Are You Prepared for the Upcoming Break-Outs?

A break-out is technical term often used by traders, when referring to a range type chart pattern, which is then followed by a strong move out of the range. A break-out normally appears after a consolidation stage, a time when the markets pause before their next wave.

Last week’s trading sessions were characterized by high intraday volatility that led to zero movement on a weekly basis. The U.S Dollar finished the week with a minor gain of 0.10% while the U.S stock market dropped by only -2.64%. At the start of the week the U.S continued to play a major role in leading the various global indices and currency pairs, as the S&P500 nosedived, presenting three days of losses.  Towards the end of the week the index managed to find support on its 200 day moving average, bouncing higher, regaining partial strength. Even though many traders focused on economic data last week, presuming that the results being released were affecting the day to day movement, news headlines had a surprisingly larger affect on the intraday movement, as new topics hit the boards.

How many more banks are going to fail?

New rules and regulations; that was the major topic last week as the U.S proposed a new plan to assure the stability of the financial system, preventing individuals or institutions from exploiting the system and causing another financial recession. Even though recent data has shown that the financial structure is slowly recuperating; LIBOR rates have dropped astonishingly and reports are showing that certain major institutions are slowly recuperating, due to the government’s help, U.S officials felt that further precaution is required, in order to prevent another situation that could jeopardize the economy and financial structure. During Monday’s session president Barak Obama proposed that a group of 8 persons should have the authority to grant the Fed control over the banking system if required, to prevent an additional economic catastrophe.  While the new plan fails to change the structure of the financial system itself, the Fed will have the upper hand permitting them to demand less leverage and higher capital standards.

Even though the new laws and regulations are being objected by some, others are claiming that it will help the U.S economy, especially as smaller local banks are still having problems and are finding it hard to keep their heads above water. According to the Federal Deposit insurance Corp, two additional banks failed last week bringing the number of failures in 2009 up to a whopping 29 banks.

European Expectations are improving

On the other side of the Atlantic, European officials seem to be changing their tone of voice, stating that the global economy could see a recovery in 2010. In addition, recent comments have even mentioned that there is now evidence of minor improvement throughout different sectors. Japan also changed its stance regarding the economic situation, acknowledging recent improvement. While both central banks still remain cautious regarding their words, recent comments have had an enormous affect on investors, mildly improving their sentiment and confidence.

By taking a glance at the chart below one can see that consumer confidence has increased in the U.S and has shown a minor bottom in other economies.

The Dollar Stumbles, Where to Now?

From a technical point of view most of the traded assets are now range bounded, waiting for a major event to drive them forward, into trend. The Dollar index, calculated against a basket of currencies closed the week stuck between trend line support and resistance of 81.50 points. The non directional week had an enormous impact on all the majors and the crosses, as numerous pairs have now entered ’sleep mode’, forming potential break-out setups. One must remember that the Dollar is still showing a strong correlation with the U.S stock market, as it continues to act as a safe haven. A recent pause in stocks has been characterized by a stronger Dollar, especially as investors are dubious regarding the continuation of the equity market. Should equities break their range, one could expect a weaker dollar and stronger counterparts.

This Upcoming Week

 Even though the economic calendar is a lot less packed compared to last week’s schedule, data will continue to take its toll on the intraday sessions, causing increasing volatility. The U.S will stand out this week as they are expected to release an interest rate decision, their annualized GDP result and consumption results, among others. While many are focusing on the rate decision, one must remember that with a low rate of 0.25% the Fed doesn’t have many alternatives that to help the economy via further quantitative easing. Even though bonds are starting to price in future rate hikes, the economic situation should prevent the Fed from taking any irrational moves. Due to that fact one should look to other results, for example housing data could be a potential candidate to stimulate the break out. With a gloomy housing sector, could a combination of Existing Home Sales and New Home sales spark the break-out this time round?

Potential Break-Outs
(Please note that even though we are pro bullish patterns the direction will depend on the Dollar’s reaction to the U.S equity market)

USD/CHF

EUR/CHF

GBP/JPY

CAD/JPY

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