What is a Coiled Market
A coiled market is one which has the potential to make a strong move in one direction after being pushed in the opposite direction or held flat. The idea is that if a market should be headed in one direction due to its fundamentals but has pressure in the opposite direction, it will eventually make a strong move in the course of the original fundamental direction. This coiled move will often be more substantial than what might have been the case if it had continued in the normal direction without interference.
BREAKING DOWN Coiled Market
Coiled markets happen when the market has been held artificially held down. Commonly, coil market snap-back occur in the commodities markets, such as gold and silver, but can befall any market.
Technical analysts refer to triangle patterns on charts as coils. In this chart pattern, as the upper and lower parts of the triangle move closer towards one another, more price pressure builds up. Like with tectonic plates in the earth, eventually the built up pressure will look for a release. As pent-up energy increases, theoretically, the more massive the breakout will be. At some point, prices will move outside of the triangle's boundaries. The question is, whether they will move higher or lower.
Example of a Coiled Market
An excellent example of a coiled market is with a government that intervenes in its currency. Market observers often point to China when talking about the potential for a coiled Yuan market. The Chinese government has a penchant for placing controls on the Yuan, namely keeping it artificially low relative to its fair market value (FMV). If the government were to lift the controls suddenly, the currency would likely increase at a rapid rate.
However, the rebound on a coiled market is not always higher. The market for the pound sterling (GBP) became coiled in the other direction leading up to September 16, 1992, otherwise known as Black Wednesday. That day, a collapse in the pound sterling forced Britain to withdraw from the European Exchange Rate Mechanism (ERM).
The ERM was introduced in the late 1970s to stabilize European currencies in preparation for the Economic and Monetary Union and the introduction of the euro. Countries seeking to replace their money with the euro were required to keep the value of their currency within a specific range for some years.