Market Volatility and Indirection

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Market Volatility and Indirection

Postby bforex » Thu Jun 10, 2010 12:35 pm

The GBP is still holding up quite well after finding Support at 1.43. Lows several times traded below 1.4250 but were always pushed back up. We are noticing a number of long wicked candles including 3 Doji's over the last 5 sessions. Both of these observation suggest a true lack of direction in the market. On the chart below we have added Bollinger Bands. The Bands widen as volatility stirs and narrow in calmer markets. When the bands narrow substantially it suggests an over consolidation in price which usually triggers a breakout. The Bands are narrowing because the GBP has been trading a tight range since mid May. The blue arrows points to the last narrowing of the bands in which was then followed by a big break out play.

We are once again seeing volatility all over the market. Normally crosses of the 200 day moving average are significant occurrences and therefore become directionally significant. However the CAD has been hugging the 200 day MA for almost 2 weeks. Yesterday's price action closed below the 200 day MA. However, it is the 100 MA that has been acting as major Resistance. A close below the 100 day MA would be important as the major MA's still favor CAD appreciation. A close above 1.06 would be the first signal of a weakening CAD, however a close above 1.07 may trigger some short CAD entries while more major Support sits at 1.0850. A close above that handle coupled with a cross of the major MA's would all but seal the deal for the CAD bears to re-enter the market.

The AUD is still in recovery mode. On the chart below we have added Bollinger Bands to highlight the AUD's fall. We mentioned above that when the Bollinger Bands narrow (see blue arrows) we expect significant volatility to follow which causes the bands to widen significantly. The AUD has found Support at the .8100 handle. A close below that level and the AUD free fall will seemingly continue. However, the AUD could firm with a close above Resistance, just north of .8500. Note the major MA's favor falling prices, and with Bollinger Bands still so wide there is certainly more volatility ahead for this pair. The increased likelihood of a break over or under these levels increases in the short term when volatility levels are high as they are now.

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