FYI | Jul 19 2011
By Paul Robinson
In recent trade the SPX500 has been unable to gain much traction after the 50+ point slide from the market high of July 7th-8th. Over the course of the past few sessions a nicely formed triangle has developed and should result in a break lower sometime within the next 1-2 days. In the event the triangle does trigger to the downside, risk aversion across other assets and currency pairs will likely accompany any move lower in equity prices. Yen crosses will be particularly vulnerable as traders are still betting heavily that we will see higher prices over the near-term. SSI levels on Yen based pairs range from 65-90% net long. The AUD, ‘carry trade de jour’, will also likely see further pressure should another round of risk aversion take place. Triangle patterns typically break in the direction of the prevailing trend prior to the formation; however, they can breakout counter to the trend.
This is why my game plan includes two scenarios:
– Short on a clear break below 1304 with a target at 1275-1270 and stops placed just above the declining top-side trend-line at approximately 1315.
– Buy a clean breakout above the declining top-side trend-line with a target of 1335-1340 and stops will be placed just a couple of handles below the 1304 low made on 7/14.
(Targets for triangle patterns are determined by the width of the pattern. Furthermore, a significant bullish trend-line extending back to the 2009 low currently resides around the 1275 level.) In either event, a short-term move of at least 30-35 handles looks to be just around the bend and risk/reward profiles are favorable with both scenarios offering potential to make 2-3 times the initial risk.
(Trade Update: Remaining short EURUSD, GBPJPY, and AUDCAD. On deck: Buy AUDUSD on a solid move above 1.08.)
The views expressed are not FNArena's (see our disclaimer).
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