Magazine article Modern Trader

Unsustainable Patterns for 2011

Magazine article Modern Trader

Unsustainable Patterns for 2011

Article excerpt

As we start 2011, the question arises for many traders as to which currency pairs offer the best opportunities? By stepping outside of the usual day-to-day, and even monthly scanning of the markets, we can detect patterns that are not that obvious. Consequently, we can shape some interesting strategies for the coming year. Currency pairs certainly react daily and weekly to changes in sentiment caused by new economic related information and new fears, but when looking at multiple quarters and multi-year periods, price action starts reflecting major global forces that don't change too quickly.

From a multi-year perspective, classic resistance, support and trend lines become robust landmarks. When price breaks through them, it should get serious attention because they are at the vanguard of a possible new direction. It is useful to look at cross pairs because they leave the dollar out of the picture, and often provide more stable price geometry. When cross pair patterns break, the break is a more reliable predictor of future direction.

The EUR./AUD merits attention for this reason. A 10-year sideways range was broken in 2008, leading to a more than 35-handle move to historic highs. This was followed by a return back into the range, and then a breakdown in 2010 leading to a drop of about 77 handles from peak to trough, making an all-time low (see "What now?"). The fundamentals of economic growth in Australia and turmoil in the Eurozone certainly helped shape the pattern of the last two years, leading to the extreme lows of today. These conditions are not likely to be sustained if a slowdown in the Aussie economy, combined with some stability in Europe, occurs. The result is the potential for a significant recovery for the EUR/AUD.

The CHF/JPY crosspair offers a classic example of the value of looking at patterns. Looking back 10 years shows a remarkable sustained monthly downtrend from Q4 2003 until Q4 2008. …

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