As this morning's Dow rallies past the gap close on the YM Dow futures contract, the stall that would be expected at that resistance level and further up into the major psychological level at 13,000 will play a significant part in where the near-term risk ON attitude can shift what is a growing sentiment of pessimism and fear.
The current rally is a retracement of the last sell-off that being on May 4 from the 13,168 high on the YM contract. The correction represents a 38.2% Fibonacci Retracement and puts initial selling pressure in front of the expected order size waiting at the 13,000 level. The gap close/psychological level/retracement creates a "stacked" resistance area at which the bears could regain control of market sentiment and momentum and then potentially push the Dow back lower towards the range lows of the daily chop. This of course would also be good for RISK OFF positions. Pairs such as the AUD/USD, AUD/JPY, AUD/CAD, EUR/USD, and USD/JPY would move lower on fear and risk aversion as well as weakness in the Australian dollar and strength in the Japanese yen. The euro would also be pressured in a risk off environment and the EUR/USD would push lower as the U.S. dollar would benefit from a weaker Dow and thus risk aversion.
The AUD/CAD and AUD/JPY are two pairs to watch with interesting central bank plotlines and a clear daily Directional Bias - an excellent fundamental and technical combination. The downtrend on the daily AUD/CAD reflect a bearish Directional Bias and this sets up trend following short sells on rallies to the 20 period SMA close and 34 period EMA high on both the daily and 240-minute time frames.
This is a swing short strategy that takes advantage of expected exhaustion at resistance after a rally. The rally remember is not a overall trend reversal but rather a correction. That's the key to the entry. Remember that the "overall" or dominant psychology of a market is taken from the daily chart.
The AUD/JPY has the added weight of movement lower reflecting risk aversion along with Australian dollar weakness and yen strength. The aussie weakness comes from a dovish RBA and a struggling consumer while the yen strength is s RISK OFF/risk aversion play. The yen strength would continue to benefit from a weaker Dow and without footing north of 13,000 bullish momentums will be difficult to generate. The AUD/JPY has swing short opportunities -much like the AUD/CAD - that will trigger on rallies. The key is to identify the resistance area that will attract selling pressure and cause exhaustion.
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- An update on Risk and Transition 12:28 11 April 2012
- ISM Pushes the Dow Lower, here's how I'm playing today's risk aversion 09:10 02 July 2012
- Key Levels on Market Pulse Charts 22:36 11 July 2012
- Using Fibonacci to project where the dollar goes from here. 13:52 15 March 2012
- Dollar & Dow Rally and QE Unwinding 13:11 01 May 2012