Volatility Erupts and Leaves a Trail of Key Reversal Days | FXTRADING.com - International

Volatility erupted overnight which saw nearly all major markets we track far exceed their ATRs (average true ranges).

Volatility erupted overnight with wide daily ranges across equities, commodities, indices and forex markets. With the outbreak of a new strain of COVID-19 in the UK initially weighing on sentiment, the S&P 500 (US500) and Dow Jones (US30) fell a much as -3.2% and -3.1% earlier on the session. Yet expectation of a US $900 billion relief bill managed to lift equities from their lows to pare losses by the end of the session. The bill may be lower than originally expected, which is why markets were unable to completely reverse earlier moves of the session.

The VIX (volatility index) rose 31.5 points amid its largest single-day rise in seven weeks and market have been littered with key reversal days. Key reversals are particularly large bars seen on heavier trading activity and can be indicative of a turning point for a trend.

The US dollar index (DXY) also endured its most volatile day in seven weeks, although closed the session just +0.3% higher. Gold (XAU/USD) and silver (XAG/USD) finished essentially flat despite falling -1.3% and -3.3% earlier on the day.

 

Today’s Calendar Events (Times are GMT+11 Sydney)

UK GDP is the main economic event scheduled for today. Although Brexit headlines continue to supersede economic data where the British pound is concerned. 

  • UK GDP is the main economic event scheduled for today. Although Brexit headlines continue to supersede economic data where the British pound is concerned.
  • UK GDP is expected to have grown by 15.5% in Q3 which would confirm the end of its technical recession (defined by two or more consecutive quarters of negative growth). Yet with parts of the UK back in lockdown with some now facing even more stringent measures imposed upon them over Christmas, the odds of a double dip recession appear high.  Still, a better-then expected number could support the British pound, although positive developments with Brexit would likely be the grater bullish catalyst for the pound.

 

Nasdaq 100 (USTEC): Key Reversal at the All-Time High

To see a key reversal at an all-time high gives an ominous sign and brings into question whether Santa’s Rally is about to come to an abrupt end. We can see that yesterday’s candle was on much higher volume which underscores the strength of the key reversal as a possible reversal signal.

And its also plausible that some traders will want to square up their positions by the end of the week, which may also cap gains.

A key reversal bar on higher volume has appeared on the Nasdaq-100 around the all-time high.

  • If bears are confident that prices are about to top out, they can consider entering short beneath yesterday’s close with a stop above the all-time highs (ATH).
  • The initial target is near the 12,260 low but, if the key reversal does mark a change of trend then bears could keep an open target.
  • A clear break above the ATH invalidates the bearish bias.

 

CHF/JPY: Rally Pauses at Long-Term Resistance

CHF/JPY has been carving out a bullish trend since the September low, yet its rally has stalled just below the 118.00 – 118.50 resistance zone which has historically been a strong resistance level and turning point for the market.

In July 2017, the pair fell by over -5% after printing a bearish engulfing candle around 118, and then fell over -8% in February 2018. The following September CHF/JPY fell over -10%. So, there is clearly some significance around the 118 area, so we are now seeking bearish opportunities again.

Price action on this pair is by no means glamorous, but it seems clear than SNB (Swiss National Bank) do not like to see the Swiss franc strengthen too much against the Japanese yen.

The 118.00 - 118.50 zone has held as a strong resistance level since 2017.

  • Bears could consider shorts with a break beneath 116.30 support and initially target the 113.23 low.
  • A break above (or series of closes above) 118.00 – 118.50 resistance zone invalidates the bearish bias.
  • Given this is for a weekly chart, the trade could last for several weeks or months so a wide stop would be required to manage the volatility.

  

Gold (XAU/USD): Long-Legged Doji Respects Channel

By the close gold had produced a long-legged doji at the upper boundary of the bearish channel. Whilst the channel continues to cap as resistance the bias is for a swing high to form and see gold prices fall further.

It is also worth monitoring US indices to help gauge sentiment. If we see bearish moves sustained, it could also weigh on gold prices if the moves are volatile enough.

A long-legged doji has formed on gold's daily chart at the upper trendline within a bearish channel.

  • A break beneath 1850 assumes bearish continuation. However, given the size of yesterday’s bar, bears could also consider entering short beneath yesterday’s closing price to increase the potential reward to risk ration.
  • A break above yesterday’s high / upper trendline invalidates the bearish bias and brings the 1965 high into focus.

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