I was out of the country and out of touch with markets last week and it has been hard to catch up with the European soap opera after missing a few episodes.
First here’s a quick guide to what happened in the EU.
The UK press has been helpful. Here’s a good article in The Guardian on seven key questions Britain must face after Cameron’s EU veto. The final three questions are the most compelling.
Britain may be forced to recognise sooner rather than later that by embracing the self-fulfilling prophecy of Eurosceptic rhetoric. Europe and the world has indeed become a more difficult place for the UK to exert its influence.
The Guardian’s news blog is also a helpful takeoff point.
The big loser in the papers so far appears to be Nick Clegg, leader of the Liberal Democrats, who are the junior coalition partner. His party’s position has always been pro-Europe and now he doesn’t appear to stand for anything. Clegg certainly doesn’t sound happy:
I’m bitterly disappointed by the outcome of last week’s summit, precisely because I think now there is a danger that the UK will be isolated and marginalised within the European Union.
Every day we spin the wheel. Pick one of the PIIGS and pick one of the four following problems: banks, bonds, politics, ratings.
One day it’s Greece and politics, the next it’s Italy and bonds. The news is never positive; just bad or good enough to spark a short squeeze.
I’m generally a trend-following trader and after two weeks of nasty, directionless gyrations, I’m frustrated.
But there may finally be some clarity. I’m closely watching cable right now. The October rebound cleared but failed to close above the 61.8% retracement of the September fall. Now, we are testing the low end of the range and a break may be imminent.
It’s doubtful that I will trade a potential break of 1.5868. Ideally we will get a close below that level and perhaps a weekly close below 1.5820. That would give be the confidence to sell GBP/USD.
Cable broke out on Tuesday. In yesterday’s post, we noted that we thought the bias was to the upside, despite the resistance around 1.6475. When that level broke, the pair rallied more than 100 pips. We talked about buying at 1.6500 and perhaps some of you did, but we did not have a buy order in play.
The reason we didn’t have a buy order is because we hoped the pair would come back and re-test 1.6475. It’s an effect called ‘buyer’s remorse’ where the pair will re-test a breakout level. This is generally where we like to pickup breakouts. Sometimes we miss the trade but it diminishes the number of false breakouts.
With cable trading at 1.6513 at the moment, we are getting an itchy trigger finger. What’s making us hesitant is that we have had 5 consecutive days of gains in the currency that we believe holds a heavy short interest. The weekly IMM data from the CFTC shows GBP is the only currency held short against the USD. That could mean we have been experiencing a short-covering rally. If that’s the case, it’s probably running out of gas and could reverse.
Ideally, we would like to see a day or two of consolidation with the pair generally holding above 1.6450. This would relieve somewhat overbought conditions and give us the confidence to aggressively buy. At the moment, we’re going to wait, watch and stay disciplined.
Our AUD/CAD trade was up more than 200 pips on Tuesday but has pulled back to 1.0312, which is still 60 pips above our first unit and 20 pips above the portion we added on Monday. We will stay patient but might trim some of our exposure on a close below 1.0296. We are still very confident in this trade and like how the technicals have progressed.
We are awed by the trading possibilities of the GBP/USD daily chart at the moment. We see amazing opportunities to make money long or short depending how the market breaks.
Cable hit the highest since May on Tuesday but it only exceeded the prior high by one pip before slipping back below 1.6450. The area around 1.6475 has now become a critical inflection point. We see a minor bias higher because the break lower after the first two tries at 1.6474 was rejected so aggressively. What makes us hesitant to buy is the lack of follow-thru above 1.6475 on the break.
If cable does break above 1.6475 we don’t expect 1.6547 to offer much resistance. Instead, we anticipate a straightforward rally to 1.6747 and a likely test of 1.7000.
We are in no rush to jump in here. We may see a slide all the way down to 1.6325 before we get the conditions to rally. We will buy on a break above 1.6500.
Alternatively, if GBP/USD falls below 1.6300, we will sell on expectations of a move back to 1.60, or lower.
In either case, we expect to make upwards of 200 pips, so we can afford to be patient.