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Fitting Risk Like FOMC Decision to Conditions for Trades

Fitting Risk Like FOMC Decision to Conditions for Trades

2017-03-16 03:23:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The Federal Reserve's rate decision was a high profile event that was destined to generate volatility
  • Yet, a surge in activity doesn't promise the extension of a persistent trend
  • Establishing market conditions first can direct us to successful ranges rather than destined-to-stall trends

See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.

A strong charge of volatility can trigger a long overdue trend...or it can present a mere flash in the pan that charges the market only to see it settle well within range. What we saw from the Dollar following the Federal Reserve's expedited rate hike Wednesday illustrates the importance of aligning a opportune technical and fundamental mix to the proper underlying market conditions. Participation and the flow of capital override all other analysis concerns as it represents the actual mechanism for dictating an assets price. If a market finds appetite fading and capital draining, charging a lasting trend is an unlikely prospect.

The Fed decision was a poignant example of how effectively the environment transmits event risk and tests the validity of technical structure. High expectation for the central bank policy meeting rendered a hike and forecast for more a 'disappointment'. The Dollar slide that followed was sharp, but its reach was limited. In part this is due to the reality that while the event may have disappointing, it was still hawkish/bullish in the broader sense. Promoting a lasting bear trend on this backdrop is unlikely. Yet a more systemic limiting factor is the market's reticence to commit to a full-blown trend. Such persistent moves are more costly to maintain and find greater struggle when faced with technical hurdles.

With a first level filter of restraint in trend, a propensity for volatility and more robust technical boundary; trade selection can be easier. Following the FOMC decision, the Dollar Index (DXY) looked as if it were breaking a rising channel and were tipping into a more significant trend reversal. However, through the given filter; range conditions on GBP/USD, NZD/USD, USD/JPY and USD/CAD look more reasonable. We consider the importance of market conditions as a first line assessment for trade setups in today's Strategy Video.

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