Before we begin discussing potential trade setups for the coming week, I want to make a few acknowledgements.
First and foremost, the first two weeks of 2016 have produced an unusually high level of volatility. This past week saw the VIX (CBOE Volatility Index – also called the “fear index”) rise to levels last seen during August of last year, a month that is most remembered for seeing risk-sensitive pairs such as AUDJPY fall 700 pips in a single day.
Needless to say, it seems that we could indeed be entering an extended period of increased volatility. Of course this shouldn’t have come as a surprise to those who read my recent post which outlines some of my top trade ideas for 2016.
I bring this up again for two reasons…
As a reminder, that any environment where volatility is elevated brings with it an increase in risk, regardless of the day to day happenings in the market. And while proper risk management is important in any trading environment, it is even more so during times of uncertainty.
What’s more, this environment of elevated volatility/fear brings with it an ability to exacerbate key event risk that might otherwise fall by the wayside, which brings me to the more immediate concern.
China is set to report a plethora of key data on Monday at 9pm EST, just as the Asian session kicks off. Among the data will be Q4 GDP along with industrial production, to name a few.
These data sets have been known to trigger volatility under normal conditions. However, given the spotlight that has been on China in recent weeks, we can expect an even greater level of volatility coupled with widening spreads.
Without exhausting the topic or getting too technical, the key takeaway from all of this is that profitable trading in 2016 will require an extra dose of patience and prudence. If the first two weeks of the year are any indication, we will likely see volatility continue to rise which could eventually rival that of the 2008/2009 era.
It’s times like this that the concept of capital preservation takes on a whole new meaning.
With that said, let’s get started.
Not much has changed for EURUSD since it was last covered as the pair continues its range-bound movement between 1.0710 and 1.1020. As such, I still have little interest in trading the pair as I believe there are much better opportunities out there, more on this later.
For regular readers of my blog, this should come as no surprise as I have been talking about the unfavorable price action from the single currency for some time now. In fact, aside from last October’s break below channel support, the pair hasn’t provided many opportunities for us.
From here, only a close below last year’s lows would pique my interest. Until then, I will stand aside and continue to monitor the price action from a distance.
GBPUSD continued its tumble last week in epic fashion, losing 260 pips from the prior week’s close. While I do think further losses are likely, the pair is currently hovering just 30 pips above the 2010 low at 1.4225.
This level is likely to attract buyers in the near-term, but given the recent bearish momentum, a sustained rally from current prices seems unlikely.
Keeping with the bearish theme, a close below 1.4225 would open up the potential for a move to 2009 low near 1.3500. Key resistance remains the 2015 low at 1.4565.
AUDUSD cleared an important level last week on the back of mounting concerns out of China. The close below 0.6910 signals that further weakness is likely over the coming sessions.
I have been bearish here since the pair broke below the trend line that extends off of the 2015 low. With the pair now trading more than 200 pips lower following that break, it appears that it was the right call at the time.
Looking even lower, the 0.6800 handle will likely attract a bid considering the role it played between late 2008 and early 2009.
That said, I still like the longer-term potential here (see link above), which is defined by the descending channel that began in October of 2014. As such, a close below 0.6800 could be enough to push the pair as low as 0.6250 in the coming weeks and months.
USDJPY lost additional ground last week, closing marginally above the key support area between 116 and 117, which is marked by several lows from 2014 and 2015.
As mentioned previously, the price structure that has formed over the last fourteen months appears to be a head and shoulders reversal. If broken (close below 116), it could send the pair to the 106 handle in the coming weeks and months.
Another level to keep an eye on should the pair confirm the topping pattern is 112.30. A move to this area would close the gap that was formed back in October of 2014.
All in all, I remain bearish here pending a daily close below the 116 handle. Until that time, I will stay on the sidelines and look to other currency pairs for confirmed opportunities.
Last but not least, one of my favorite longer-term trade ideas for 2016. You may remember this NZDJPY chart from my top trade ideas for 2016 post I made last week.
Although last week saw the pair deteriorate further, the selling pressure wasn’t quite enough to push prices below the seven-year trend line support.
For those who aren’t aware, the 2009 low was the bottom for NZDJPY following the 2008/2009 global crisis. As such, the trend line shown below becomes that much more important as a close below it could trigger the start of the next bear trend.