Risk Aversion Trading Strategies
We may be in front of extreme volatility in global markets within the next 60 days. We cannot determine if the risk event will be the UK referendum, a credit event in Greece or other critical event, possibly related to China. In the past the US Dollar (USD), Japanese yen (JPY) and the Swiss Franc (CHF) used to benefit from safe haven flows in the Forex market. It has been altered some time ago and it is now the Euro (EURUSD) that benefits from these safe haven flows and the Japanese yen.
We have mentioned the following in the past, it appears the leading markets are due for another leg lower.
SP500 Weekly Chart
Please click on the chart to enlarge:
SP500 Weekly Chart 05/04/16
We have selected the SP500 as an example, the same applies for other key indices. If the indices will indeed correct lower it may intensify the gains in EURUSD and possibly general USD weakness in the Forex market. We are currently holding a long trade in USDCHF and are perfectly aware we may be due for some turbulence. We have updated all our traders the possibility of a weak CHF remains strong.
EURUSD Weekly Chart
Please click on the chart to enlarge:
EURUSD Weekly Chart 05/04/16
If the SP500 along with other key indices continue to fall EURUSD may break into fresh highs. A break above 1.1495 may be technical trigger for medium-term gains in the currency pair. There is no technical entry in EURUSD at the time of this writing but if the market will be more fundamental than technical we are unlikely to discover such an entry unless the breakout (above 1.1495) takes place. EURUSD gains may take many technical traders by surprise if our projections for the indices and the risk aversion correlation in the FX markets are correct. We have the ability to shift to a more fundamental strategy and dismiss the charts but such a manoeuvre must executed delicately and at the time of this writing we are uncertain whether it should be done.
Many technical traders that attempted to use the European Central Bank (ECB) rate cuts and quantitative easing measures as their logic for shorting the Euro were bruised as the ECB measures focus more on growth rather than a weak currency, which is the complete opposite of the Fed’s stance.
XAU/USD Monthly Chart
Please click on the chart to enlarge:
XAU/USD Monthly Chart 05/04/16
Gold broke above its monthly resistance, which is the first signal of further gains in the precious commodity. Following a breakout the price tends to re-test the breached resistance before climbing higher and such re-test was seen in gold at the time of this writing. The weekly chart is not inviting either as the risk for top Head-And-Shoulders (H&S) is noted. If the market will be more fundamental the price will dismiss the potential H&S and break above the head. Entering gold is quite challenging due to the volatility and it greatly depends how confident we are in the market becoming more fundamental than technical. We can also opt for silver (XAG/USD).
Based on the above, as EURUSD is likely to dominate the Forex market other EUR crosses such as EURAUD and EURNZD may follow suit. Our main concern with EUR crosses is the required stop loss order. We can use a 60min stop but we must bear in mind there is no technical entry available to support the long trade.
We cannot opt for all instruments as we would like to maintain a low market exposure. If the above strategies were technically supported we may have made a rare exception but it is not the case at the time of this writing. We would like to opt for one of the commodities and EURUSD. We will re-assess the market at the daily close and decide how we wish to proceed. We repeat that we are still debating whether today is the right time for those strategies and whether dismissing the charts is a wise idea.
EURUSD Trade Alert
There is an element of risk to taking a long trade in EURUSD as it is not technically supported. We are using the 4hr chart for the stop loss order. Please note this is not a hedge to the current USDCHF long trade.
Please click on the chart to enlarge:
EURUSD 4hr Chart 05/04/16
EURUSD long at market price (1.1381)
Take profit: 1.1644
Protective stop: 1.1301
Risk Ratio (RR): 1 : 3 (approx.,)
Estimated duration: 14 days
Despite the estimated duration we hope to be in a modest profit by the end of the week, We may also take a long trade in gold or silver.
XAU/USD Trade Alert
We are initiating a long trade in gold based on the strategies we provided. Please note the size of the stop as gold is extremely volatile. We used the daily chart for the location of the protective stop loss order.
Please click on the chart to enlarge:
XAU/USD Daily Chart 05/04/16
XAU/USD long at market price (1,229.81)
Take profit: 1,296.50
Protective stop: 1,220.00
Risk Ratio (RR): 1 : 6 (approx.)
Estimated duration: 14 days
USDJPY trading strategy will be released tomorrow as we strive to locate an entry for a possible FX intervention.
06/04/16 UPDATE: Large stops were targeted in EURUSD, which lead to a strong US Dollar. Gold missed the protective stop loss order by 1 cent. We were prepared for such events but this was truly close. We are adjust gold protective stop loss order from 1220.00 to 1119.60. We will not adjust the stop loss again if the selling resumes.
Gold is trading at 1,220.64 at the time of this writing.
06/04/16 UPDATE II: Although we are aware we were stopped out on gold due stop hunting we are not re-entering the trade. We experienced a similar event on 23 December, 2015 and although the price retraced higher we chose not to re-enter. Re-entering trades that were stopped out have devastating psychological effects.
06/04/16 UPDATE III: The gains in EURUSD is what we have been expecting but were rather unfortunate in gold. We are closing 20% of the long trade ahead of the FOMC minutes and shift the protective stop to 1.1374.
Please click on the chart to enlarge:
EURUSD 4hr Chart 06/04/16
EURUSD is trading at 1.1415 at the time of this writing.
06/04/16 UPDATE IV: We are shifting EURUSD protective stop loss order to the entry despite the minimal distance from the market.
07/04/16 UPDATE: EURUSD triggered the protective stop los order, ending the trade with a minor profit.
Gold safe-haven flows were noted in today’s session but as noted earlier we did not wish to re-enter.
Please click on the chart to enlarge:
Gold Daily Chart 07/04/16
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Last Updated on April 10, 2016