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Trading When Skeptical of Strong Risk Trends

John Kicklighter

The markets are thankfully starting to fill back out after August's painful liquidity slump. I'm greatful for the increase in productive volatility and tentative lean potential for trend development, but I'm very skeptical of the opening thrust we have with the return of activity.

A positive risk and euro run fit the superficial fundamentals we have been presented with recently (ECB OMT program and Fed QE3), but we've seen the market's grow increasingly skeptical of the influence of stimulus against a broader backdrop of lacking participation (liquidity), anemic returns and tangible fundamental issues. The market can fight slowly higher on both fronts, but the return of volume/liquidity would likely accompany (whether it follows or leads) unwinding of riskier trades.

For my current exposure, I'm not heavy in a risk or euro position. For risk I have a NZDJPY long (E: 64.70, S: Moved up to 64.25) on the break of its ascending triangle top. Given this pair's restraint during the past few months, it feels lower risk than many others. My GBPCAD long (E:1.5625) has little exposure to either theme and I've already taken most of the position off at 1.5770 at the top of its range. I'll probably close the remainder before the week ends.

My reduced EURGBP long (E:0.7990) has had its stop trailed to break even, but I haven't taken off the first half given its size. The pair is less exposed to pure euro swings due to its coupling with the sterling. And, then there is USDJPY (E: 77.50, 78.00). I have liked this pair for the long-term but that big-picture view will take time to play out. Meanwhile, I like a move up to 79.25 and see if it can gain more traction. This is an interesting one for next week's BoJ.

As for the possibles, there are plenty. I have my views on risk and euro performance overextending itself, but I won't play them until it is clear that the market is ready to come around to the same view. I am watching AUDUSD as it has put in a potentially critical failure to overtake 1.0600. If it reverses (fundamental view with a move below 1.05), I may jump. EURUSD is another highly exposed pair given the slack in crisis fight for Europe with the stimulus breather. Looking for a reversal of price and fundamentals here too. Then there is EURCHF. The pair that stands for my greed. I have missed out on this recent rally due to my effort to place a slightly better entry price. I still have my entry to reenter on a move back to 1.2015. I don't think this is the Euro-area recovery.

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