The Japanese yen and crude oil have moved outside our ranges, which suggests reversion trade opportunities, reports Trevor Smith.
Several markets are at extreme valuation levels based on multiple technical indicators (pivots, average ranges, Bollinger Bands). Mean reversion trades (markets returning to a median/mean or fair value level) after such extremes, provide opportunities for profit.
Mean reversion trades tend to work best in market conditions that favor sideways, range trading. Prices can bounce off of moving averages, pivot levels, prior highs/lows and reverse directions easily when there is not an overwhelming fundamental reason for price to be reaching extremes.
The Japanese yen and crude oil futures have both expanded beyond compressed Bollinger Bands on their daily charts, which creates reversal candlestick signals aimed toward fair valuation levels or a median/mean trading price. In the Japanese yen that target is .009229, the low end of my projected weekly range for the yen. Momentum studies support the directional return to lower, fair-market pricing. The crude oil fair value target $61.91. One momentum study supports Crude’s directional return to lower fair-market pricing.
Both the Japanese yen and crude oil price moves are related to increased geopolitical tensions around the Middle East. As of now, that situation has remained relatively contained but could spike at any time.
As noted above, if there is no extreme fundamental behind a move, chances are markets will return to normal levels after moving outside of fair value. Keep an eye on the fundamentals before following these trade recommendations based what appears to be extreme valuations.
Trade Ideas
- Sell weekly expiration crude oil futures call spreads near the $63.50/$64 strike prices.
- Sell weekly expiration Japanese yen futures call spreads near the .009250/.009275/.009300 strikes.
I wish traders excellent luck in in analyzing and trading this week’s markets, and please reference my ranges article for my estimates of range extreme numbers.
