Home > Commodities and Rates, Equities & Indices, FX, Short-Term Trader > ‘Risk-off trade’ Likely Has More Room

‘Risk-off trade’ Likely Has More Room

November 22, 2010 Leave a comment Go to comments

Markets, across all asset classes (risk-on, risk-off trade), suffered sharp losses, with modest bounces taking place during the last few days. We are now left with the question – was the downdraft just another “buy-the-dip” opportunity, or could the sell-off be the beginning of a trend change? There are indeed several sentiment measurements published by different folks which point to the possibility that we might be in the process of forming an intermediate top. One of the more notable polls, in equities, the II (Investor’s Intelligence), recently reached up into levels seen at previous peaks, including the one made in 2007. Commodities such as Oil and Gold saw record levels in speculative holdings in their respective futures contracts.

Recently, there were several great short opportunities, especially in the commodity sector where obvious signs of speculative fervor were prevelent. One needs to look no further than silver, sugar, ags and cotton to see this. Now is the time for the ‘risk-on trade’ to prove its worth it’s salt, or fail.

At this juncture, one of a couple of scenarios will likely play out. a.) Markets will settle out and form a basing pattern, allowing market participants to gather their breath for another leg higher. Or, b.) we will see volatility in the form of see-sawing price action, whereby the buyers and sellers duke it out before seeing the bulls succumb to selling pressure. Furthermore, if we are in the process of forming a top, then we should see many of the high correlations between assets demonstrate reversion to the mean; this is not to say they will completely diverge, but rather dance to slightly different beats. The first correlation, or ‘anti-correlation’, which is likely to see the biggest correction to the mean is between the Dollar and equities. During recent months, equity traders have in effect become currency traders, and vice-a-versa. However, it is still very possible that the correlations will break down, whether we are amidst a top or simply digesting recent gains before thrusting higher.

Bottom line; be patient, opportunities of significance will, as they always do, rear their pretty heads. My biggest focus right now lies in the FX/Commodity sectors. The Dollar bullish trade looks like, from where I’m sitting, to be the best opportunity on this small pullback. Last week, I touched on this trade in a bit more detail, click here last weeks commentary. Technically speaking: EURUSD – weak bounce, looking for uptrend line going back to June to get tested in the 1.33 area; AUDUSD – head-and-shoulders pattern forming (should it trigger, .9275-.93 will be the target; GBPUSD – trying to maintain a a trend-line extending back to early September – trust until broken.


Precious metals also look like they will experience another leg lower, as the speculative excesses, particularly in silver, have not likely been purged enough to warrant bullish bets at this time. Gold appears to be forming a head-and-shoulders pattern, which may have a very weak right shoulder should the next push lower begin shortly. Stay tuned for further updates.

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