Archive for the ‘Risk’ Category

What the heck is going on today? That’s rhetorical – basically what’s going on is “risk aversion”. Which means everyone has decided they’re scared and they’re running into holes all over the place. It’s jitters over the world economy.

All you need to know is that the carry trade does great when all is well, it doesn’t when things look bad – like, now – so look out below. Don’t try and second guess this thing, thinking it’ll pop back up any second and it will all be roses again. I’ve done that and got owned. But watch. Most pairs which pay a heavy interest payment are coming on some strong support levels (AUD/JPY below at its last fibonacci support). A lot of damage has been done. If they keep going they have much further to fall.

And of course, but the yen and franc as you get buy signals.



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If you haven’t done so do so now. Stocks looks like they’ll get whacked and drive most pairs for the worse today and, scarily, going forward. The carry has further downside and today may get nasty. Same stuff we’ve been talking about for week.

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Well, Uncle Ben came through for investors and it turns out they were satisfied with the 25 basis point in interest rates. Read the statement here. And everything you want to know about the Fed is here at The Fed 101.

It seems that decent earnings over the past couple weeks and fairly strong economic data are back in focus after the baited breath waiting game.

Here’s another way of looking at this: the VIX. One of the market’s primary fear vs complacency meters described here. Keep an eye on this because after breaking higher, it is coming back down. If it breaks below its trendline (support lines on the chart, the green oval area) , good times are officially back in fashion. If this happens, you can participate in those mad trends going on with much more confidence, or larger positions, because you can more objectively say that glad economic tidings are outweighing negatives.


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201px-ben_bernanke.jpg Tomorrow the Fed steals the show announcing its latest decision on interest rates. Forex basics recap: high rates are good for the dollar, low bad. Low are good for stocks, and stocks still have a leadership cap on, meaning the more rate cuts the better for most currencies out there (the carry, the higher interest payers.)

Here’s the deal. Stock investors have been halfway in a parallel universe of delusion lately! There’s huge expectations of a 25 basis point cut, perhaps 50. I think with this pressure, there is more risk to the downside. What if the Fed only does .25 and everyone is disappointed there’s no .50? What if the .25 doesn’t even come? It’s always possible .50 comes or there is lots ofhawkish pulpit pounding, but I’m a little leery. We’ll see right?

Sooooo, this is called event risk. It’s like super earnings for a stock, but universal. If you’re up a way in a trade, “being careful” here may mean taking some profit off the table. Some tighten stops, whatever that means (I always keep mine as tight as technically makes sense …)

Otherwise, if you trade longer term (daily) it’s business as usual – there just may be a bigger move than usual one way or the other. If you trade long term watch for a break and follow it till it runs out of steam. And enjoy the show!

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When the going gets murky, put some armor on. I can’t help but feel luke-warm about some of the trends going on with U.S. stocks displaying weakness.

Sometimes my armor is reducing my position size, doing shorter term trades, or simply just trading less. You can also hedge your risk by choosing less aggressive pairs. Ones with a trend (always follow the trend, even when you’re wary) but which haven’t been the hot performers. The GBP/CHF is an example.

The trend is already against the pound here, which is unsurprising given the sterling’s weakness. The nice thing though is that any further weakness in the markets feeds the pair. The franc will only get stronger. Because the pair trends in the direction of the franc, there is less technical risk with uncertainty swirling about.

I highlighted below a couple scenarios. A break to the topside, a continuation to the downside. It’s interesting that as we watched this break out of the last few weeks, it hasn’t gone far and has shrunk back down parallel to its channel.


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danger.JPG I wanted to chip in with what Brandon said below. The CBOE Volatility Index measures implied volatility in the stock market. It is a risk-meter. When it rises, so does fear. When it falls, complacency (or greed) rises. Notice the spike in July and August and how that corresponded with carry trades imploding.

I keep an eye on the VIX as part of my trading routine. In the chart below notice the support line, I drew that weeks ago. There is a famous adage I’ve told my students for years:


When the vix is high it’s time to buy, when it’s low look out below.”

The vix is a contrarian measure. When people get complacent, worry. That is, highs or lows which are more than usual. And by the way, the saying should be when it is high or low and starts to bounce then do whatever. We are there now so heads up for increasing volatility, and possible bouts of panic.


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