For currency traders, whether on spot markets or futures, the British pound is now building a classic congestion phase which exemplifies Wyckoff’s second law of cause and effect. The example I have taken here is for the currency future for cable and the December contract, and for those of you unfamiliar with this law it encapsulates the importance of time, and in simple terms states the greater the cause the greater will be the effect. In other words, in this case, the longer the market is in congestion, the greater will be the trend once it breaks away from this region.
The reason for the current malaise is simple, with the British pound dominated by the forthcoming election whose result will be known on the 12/13th December, and until the outcome is clear, further congestion will follow until then. The effect can be likened to that of the spring in a clockwork toy, which is constantly wound ever tighter, storing more energy with each turn until finally it is released with the toy surging forwards. In trading terms, time dictates the amount of energy stored in the chart, and as such, the consequent effect once this energy is released. And of course, from a trading perspective, this also introduces the concept of support and resistance from both a price and volume viewpoint.
If we start with the chart itself, the volume point of control, the yellow line, is currently anchored at 1.2900 which is where we have the heaviest concentration of volume. It is also the fulcrum of the market at present and confirming price is in agreement with no firm bullish or bearish sentiment. Above we have a very strong level of price based resistance with the blue dashed line of the accumulation and distribution indicator, and there is a platform of support building in the 1.2800/1.2850 area. So the question is how to play this market in the run up to the 12th? Whilst the polls suggest the Conservative party will gain a working majority, this is far from certain, with parallels being drawn to the 2017 election which saw a large potential majority reduced to almost nothing in the final days.
One strategy which springs to mind is the long straddle. This is a directionless approach and based on the expectation of volatility, which we can expect on the 12th of December. A long put and call of the same strike price and expiry. The position will be profitable, provided the market moves from one of low volatility to high volatility. The risk of course is we ultimately see an inconclusive result which would see the position lose money. A strong move is the key, and for such a strategy based on a political event, the spread betting companies can certainly provide a further perspective with most forecasting a spread of 336 to 342 for the Conservatives, which would be sufficient to provide an overall majority and be pound positive.
Finally, on any breakaway trade, it will be volume which dictates the strength of the move as we break free from this extended congestion phase. And staying with volume, as we can see the volume histogram is falling away as we move to 1.3000 and beyond which will certainly boost the pair in any move through this region as there is little in the way of resistance from a volume perspective.
By Anna Coulling
Charts from NinjaTrader and indicators from Quantum Trading