Look at the range or channel alert traders could have noticed while watching the USD/JPY on June 16-17.

USD/JPY 1 hour chart.

Note how the USD/JPY chart June 16-17 showed resistance around 97.00, and strong support around 95.60 Traders who caught just most of the move between June 18-19 could again have made over 1% within a day. As above, a $5000 position at 200:1 leverage would bring around $10,000, a 200% profit, in less than a day. Using a reasonable 10 pip trailing stop loss and sell stop placed just beyond these ranges would have kept risk to about 10% of the potential gain from a move across the trading range.

Alert traders who caught the ride down June 19-20 had just as much fun and profit. Those catching both had a very

Thus even beginners could find opportunities to take positions near likely resistance or support levels. Traders can then limit risk by placing stop losses just beyond these levels. Thus if the expected short term low price or high price is broken, traders are automatically closed out with only small losses. If the levels hold, traders may potentially place sell orders near the upper range of recent prices and capture gains far larger than their potential losses.

Note: If stock indices continue to slide, this could support the USD and Yen in the short term as risk averse traders seek these as safe havens.

2. World Stock Markets

Stocks too stayed in tight trading ranges. On Thursday Asian and European stocks held support and made respectable gains. Wall Street built on these gains, boosted by better than expected manufacturing and inflation data. On Friday Asian stocks followed through with further gains, so did European indices. U.S. indexes were range-bound and ended mixed. The Nasdaq 100 and Russell 2000 were slightly up.

A. Doji Star Omen?

However the S&P ominously printed another disturbing Doji Star (cross shaped candlestick). These shapes suggest indecision (makes sense, up, down, then no net change) and often a change in the direction of the trend. Thus at the top of rally, they can foreshadow a coming reversal.

S&P 500 Daily Chart: Note Doji Star (cross shaped candlesticks) June 10-11, and the 3-day drop that followed. Does the June 19^th Doji Star foreshadow the next move down?

For example, if you look at a daily candlestick chart of the S&P, note the double dojis on June 10-11, and the three day drop that followed. Given that stocks have risen 20-30% world-wide since March, and that the recovery has not suggested similar growth in the coming year, the markets are vulnerable to a bigger pullback than we've seen thus far. Looking at recent support on the S&P, another 30 points down to around 877 wouldn't shock anyone. It could also drag overseas markets down as well, unless local conditions prove more optimistic.

B. The Vultures Gathering for Bank Earnings Announcements?

Forget Godot, we’re waiting for Q2 bank earnings announcements. Potentially disappointing results could be THE biggest near term threat to the possible recovery.

Note that Second Quarter Bank earnings will be coming out in less than a month. The current crisis began with very bad news from the banks. The current rally began with hopeful news from them. Decisively positive or negative news from the financial sector, both U.S. and international, could be the next really big news that moves the markets. Advanced leaks or rumors from unnamed sources could well provide earlier surprises that stir the pot in the coming weeks.

Positive news will very likely be leaked early, as banks and Washington both want to keep equity markets positive, even if it’s just long enough for the banks to sell more stock that helps them recapitalize.

Be on guard.

3. Commodities

ATTENTION ALL RANGE TRADERS! Crude oil has dropped to test its $68-$72 range. The same goes for Gold, currently at 925.3, its recent range being $925-$940. Will support hold? Will it break down? Whatever your theory, you've got a chance to try a trade and find out quickly with small loss if you’re wrong. If you're right, enjoy riding the bounce!

Crude is likely to remain in its range until there is further clarity on the supply/demand situation. Rising economies or declining inventories could boost it back to around $72 in the short term. The opposite news would indeed test the $68 support level.

Gold awaits news on whether inflation is coming soon or will remain dormant for a while. Most commentators suspect the massive increase in money supply across all major currency groups will bring inflation at some point. The debate now is whether world economic weakness will continue and perhaps bring deflationary pressures, which in turn would pressure gold prices.

Of course, negative economic or stock news could cause commodity prices to shatter these support levels.

4. Economic Calendar

German Business Ifo Business Climate survey came in at 85.9, beating a forecasted 85.1. The news had no significant effect, the Euro was mostly dropping before and after the news.

Breaking News to Know

U.S. Treasury Says The $134 Billion of Treasury Bonds were Counterfeit. Two Japanese men caught in Italy trying to cross into Switzerland with what appeared to be $134 Billion in U.S bonds in fact held nothing buy fakes according to the US Treasury Department.

Coming News to Watch

Tuesday: USD Existing Home Sales

5. Conclusion, Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

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