With uncertainty over the timing of the Federal Reserve’s tapering of asset purchases, several major markets have become stuck in ranging configurations. US Treasury bond yields are moving sideways and the US dollar has taken on more of a medium-term trading range. This is impacting major forex and commodities which also look increasingly uncertain. Trading during these times can become difficult amid the swings of market sentiment. Using technical analysis can help, however, some indicators are better than others.
- Assessing the ranging outlooks.
- We prefer to use oscillator indicators
- We find that trending indicators are giving false signals and need to be used with caution.
The ranges have set in on major markets
Markets are searching for direction, but for now, this is hard to come by. We are seeing ranging conditions have taken hold on US Treasuries and this is important across markets. Yield differentials are one important factor in driving the direction of the US dollar. With little real differential through other bond markets, this is leading to a lack of direction across major forex.
So we are seeing EUR/USD, GBP/USD and USD/JPY all forming ranges in recent months. We see that this is similar across other asset classes too, with Gold also ranging. During the past three months, these markets have made very little progress. Sharp moves have unwound with a lack of trend and essentially markets are settled.
Looking to use oscillators for signals
During these moments where markets lack trends, traders can find it difficult to make consistent profits, but there are technical indicators that can help. Oscillators, such as the momentum indicators (we prefer the RSI and Stochastics) can help to guide and time moves. We also use key support and resistance levels for turning points.
Looking at EUR/USD we see a broad range between 1.1660/1.1900. Today’s break below the pivot support at 1.1800, which if confirmed on a closing breach would open a move to the next support at 1.1735. However, we also see the Relative Strength Index (RSI) momentum oscillator moving back below 50. This opens a likely move back towards the low 30s.
We also look at the chart with the Bollinger Bands and Stochastics Oscillator too. The Bollinger Bands have been broadly flat for several weeks now. This suggests playing the range. Also if the price level moves below the 20 day moving average (the middle line) then it is increasingly likely that a move back towards the lower band may be seen in due course. This is also backed by the Stochastics which are in a decisive reverse lower now, but with plenty of downside potential.
We are wary of trending indicators such as moving averages & MACD
Other popular indicators can though provide false signals during ranging periods. Indicators that work better in trending markets will not work well currently. We are finding this with moving averages especially as they are broadly flat. When moving averages are flat, the price is fluctuating higher and lower but without any decisive direction. It means that trading strategies using crossovers, and moving averages as support/resistance will give a multitude of false signals. This is also the case with MACD lines. This is because the Moving Average Convergence/Divergence lines, as the name suggests, are derived from moving averages and therefore are also giving false signals.
Looking at the Gold chart (MT5 code: XAUUSD) we see the 12 and 26 day moving averages which are used to formulate the MACD lines. The moving averages are almost flat sideways and this is leading to multiple crossovers and therefore false signals for Gold.
Amidst these ranging markets, it is a difficult time for traders. Until markets start to trend once more in a decisive direction, we prefer to use oscillating indicators for our trading strategies.