Friday, January 15, 2010

Morning Briefing for January 15th: Handicapping the Range Trade

The most recent market posts have emphasized that we created a range trading environment once we broke important support levels earlier in the week. Note (above; ES futures) how that range trade has evolved, going into today's open.

U.S. dollar strength has pressured commodities and stocks overnight, but observe that we've thus far held support around the 1137 area that had been resistance earlier in the week. If we can contain selling and hold that support--and particularly if we see major currencies hold their lows vs USD--I would expect to see a run at new highs for stocks. Should we see a number of divergences at those highs, I would lean toward lightening up on the long side.

Conversely, inability to hold that 1137 area support would have me looking for a retracement of the range, particularly if we saw range extension in USD and further commodity weakness.

Fleshing out "what-if" scenarios can be very helpful in preparing for big trade ideas for the day. The more we prepare for, the less we can be surprised by.