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Lots of Potential with Dollar and Equities but Wait for the Break

Lots of Potential with Dollar and Equities but Wait for the Break

2012-10-20 05:24:00
John Kicklighter, Chief Strategist
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The end to this past week was the perfect setup for a seismic shift in the near future. Of course, just because the setup is there, doesn't mean that it has to play out. Patience is key, and it is exceptionally important to practice given the level of shift that can come and the frequency of false starts we have seen.

Where is the potential: recently the USDollar has advanced back into the top of its descending trend channel (from June 1) / 50-day MA while the S&P 500 has dropped back to its own channel floor and pivot support above 1425. Though they are threatening breaks in the opposite direction (notionally), such a move would speak volumes fundamentally. Such a move would be a big step towards risk aversion.

However, when we have sharp moves to heavy levels (and the future of risk trends is about as heavy as it gets) into the end of a week, an immediate break the following week is historically a low probability event. I don't want to diminish the considerable potential in such a break but I'm a realist. I'll wait to see a clear break on both accounts before the full size and more aggressive targets are brought out.

For now, I am in smaller size and have far less risk exposure. My only direct exposure over the weekend is a EURUSD short from around 1.3100 (I took profit on the first half for 85 pips and trailed the stop on the second half to break even). This is a good pair to play on a serious break lower for risk. The next big level of support to clear that I see though is 1.2825. That may actually play in this pair's favor if risk trends are mute for the first 48 hours (EURUSD may continue drifting lower to set up good position for a break).

My other trades are further removed from risk. My USDJPY long from the channel break at 79.00 has a 100 pip stop and is expected to be a slow mover. A USDollar channel break would be very influential hear. My smaller size EURGBP long (from below 0.8000) is well in the money and the stop is trailed above breakeven. AUDNZD has less risk sensitive but the strong Aussie dollar has drug it into the read. Continuing above 1.27 would require an exit and reevaluation as to where it will turn.

As for trade potential next week, the opportunities seem endless. A sizable risk move has far-reaching implications. With a strong risk aversion drive, I like playing EURUSD separately on a break below 1.2800; NZDUSD with a break below 0.8100; a reversal (and range play) on AUDJPY below 81.65; AUDUSD below 1.0150; and there are others.

It's always good to have a plan for an alternative scenario. I think a strong risk rally is very unlikely, but in the event that it does occur I like GBPJPY above 128.50. The most likely path going forward: congestion. That will necessitate shorter-term trades within congestion patterns with smaller size. We'll take those as they come.

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