Thin Markets Are Technical Markets

• faithmight
• December 20th, 2010

It is Christmas week. With Christmas on Saturday, many of the institutional traders have started their holiday vacations effectively drawing liquidity out of the market. With the decreased liquidity comes increased volatility and the best way for traders to trade these market conditions is to trust the levels on the charts and remain with the long-term trends (or directional bias as @RagheeHorner discussed all last week on ForexAM). Even as fundamental developments crop up, like the tension between North and South Korea being reported this morning, price action still remains true to the charts.

$GBPUSD ended last week breaking to new lows below the technically significant 1.5500 level to 1.5455. As the new trading week opens, cable has corrected off these lows to the 61.8% Fibonacci retracement level of Friday’s move at 1.5672. This Fibonacci level becomes more significant with confluence of the 100-hour simple moving average at 1.5667 (on my chart). If price violates these levels with an hourly close above them, then the Fibonacci retracement levels on the bearish price move last week (green) must be considered.

I started this week saying that I would not be forcing anything. The $GBPAUD chart is one such chart. It produced a bearish breakdown to end last week as it fell to new all-time lows at 1.5681. As the new week opens, the pair has not quite corrected Friday’s price move. In fact, the pair has continued to find new lows in early market action. As a swing trader, I wait on price corrections (or swings) to enter the market. There are times when a trader can decide to take more aggressive trades when the market doesn’t not retrace to the ideal Fibonacci levels. However, in this thinner market environment, I prefer to wait on my ideal levels. No forced trades. If the market continues to head lower, I will simply wait for another opportunity to enter, if at all. As it stands the $GBPAUD looks to continue lower without a real correction and without me on board until it does.

The $EURGBP has seemed choppy but it has actually moved very, very technically. After bouncing off the lows last week at 0.8350, price has been unable to get below what is now a major support level at 0.8450. In fact, if this morning’s lows hold we will have a triple bottom at this level on the hourly chart. On every rally, I have called for 0.8560 which the 38.2% Fibonacci retracement level of the bearish price move from the 0.8941 high to the 0.8335 low. In fact, last week’s low at 0.8350 was a higher low and with price still not correcting to 0.8560 there is still potential for price to move higher back towards that price level. A move above 0.8560 targets 0.8600. However, if price continues to fail the 0.8500 whole number, price remains rangebound until we get a break below 0.8450 or above 0.8560.

As the markets wind down into the new year, bear in mind that the thinner markets become more technical markets. Price will respect important price levels on the charts. When they don’t, traders use that information as a signal for a different trading opportunity. The point is to trust the charts and what the levels are telling you. Use this holiday volatility to your advantage and wait on your setups before pulling the trigger. Aggressive trading may not be the best strategy in thin markets. Trade what you see but trade it safe and patiently.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: EURGBP, GBPAUD, GBPUSD, liquidity, market open, thin markets

blog comments powered by Disqus