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The Anticipation Before and Quick Thinking after Today's Stress Tests Defines a Trader

The Anticipation Before and Quick Thinking after Today's Stress Tests Defines a Trader

2010-07-23 15:07:00
John Kicklighter, Chief Currency Strategist
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I was debating over whether to update my picks before or after the Stress Test. I think it is better to do it before; so I can look back at my potential setups to see how well they were formulated. Heading into this event; we have to first considered whether it will be actually market moving. We have seen too many instances in the past were big indicators have let us down when it came to actually fulfilling its unspoken pledge for volatility. As for this event, there is a reason EU officials decided to release the results at the time they planned - it is after the European market close and therefore most market participants will be forced to stew on the results until the following week. That being said, the FX crowd isn't barred by such restraints; but we still have few hours of liquidity to work with. That being the case, volatility may spike; but follow through could be lacking. I may be encouraged into a very attractive technical and fundamental scenario to hold over the weekend; but the hurdle will certainly be set high. Short-term reactions offer better probabilities.

There is a lot of pent up event risk before the EU drops the bomb on the market. While there are reversal and trend revival opportunities out there; those are setups for more calm market conditions. We don't have many trading hours left in the week; so I am taking stock of possible breakout candidates. And if we don't get a breakout before the weekend, all the better. I think a break after reflection just increases the potential for follow through. A quick stock of those pairs I am looking at for this event. EURUSD could extend its run above 1.30; but there is a good opportunity for a steeper retracement below 1.2750. EURJPY is a consistent one with a ceiling at 113.35. GBPUSD is stations between two very large levels at 1.55 and 1.5150. CADJPY is creating short-term technical levels to work with; but the long-term and gradual rising trendline is my main concern. And, my favorite potential breakout opportunity is USDCHF on a break from 1.0550/0400 congestion following a very steep and consistent decline. A correction is long overdue.

For my currently held positions, only two survive. The remaining half of my AUDCHF short was knocked out at breakeven this morning on a delayed follow up to AUDUSD's impressive breakout yesterday. As for the other trades, they are still floating. The CHFJPY short is highly prone to the forthcoming event risk; which is to be expected. In hindsight; I should have reduced position size ahead of this event risk when I slipped back to breakeven; but we don't trade in hindsight. My stop is set at 84.60. As for my USDJPY long, we are stuck between 87.50 and 86.50. A bearish break will just encourage me to add to the small position size I have. Since this is for a longer holding period; I'm not too concerned about this pair ahead of the Tests.

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