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Jan 3 Weekly market preview

01/03/2012

I wrote this yesterday, but the levels and ideas are still for the most part valid:

January 2 update.

First, an upbeat quote:

“I believe that anyone who is intelligent, conscientious, and willing to put in the necessary time can be successful on Wall Street [or the market]. As long as they realize the market is a business like any other business, they have a good chance to prosper.”

We ended 2011 with quite impressive moves in some pairs, and complete snoozes in others. I would be careful calling those yearend moves a selloff in risk, as low liquidity conditions can cause general correlations to break down. In addition, SPX did not follow European risk currencies lower. Gold and silver (both generally, and in my opinion incorrectly, considered a barometer of overall risk apatite) sold off quite severely.

Selling in the Eurozone was the news of the day (if not the fourth quarter of 2011). The markets seem fairly immune to any news from the US, and if there is good news from the eurozone, the markets continue to take this with a grain of salt.

In the majors, Euro was the unquestioned loser, followed by Pound. Interestingly, Asian pairs (Aud and NZD) actually closed slightly stronger against the USD. So what is our theme? As always, it is to wait for a good setup before initiating a trade. It’s important to manage risk, trade with the dominant trend and depending on your trading style, wait for bounces before getting in.

While I like selling bounces in Euro and Gbp, I believe there is also some good opportunity in the crosses.

Eur/Usd: we are [was yesterday] sitting on a minor daily support zone around 1.2930. This area was last tested in a severe spike lower on 1/7/11, and that’s why I would be careful in considering this level a significant support zone. We’re below a daily .618 retracement. We may favor a minor bounce and daily trendline break before continuing a short move, but not necessarily. I would expect any bounce this week to be capped around 1.322

Gbp/Usd remains weak but not nearly as much as the euro. We need a solid break of 1.5370 to propel downside momentum. On a daily chart, this pair is bearish, but not nearly as severely as the euro. The .50 retracement on the h4 bounced well, but we are clearly consolidating.

Eur/Gbp. With relative euro weakness this is a good pair to short. I first highlighted this in my SFO article on Nov. 1, and called for a small long move. I was wrong, and in a Dec 1 followup, I said pullbacks are shortable events. So long as the current downward trendline holds, this is a good pair to short. Any further bounce will find resistance around .850

Aud/Usd – has not been following the euro lower. While I believe this pair will likely find resistance on daily fib retracements and be short able, I wouldn’t want to risk much of my money trading this.

Eur/Aud – So, with relative weakness in Eur, and relative ambiguity in Aud/Usd, this pair remains a nice short. I would be cautious shorting the lows. But, 1.300 was very strong weekly support. So long as this resistance level holds, I would consider shorting pullbacks. Considering this pair’s recent volatility I wouldn’t be surprised to see this area retested, but a 350 pip move on the long side would be rather brutal. We are in uncharted territory, I would watch fib extensions to offer support on the way down. A minor one comes in around current levels at 1.26, followed by 1.2367.

Gbp/aud, Eur/jpy, Gbp/Jpy all tell a similar story. Jpy is slightly stronger than Aud or Nzd, but not enough to make much difference. I would be careful aggressively shorting multiple pairs as this trade is basically a duplicate of the eur/aud discussed above.

Side note: When you find a pair like the eur/usd has broken a significant level, and aud/usd is still finding support, both pairs may be a good short / long depending on the setup, but it’s most advantageous to pick the weakest currency to short and go from there. So in this case, eur/usd is a good short, aud/usd is not as good, and may even look slightly long, therefore, eur/aud short should be a fairly safe trade.

Aud/nzd – I like this pair. Mostly due to a bit of a masochistic personality. A weekly .618 has held fairly well since the beginning of November. On a daily basis, we are beginning to stair step lower. A break of 1.3050 will likely open the way for lower prices. Conversly, if the recent daily highs give out 1.3446 should be in play.

Happy Trading,

Kosentrade

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