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Ending the Week with a Cliffhanger for the Markets

Ending the Week with a Cliffhanger for the Markets

2011-03-12 02:01:00
John Kicklighter, Chief Currency Strategist

What a way to end the week. At the beginning of Monday's trading session, risk appetite was crumbling and the sixth largest earthquake on record in Japan was pushing sentiment along. Yet, by the end of the day and week, the capital and FX markets had rushed in to retrace their losses. What is the prevailing move out of this extraordinary volatility? We can't tell from this activity alone. Follow through is essential. More accurately, follow through on a distinct risk trend is critical to turning the entire market on the same path. If, for example AUDUSD tries to catalyze its wedge reversal below parity without a supportive collapse in the S&P 500 and other benchmark equities; the currency move will quickly run out of steam. The easy analysis to establish our trading approach next week is to follow the S&P 500 to see whether there will be a definitive break below 1,295. If that is the case, there will be an incredible range of trading opportunity in the currency, equity and commodity markets.


Now at the end of the week, I have to take inventory of my positions. Having taken out the remainder of my GBPUSD position Thursday, I save myself some heartburn. However, my long dollar exposure elsewhere caused a pinch. My short entry orders on EURUSD and AUDUSD were both triggered (1.3825 and 1.0020 respectively). The Aussie pair was stopped out; but the euro-based major is still on with a stop that is only 25 points above where the market ended. The losses on these two is mitigated by the fact that my position was small as I was waiting for a true shift in risk trends to cue me on confirmation and a larger position. Despite Friday's correction, I still think both EURUSD and AUDUSD have extraordinary potential (especially AUDUSD) - but it is conditional on sentiment. Another carry over, dollar-based pair was the long USDCHF which has eased off its reversal. I was looking for a quick turn around and didn't get it. If we have a breakdown in risk trends, and this pair doesn't lead the pack, I will cut it to keep the exposure against the euro and Aussie currency.


Other new trades to the mix, the second half of my short-term long USDJPY setup knocked out at breakeven; but I liked the hold at the rising trendline from the beginnig of November that I jumped back in at 81.90 and put a 70-point first target and stop on it. GBPNZD proved the best setup on the day with the long-awaited reversal tripping 2.1750 and quickly hitting a first target at 2.16. My EURNZD short entry order was also tagged at 1.8650 and now we wait to see if the 1.87 pivot break will hold along with my 200-point stop and first target (position size here is small to accomodate the notional stop).


For potentials, I am looking at setups that span different scenarios - primarily what if risk appetite continues to climb and what if it confirms its collapse. Should sentiment hold (and confidence in the euro improve with the week-end comments from EU officials), I like a renewed effort to break the 115-neckline on the long-term inverse head-and-shoulders pattern. A stable outlook could work in GBPAUD's favor as it tests the bottom of its 1.62 to 1.58 range. And, beyond my existing exposure, a risk aversion move could pull NZDUSD down from its descending trend channel or push GBPCHF 1.4875. Opportunity for all occasions - but a preference for one (risk aversion).

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