ISM Pushes the Dow Lower, here’s how I’m playing today’s risk aversion

May unemployment in Europe was at a record high and China’s exports have weakened suggesting a deeper slowdown. All this as the Friday rally is seeing some profit taking and a significant sell-off caused by the slightly weaker-than-expected ISM Manufacturing PMI. None of the events singlehandedly were enough to push the equities market lower, but together it was a weight too heavy to carry for the bulls.

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The correction may be inevitable but there are glimpses of strength in currencies like the aussie and kiwi. Both these two comm-dolls are gaining even amidst the euro anxiety.

So as the risk appetite makes its way into the market, the aussie and kiwi are just that much stronger and when there is risk aversion, these two currencies are holding their own. Talk about relative strength.

The AUD/USD is facing a substantial hurdle however as the daily chart is at the doorstep of the 200DMA (200 period simple moving average on the daily chart). With the 1.0280 – 1.0300 level overhead this will added more selling pressure especially as the Dow is still lower based on likely clearing period profit taking and the ISM number.

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Even a 38.2% to 50% daily retracement would put the AUD/USD at 1.0170 and 1.013 respectively. That would leave plenty of room to move lower on a 60-minute Wave reversal entry short if prices can break through the 1.0200 major psychological level. The challenge is that I do not want to commit to a much of a longer-term bearish view on this pair. A intraday short sell would simply take advantage of some profit taking and short-term weakness.

By the way, even those of you more interesting in a long set up in the AUD/USD should be rooting for a near-term correction that could lead into a buy. The move lower could bring some bulls back out – bulls who may be sitting on the sidelines because they think the pair moved higher “too far, too fast”. In an uptrend or in a bullish environment, traders will buy into pullbacks so some near-term term weakness could be shorter and then bought. More on that if/as it happens.

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