Forex Majors - ETF Outlook

By Cory Mitchell | Updated August 28, 2013 AAA

2013 started out with some strong trends in currency ETFs, mainly in the CurrencyShares Japense Yen Trust (ARCA:FXY) as the Yen gave way to many currencies around the globe. In recent months the trading has been more choppy, with the trends--of any sustainable length--being harder to find. There are opportunities though. In some of these ETFs a little creativity is required, such as waiting for false breakouts or trading in the ETFs where there is still a dominant trend, such as the CurrencyShares Canadian Dollar Trust (ARCA:FXC).

SEE: 4 Ways To Use ETFs In Your Portfolio

CurrencyShares Euro Trust (ARCA:FXE) has seen very choppy trading in 2013. Following the 52-week high at $136.03 in February the ETF seemed to have found support at the $126.44 March low. That level was just slightly broken in July though ($126.30 low) before the the ETF shot back higher. This false breakout indicates short-term bullishness, but overall this is still a very choppy ETF. There isn't a whole lot of resistance until $132, so there is still a bit of upside potential based on the July 16 $130.41 close. Overall though, I think the better strategy for this ETF, being as choppy as it currently, is to wait for a recent or high or low to be broken, and then watch for a false breakout. Trade in the direction of the false breakout to a catch move similar to the bullish move seen between July 10 and July 16 (so far).



SEE: Trading Failed Breaks

CurrencyShares British Pound Sterling Trust (ARCA:FXB) has also been choppy since March, although the price swings have been more pronounced than in the Euro ETF. After a strong downtrend starting in January through March, the ETF has been in an expanding range, creating both higher highs and higher lows. Watching for false breakouts seems to be play here until a more dominant trend establishes itself. In July, the price low of $146.26 just eclipsed the former March low of $146.85 before reversing higher. This false breakout signals short-term bullishness. If the expanding range continues, the target for the current up move could be as high as $156 through $157. Expanding ranges typically don't last for though, so the probability of the ETF heading straight toward that target is low. More likely the price range will begin to contract, bring the bullish target into the $154 to $154.50 range.



SEE: Trading Is Timing

CurrencyShares Japanese Yen Trust (FXY) started falling late in 2012, and continued to fall through the first several months of 2013. The ETF declined from near $126 in September 2012 to a May 2013 low of $94.38. A potential trend change is in the offing though. In June the ETF put in a higher swing high than the former swing high seen in April. Also, the Yen ETF found support at $96.69 on July 5, which is higher than the former swing low of $94.38. A higher high and higher low indicates a new uptrend may be emerging. By placing a stop order just below $96.69, the July 16 close at $98.83 offers an attractive low risk entry into a long position given the potential reward. The target for the long trade is between $106 and $108. The downside of the trade is that it is going against the longer-term downtrend. If the price breaks back below $96.69 it likely has even further to drop.



SEE: The Stages Of A Forex Trend

CurrencyShares Canadian Dollar Trust (FXC) is still in a longer-term downtrend since September 2012. A new 52-week low in July at $93.78 indicates this trend is still in effect. Therefore, I prefer to wait to go short, as opposed to going long on the small upside rallies. The price has been rallying since the July low, but is likely to hit selling pressure between $97 to $97.50. I like this shorting opportunity, should it arise, with a stop just above $98 and a target of $93.50 to $92.50.



The Bottom Line
There are trading opportunities in the currency ETF space, you'll likely just have to get a little creative and be very patient. Watching for false breakouts in choppy ETFs is one tool you can use, and the upside is that the risk is typically very small compared to the reward if you get in on it early. There are still some trending currency ETFs too, so waiting for pullbacks and then trading in the direction of the trend is the favorable strategy here. Always control risk, and be aware that currency ETFs are susceptible to price gaps at the open since the forex market trades around the clock, but the ETF doesn't.

At the time of writing, Cory Mitchell did not own shares in any of the funds mentioned in this article.

Charts courtesy of StockCharts.com

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