This past week has seen high levels of volatility; but there has been little consistency when it comes ot overall direction. This is especially true for those pairs that are highly sensitive to underlying sentiment trends. The dramatic shift from fear to confidence and back again surrounding the possibilty of a Greek bailout has had a profound effect on risk appetite. This same catalyst will likely continue to define price action for the broader markets in the week ahead as well. The EU tentatively agreed to offer assistance to the struggling economy yesterday after much speculation; but the details were left for discussion sometime next week. Should the measures the group agrees to fall short of what the market as a whole thinks is needed to genuinely stabilize conditions in the single economy and the European Union, the rise in risk aversion that predated the deficit concern will pick up once again.
Knowing that there is an unpredictable and all-encompassing fundamental driver lying in wait, it is difficult to look for a clear setup among the commodity crosses. What makes this an even more difficult prospect is the fact that so many of these pairs have already developed their respective trends (for risk aversion) and marked notable reversals that have left them floating in the middle of ranges. I feel the best approach is to look for a setup that would require a catalyst (like a major reaction to the EU bailout details) that doesn’t force the need for a momentum that isn’t coming. For this type of setup, I believe AUDCAD’s descending wedge is a good candidate. The falling trend from the November swing high (11/9 to 12/3 to 1/26) now coincides with a notable Fib and 50-day SMA at 0.95. On the other side of the pattern, we have a horizonatal range support at 0.9200/30. I would prefer a break to the downside as it opens us up to a better opportunity for follow through; but the market will decide where it wants to go. Taking a speculative position on the market though, I am also looking at a reduced-size short entry order on AUDUSD. The pair has rallied back to a notable pivot at 0.8900/15; and this sets up a decent techncial backdrop. I am medium-term bearish on risk trends and carry; so this works out well. And, keeping the position size down will help limit my risk. As for the AUDCHF, psotion I developed last week, yesterday’s break of the short-term falling trend channel was my cue to exit.
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