KRUGER INSIGHTS MONDAY, FEBRUARY 10, 2014

By: Joel Kruger

Correlation Break - On Friday I cited USD/JPY 102.90 and S&P 1792 as the key levels to watch. I had said I liked selling rallies to those levels in anticipation of bearish resumption. USD/JPY didn't quite get there, but the S&P managed to achieve its objective, with the market trading just shy of 1800 before stalling out. Because the level was hit later in the day, and because I don't like trading on Fridays, I did not establish the short position. Moreover, given the fact that USD/JPY had deviated a bit from price action in equities, with USD/JPY having a harder time rallying towards 102.90 (a level I had though coincided well with S&P 1792), I am also now a little more reserved with equities, and instead will wait to see if USD/JPY can now trade up to test 102.90 before rolling back over. For USD/JPY, so long as this market holds below 103.50, I still see good chance for a lower top and fresh downside extension to challenge 100.00. I don't believe this latest rally in risk is indicative of a bullish resumption and still classify the move as a corrective bounce ahead of fresh risk off trade. 

Back To The Sidelines - The strategy right now should be to stay sidelined and wait to see just how much more this corrective rally in risk will last before relenting. The emerging markets may play a key role in determining the length of this corrective risk rally. The emerging markets have taken quite a big hit in recent weeks, and so the prospects for some relief on this front are perfectly understandable. Technically, these markets have been rallying back a bit, and you could still argue for another few days of upside before the selling continues. And if these markets find more bids over the course of the coming sessions, it is likely to have a favorable influence on markets like USD/JPY and US equities. At the same time, the overall momentum still sides with the bearish camp, and the medium-term outlook for emerging markets is still quite bleak. As per the above, I am just not sure at the moment if the risk off trades resumes as early as today, or if we see a little more recovery in risk assets before the selling resumes. As such, I happily sit on the sidelines and will wait for the next opportunity to present. I have been playing this strategy via NZD/USD, and have been selling the market on rallies over the past several weeks. There is a lot of formidable resistance around 0.8300, so I will be looking to get back in on the short side as soon as the next trade sets up.