Higher Volatility Ahead?
Good Morning,
A big week of data. International events are obviously in the mix, but as I have always stated, those are hard to predict. By no means am I saying any economic indicator is easy to predict, but when it comes to the monthly unemployment data, at least we get some intermediate help. And you are probably asking how.
Unemployment claims have been on the rise. Be sure to watch Thursday's release as this always gets "more attention" when we have the monthly number 24 hours later. We also have some manufacturing and services data. Today, we had another disastrous number in the form of CHPM. Expectations were 60.9 and we came in at 56.2 - percentage wise that is 7.7% decline. New orders was down and employment was up - so not sure what to make of that. Again, look at the employment sub-components for the remainder of the week in the ISM Manufacturing and ISM Non-Manufacturing numbers.
Currently, the analysts have employment growth for the month of April at 176k. I can't argue with that number. I have a hard time believing we will come in too far above it, but believe we could come in slightly below it. The question then becomes:
**if it is a good number, can we push higher (probably),
**if it is a bad number, does the "Fed in the background" keep us afloat
**if it is a really bad number, does the "Fed in the background" keep us afloat.
The risk seems to be a number that comes in at or below expectations, but risk for equity prices seems to be up. What if we see a disaster of a number we actually drop. Now, if that is going to happen, how do you play it?
Do you start to buy protection this week? And if so, on what? There are plenty of equities at their resistance levels with technical indicators that are saying they are "overbought". I say "overbought" in quotations because overbought is just a word. The Fed could come in and drive us higher. The unemployment report could surprise to the upside. If you are saying they are overbought, you are combining fundamental analysis with technicals analysis and price action. But just because that is your analysis, doesn't mean you are guaranteed, so as I have always said, trade the appropriate sizes for an economic climate where surprises seem to be the norm!
Here is an example using HD with a MACD that is showing a bearish divergence. Again, technicals are taking a back seat to fundamentals, so be careful to rely on any one "holy grail". We all know that your decision making using your tools is the holy grail, not one specific indicator:
Past performance is not indicative of future results
If we do in fact see a bad number and the equity markets roll lower, did the VIX act as a precursor? Look back at the VIX for the past 9 months. How many times has it made a higher low? Not many. But this week, we are seeing one evolve. Am I saying this is the low and the VIX is heading higher? Absolutely not. I am just saying to be cognizant of chart patterns and ask yourself if you see any trading opportunities out of them.
Past performance is not indicative of future results
Another relationship that has been "here and there" is the USD/equity market relationship. Overall, with equities down, the USD is up, but the larger trend has been equities up, USD down. Is this going to be a higher high in the USD just like in the VIX? Can you build trades around a long USD? Hard to go against the trend, but you would possibly be thinking that if the relationship between weaker equities and a strong USD is in place and you actually thought that the equity markets would go down.
That sure was a long sentence, but the point is, a lot of data lines up to actually get to a trading decision. Make sure you are doing the appropriate work before you hit the buy/sell button as forex is leveraged and trading without a plan definitely isn't something I am a proponent of.
So, will we see higher volatility? Based on the economic data, yes. Based on the Fed staying involved, not so much.
Happy Trading and Be Environmentally Cool
Coach Brian
Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.
