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Precarious Position

Precarious Position

2011-04-28 12:23:00
Jeremy Wagner, Trading Instructor,

Pre-car-i-ous* / Adjective

  1. Not securely held or in position; dangerously likely to fall or collapse
  2. Dependent on change; uncertain

*Google.com dictionary

After the anticipated events of yesterday unfolded, the market continued in the direction of its previous trend. Those trends are an uptrend for US Stocks and a downtrend for the US Dollar.

Precarious_Point_body_Picture_2.png, Precarious Position

(Created using FXCM’s Marketscope 2.0 charts)

Now, the greenback is at an inflection point where a direction needs to be determined. The USD Index is right on top of support as it moved into the 73.00 – 73.35 zone pointed out yesterday.

Additionally, the S&P500 moved to a high of 1359 yesterday. This places that instrument right into the resistance box of 1350 – 1383 identified on April 15. (Press HERE for a link to that article). I ran some data on the correlation between the US Dollar Index and the SPX500. Since stocks topped out in 2007, the correlation factor between the US Dollar Index and the SPX500 is -.70. This means these two instruments tend to move opposite of each other. So with stocks at resistance and the USD Index at support, it is possible they both may turn at the same time.

Another interesting point is that the VIX on the S&P500 reached a closing low of 14.69 last Thursday April 21. The VIX measures volatility in the market. When this measure is low, that can mean investors are complacent as the sentiment is generally strong in the trend. This low reading from last Thursday is significant because the VIX has not seen levels that low since June 2007! Stock traders are not concerned about a possible sell off. If one catches them off guard, it could be a sharp correction. Remember, stocks ultimately sold off 55% from those levels in June 2007 when the VIX was previously at these levels we see today.

The Current Environment = PRECARIOUS

With the VIX at 4 year lows, stocks in a resistance zone, and the US Dollar Index at a support area, this trend has the potential to change and is precarious. It is quite possible we could see another breakout in the direction of the previous trend. However, we are also at a point where a reversal may take place. Therefore, as a trader, we want to reduce the uncertainty by peeling back exposure. If you have been trading in the direction of the previous trends, you may want to reduce your trade size on open trades and/or tightening stops.

What I am NOT saying is enter a trade in anticipation of a trend reversal. We are simply at a precarious point where the market may get confusing and produce some uncertainty. In these types of environments, a breakout strategy is helpful.

The Trading Opportunity

Precarious_Point_body_Picture_1.png, Precarious Position

(Created using FXCM’s Marketscope 2.0 charts)

The breakout out trade on the EURUSD from yesterday came within a few pips of reaching the profit target. In light of the precarious level the USD Index is at, it is time to reduce our exposure and move the stop loss to break even.

Since the greenback has uncertainty floating near it, I’ll look towards cross pairs for future trading opportunities UNTIL the dollar decides where it wants to go. Future candidates will likely be the CHF, CAD, and GBP.

Jeremy Wagner contributes to the Instructor Trading Tips articles.

http://www.dailyfx.com/how_to_trade_forex/course_trading_tips

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