The Tide Is Turning In Favor Of Risk-Off
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The Tide Is Turning In Favor Of Risk-Off

Authored by Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.

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Scan Of The Markets

The indices show the performance of a particular currency vs G8 FX. A video on how to interpret these indices can be found in the Global Prime’s Research section.

Judging by the alarming sell-side action in the equity space last Thursday (worst daily loss for the S&P 500 in 12 weeks), and after a period of vol contraction lacking the snappy traits perma bulls would have wished for on Friday, there is real danger that the risk-adverse conditions may continue to be in command this week.

At the epicenter of the renewed fears that have swiftly led to a suppression of risk-on dynamics, we find a market worried about new containment measures in the US as COVID-19 related infections continue to spike at unnerving numbers.

As Reuters reports: “New COVID-19 cases and hospitalizations in record numbers swept through more U.S. states. Alabama reported a record number for the fourth day in a row on Sunday. Alaska, Arizona, Arkansas, California, Florida, North Carolina, Oklahoma and South Carolina all had record numbers of new cases and many state health officials partly attribute the increase to gatherings over the Memorial Day in late May.”

So far, the intent to appease concerns by US Economic Adviser Larry Kudlow, saying “the US won’t shut down again and it’s not seeing virus returning in second wave” has failed to do the trick. Sounding much more prudent, Dr. Fauci, the director of the National Institute of Allergy and Infectious Diseases, endorsed to act with caution and encouraged Trump to rethink their reopening strategies conditional to the trend in Covid-19 cases.

The Fed also released its semi-annual report to Congress on Friday in a reiteration of the remarks made by Fed’s Chairman Powell at the FOMC press conference last week. The report noted that “the outlook for the pandemic and economic activity is uncertain. In the near term, risks associated with the course of COVID-19 and its effects on the U.S. and global economies remain high. A wide variety of data reveal an alarming picture of small business health during the COVID-19 crisis.”

As I shift gears into the clues obtained via the technical analysis, my negative stance towards risk sentiment is backed by the recent breakouts of structures and loss of momentum in key markets (SP500, AUDUSD, EURAUD, AUDJPY, etc) through the 4-hour time scale. Remember, this is my personal sweet spot that allows me adjust the stance by acting on information promptly yet objectively without facing the unnecessary risk of missing the boat if reacting too slow off the daily time scale.

But not only the technical cracks in 4h structures and momentum constitute a red flag, but the intermarket flows are so far projecting that further follow through is very much in store. The VIX spike last week still casts a major shadow and acts as a source of concern as it does suggest that equity valuations are still out of whack based on where the market projects volatility to trade.

Besides, the market open in Asia, with the S&P 500 futures selling off through the 3,000.00 mark, does not bode well either. Remember, the swift change in narrative from the re-opening of the US economy driving optimism to now see doubts and concerns emerge over new partial shutdowns due to spikes in COVID-19 cases and hospitalizations is the catalyst that led to the change of heart.

If we take a look back to the last 5 trading days, we have the Yen and the Franc as the outperformers, commodity-linked currencies hammered, Gold pressing the upper end of its range, and US 30-year bond yields through its worst losing streak since March. This type of concerted movements across varies market instruments is a very concerning picture. One that the USD has so far not milked to the extend that it should have based on its risk-off attributes, which makes me think it has plenty of catch-up.

Lastly, if interested in my daily technicals views where I break down all the latest price actions to facilitate an understanding of the dominant flows to ultimately help us determine an underlying bias in the next 24h, the video I’ve prepared below intents to serve this purpose.

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Insights Into Market Flows

This analysis is conducted on a multi timeframe dimension. Ultimately, it is the traders’ call, via a set of entries thoroughly backtested, to enter a position, hence the video is mainly intended as a way to educate traders in upping their analytical skills.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

If interested in the best ‘free of charge’ News Indicator that displays data on past and future news in the Forex market via MT4, check this YouTube video I produced. The indicator allows you to save time, avoid mistakes. It’s spot on!

Important Footnotes

MARKET STRUCTURES

Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of market structures, refer to the tutorial How To Read Market Structures In Forex.

SMART MONEY TRACKER 

In order to assess the market momentum of a particular asset, I’ve promoted for years the idea of using what I call the smart money tracker. The settings and the indicator can be obtained via our Discord room, where traders from all walks of life interact frequently. In this video I lay out the elements I look into to call trend directions.

SUPPORT & RESISTANCE

Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, horizontal areas of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed. The Ultimate Guide To Identify Areas Of High Interest.

FUNDAMENTALS

It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term. Monitor the event risks via Forexfactory.com & refer to Fundamentals vs Technicals In Forex.

PROJECTION TARGETS

The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection