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Trade Setups for Next Week

John Kicklighter

Market swings settled into the second half of this past week, but volatility readings (VIX, FX VIX, etc) did not deflate. Nor did the risk sensitive benchmarks - S&P 500, yen crosses, the Emerging Market ETF - rebound. That is concerning. Normally, risk trends spring higher as soon as support steps back in. However, it seems confidence is starting to become existentially troubled. Whether it is admission of exposure, recognition of disparity between price and growth, or fear of leverage and correlatoin; the result is the same. Markets are on edge and risk a severe correction.

In the event of a committed risk aversion move, the call is relatively easy. Yen crosses will drop. The dollar will rally against most counterparts. The euro and pound would stumble. However, trading is rarely so tidy; so setups that can perform in multiple scenarios are the real opportunities.

The only trade I have carried into the weekend was a EURUSD short (from 1.3680) that I took on Monday. I've already taken the first half of the trade off for +125 and the second half is still on with the stop moved up to 1.3545. The euro looks exposed to risk trends, its monetary policy outlok as well as a reversal in investment flows (read more here); so I may add to this short if another fundamental booster is offered.

Amongst the other euro-based pairs, my preference is a EURJPY given its exceptionally sensitivity to risk trends and the euro's view. I'd prefer to enter on a bounce when it is clear that fundamentals are backing the short.

Perhaps the most exposed currency over the next two week is the pound (see my strategy video on the currency). The sterling has been driven higher for seven months on the expectation of a near-term rate hike than the BoE had projected. Even if the bank folds to pressure though, the market has priced in far too much. GBPUSD is at the bottom of its rising channel from July. A break below 1.6400 on a broad sterling drop would be the preferred signal, but a interim rebound for the same level is a possibility in the lead up to important event risk.

A straightforward trendline break from GBPJPY below 167.50 looks good from both a fundamental and technical perspective. For this pair, I would like to see an equity (S&P 500) bearish break as well.

Less risk sensitive, I still like the GBPNZD - though I was stopped out for -100 when the pair spiked above its wedge top Friday. The technical pattern is still in place and the outlook between the two is overstretched. I'll look for a hold and correction next week for a possible short.

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