Week Ahead: Watch For False Breaks As Markets Test Key Levels

What a week for the euro last week was! Friday looked like it was almost out of steam as the pair pushed higher towards the 1.32 mark, so where do we go from here?

Well we are now right into the holiday trading season and so far the Santa rally seems to be holding.

Reality is that we have some really light volumes and therefore exaggerated moves, but still the way the euro has held up is impressive.

The eurozone does continue to face some large challenges, there is still no resolution on Spain and the majority of actions so far simply buy more time.

However, the dollar is looking equally challenged with the fiscal cliff looming and few concessions being made be either side.

Fundamentally this makes me Bearish on the risk outlook; if I add in the fact that Germany's economy would be bolstered by a weaker euro and in fact in may well help the eurozone as a whole then I suspect we should see the pair moving lower.

That said, I always stick to some golden rules when trading. If Fundamentals and Technicals align then trade with confidence, if Fundamentals and Technicals don't align, always play to the Technicals. If in doubt stay away and trade tomorrow.

Key in this environment is to wait for the clear signals, don't be afraid of not trading if the signals fail to materialise.

Also be careful with false breaks, low volume environments tend not to like breaks of large levels, although do like testing them and jumping around. This makes for an ideal situation for false breaks and snap retracements once the market feels it has moved too far.

EUR/USD
The euro pushed much higher on Friday and is now testing upper resistance. This is now a critical point for the euro, if we break this level we could see a bigger move higher, however, I would also watch for false breaks here. Therefore, break and hold above with a clear rejection of the previous resistance now turned support could offer some good long entries.

For short entries I would be looking for stochastic divergence, a break back below resistance turned support and a nice rejection of a move higher, in any order. Alternative view is that we could now chop in a range.

Levels wise, 1.3225 or 1.3280 could form interim resistance.

GBP/USD
The pound pushed higher on Friday with the euro, interestingly they both stopped just shy of upper resistance.

I maintain the same strategy from last week looking for good signals to play the range or a potential breakout; although with secondary resistance above the risk reward ratio is limited.

AUD/USD
The aussie strategy also remains the same. Key on these is to wait for good signals though, don't jump too soon.


USD/JPY
Well Friday saw the pair test the 84.00 handle in what has been some incredible yen weakness. We continue to look overdone here and we are starting to get relatively nice risk reward ratios if we get a clear short signal.

Interesting to also watch the other yen crosses which might offer clear signals and good risk reward; there may be an opportunity to use signals from one pair to support a trade on another with better risk-reward.