By Michael McCarthy, Chief Market Strategist, CMC Markets Australia
Traders are warned that the following contains information of a graphic and concerning nature. It involves naked risk and outrageous postulation, and is recommended for only the most fearless, foolhardy or disciplined.
I love it when a market goes exponential.
Despite all the market talk of bubbles, they’re quite rare. There are three observed characteristics of a bubble market, one of which is price action accelerating in the direction of an established trend, or “turning exponential”. While I’m not arguing a bubble in USD/CNH
(the offshore and tradable USD/CNY), the acceleration of the uptrend is eye-catching:
Connecting the lows requires a steeper and steeper up trend line. The exponential price action can end in a “blow off top”, that involves a relatively large single candle that reverses sharply, rejecting higher levels. The two candle formation above the red line on the chart fits this neatly.
My view is the events of this week will see the Peoples’ Bank of China reverse direction for the medium term. This currency is not a free floater, and at the moment the USD/CNH is at a significant premium to USD/CNY. If there is an announcement from the PBOC over the weekend, the currency could drop sharply AND the premium evaporate. Bang, bang.
A break below 6.6600 would signal the start of a downturn with next potential support near 6.4600. Upside resistance has dropped toward 6.6850 from 6.7000 already. If this is a collapsing bubble (a contradiction in terms) traders could see a fast moving market.
Additional risk warning
Above and beyond the normal risk of forex trading, there are other risks to consider, including:
Bursting bubbles (or bubble like formations) may lead to severely unstable price action. This can make it extremely hard to stay in a position, as volatility may mean a triggered stop loss order, even if the market does move in favour.
Your trading mates will ridicule you, and question your sanity. Consensus is that USD/CNH is a one way bet – up. ( Irrational exuberance, anyone?)