June will be volatile-A Price Action Traders Dream
The daily charts with various markets like the S&P 500, crude oil, and gold are at critical resistance or support levels. The events in June will decide whether the markets will breakout from their resistances or breakdown.
Two important events held on 2 June 2016, were on expected lines. The Organization of the Petroleum Exporting Countries (OPEC) meeting ended without any decisive action.
Similarly, there were no new surprises in the European Central Bank’s policy meeting.
All eyes are now on the remaining two events, the US Fed’s policy meeting and press conference on 14-15th June, and the Brexit referendum on 23rd June.
Among the two, the Brexit referendum is significant as it can spook the world markets because the experts are divided on the financial impact of the UK leaving the European Union. All the polls point to a very tight race, with a very small fraction differentiating both the sides. The polls keep swinging, thereby, keeping everyone on the hook.
Nevertheless, traders can use these events as good trading opportunities. We analyze the charts of the four important markets, which will be under the spotlight this month.
The pair is stuck in a tight range for the past year and a half. On four occasions (marked by eclipses on the chart), the pair tried to breakout, but was pushed back into the range by the sellers. It has tested the support at 1.045 levels twice.
The range is well defined, hence, a short position at the upper end of the range and a long position at the lower end of the range are the only trades for long-term traders.
Let’s look at the daily charts to understand the short-term trend on the pair.
On the daily charts, the pair has support at 1.109 levels, which is both the trendline support and horizontal support. If the pair breaks down below the supports, it is likely to reach 1.0754 levels on the downside. On the upside, resistance comes in at 1.124 levels. Both the 20 and 50 day exponential moving are close to the resistance level. Hence, if the pair breaks out of the resistance, it is likely to move towards the upper end of the range to 1.1462 levels.
As long as prices remain within the range, the pair is in a no trade zone.
The pair is in a confirmed downtrend, but currently in a pullback, which is likely to face resistance from the downtrend line drawn on the chart. However, the RSI is showing a strong positive divergence, which is a positive sign for the pair. As the Brexit is a crucial event, it is unlikely that the pair will make a decisive move before the referendum. It is likely to remain volatile, within the range of 1.4770 on the upside and 1.4069 on the downside.
The pullback is within the rising channel, if price breaks down below the support of 1.432, the pair will drop down to 1.40 levels. If 1.40 levels break, the pair will retest the lows. On the upside, 1.4770 is a critical resistance, above which, the pair is likely to reach the level of 1.550.
If UK votes to remain in the EU, prices can extend to 1.60 levels, but if UK votes to leave the EU, chances are that the pair will break below the panic lows of 2001 and 2009, as shown in the long-term chart below.
S&P 500 is in a broad range after a strong bull run. Currently, prices are close to the highs, which will offer strong resistance. As long as prices remain above the levels of 1812, S&P remains in a consolidation.
RSI is showing long-term negative divergence, which will be negated if S&P makes a new high and the RSI also follows it higher.
The weekly chart shows a large Head and Shoulders pattern. However, if the S&P breaks out of all time highs, this pattern will be negated. Though the index had the opportunity to breakdown at the start of the year, it did not do so, hence, chances are that this pattern will fail.
The failing of a reliable pattern like the H&S, indicates bullishness, nonetheless, we have to wait until we get a confirmed breakout above the highs.
Even on the daily charts, the index had formed a H&S pattern as shown, however, the S&P rose sharply from the neckline, instead of breaking down. It is currently close to the highs of this pattern at 2111.05 levels. The H&S is a bearish pattern, but when it fails and price breaks out of the Head of the pattern, it signifies bullishness.
However, the index is likely to face strong resistance near the all-time highs. Hence, it’s better to wait until the S&P 500 makes a new high, before initiating any long positions.
It is unlikely that the S&P will make new highs until the uncertainty of the US Fed policy meeting and the Brexit referendum is cleared.
On the other hand, if the index breaks below the 2035 levels instead of breaking out, the pattern target on the index is 1960, strong support is at 1950 levels, which was a strong resistance earlier.
Unless the S&P breaks out and makes new highs, or breaks down below 2035 levels, traders should avoid taking overnight positions, as the index is likely to be volatile within a 100 point range.
Gold was facing resistance from the downtrend line since mid-2013, however, in January this year, gold broke out of the downtrend line with force. The rise met with resistance at the $1300/toz levels and gold has corrected back to the breakout level of $1190/toz levels.
The recent rise from the lows of close to $1145/toz to the highs of $1300/toz has 50% Fibonacci retracement support at $1175/toz levels. Hence, the range of $1175-$1190/toz is a critical area of support which should be held if gold has to move up. If prices breakdown below $1175/toz, they will likely retest the lows.
On the daily charts, gold, which had remained above the 20 and 50 day exponential Moving Averages for most of 2016, has broken down below both the averages and the averages are turning down. No long positions are advisable until price remains below both the moving averages.
As traders don’t like uncertainty, chances are that post the US Fed meeting, traders will buy gold before the Brexit referendum. If the UK votes to leave the EU, gold should see a parabolic move above the $1300/toz levels, which can extend to $1400/toz levels.
However, if the UK votes to remain in the EU, gold might either remain range bound or break below the supports.
Traders should initiate short positions only if the $1175/toz level breaks down. However, if the $1175/toz level holds, traders should wait for prices to cross above the moving averages and then initiate long positions.