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Trading Defensively Ahead of the Fed

Trading Defensively Ahead of the Fed

John Kicklighter, Chief Strategist

Though we had a swell in volatility and a sharp euro and risk-based move through the second half of this past week doesn't mean that we have gauranteed trend. When picking trades, it is important to take those setups that fit underlying market conditions. And, for now, we are still seeing tight ranges on anemic participation figures. We could very well see this persist until the Fed can give some sort of resolution to the stimulus skepticism / hopefuls. As such, I'm looking to trade setups that look good for congestion setups and/or are not extreme of risk trends.

For exposure in the safe haven dollar, I'm working with the pair that neutralizes a lot of risk exposure: USDJPY. Long from 78.15, I'm in at the bottom of a very prominent wedge that has developed over months. A stop of 77.85 (and 30 pip first target) is purposefuly tight to account for the lack of impetus for most pairs. Equally divorced from risk (and the Fed decision to a significant degree) is my GBPCAD long with an average entry of 1.5640 (stop of 1.5530). This is a pair still near the bottom of its broader wedge and few catalysts to direct impetus.

My reduced-size long EURGBP from 0.7990 (I have an order to add at 0.7965 and stop at 0.7900) is more prone to risk given the active docket from the Euro Zone. Yet pairing the euro against the pound diminishes the Euro Crisis impact should it flare up again.

As for potentials, I am looking for those pairs that would better perform under current trading conditions (congestion and with enough separation from the prevailing uncertainties to produce tradable swings.

I have an open order to reenter a EURCHF long should it drop back to 1.2015 (my greed sidelined me for the run up to 1.2150). AUDCAD is a favorite of Ilya's, and the hold / reversal at former support (1.0175) looks like a good progression phase of a larger bear trend. I may not participate until the neckline breaks at 0.9975/50 though. Then there are the more exposed (better potentially for volatility). EURJPY has pulled back from its channel top, but I'd rather go with the dominant trend. If there is a viable bounce to be played from 98.80/99.00 before the Fed release, I may take it.

As for the big ticket players (EURUSD, AUDUSD, GBPUSD, EURAUD, EURCAD, etc), I see potential - not not until the Fed has given release of speculative activity.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.