RIsk is at a Category 5 level.
As hurricane Mathew batters Florida with catergory 3 winds, the forex market is approaching another potential category 5 storm as a scheduled event approaches in the US employment report.
As a reminder (or perhaps a lesson), there are 3 main types of risk:
- Market risk is the risk inherent in an open market from normal buyers and sellers. It can be hedge, controlled, defined and limited by technical tools
- Event risk is the risk from scheduled and non scheduled events. Unemployment is an event risk. It is scheduled. The event that happened yesterday was an unscheduled event. Was it algo's? Was it fat fingers? Was it Hollande? Whatever it was an event was triggered. This type of risk is like a hurricane that just happened. Maybe some people saw something coming. Certainly the technicals were bearish in the GBPUSD but not many (any?) could see a 700-800-900 pip decline in minutes. Event risk is hard to hedge. You can have stops but those stops may have a bunch of risk too. Stops are no guaranteed.
- Liquidity risk happens when the markets lack liquidity. When a scheduled or unscheduled event occurs, liquidity risk increases. It is not easily managed. If in a position, you have to hunker down and deal with it. It may be you do the absolutely wrong thing when liquidity risk is high, but it is an invisible storm that causes the spreads to widen, that cause your fills to be not filled, that causes gaps of 100, 200 pips at a time.
At 8:30 AM ET there is a scheduled event. Event and liquidity risk will be elevated. Market risk will be elevated. It has the potential to be a category 5 storm especially with the market players under stress from the activity today. We have expectations but we do not know how strong the winds will be or how much flooding we will get from the report. We don't know if it will be a tropical storm or a category 5. We simply do not know.
Nevertheless, there are technical levels we can follow that give bullish and bearish.
For the EURUSD the story is more or less the same. The price action extended the range with the GBPUSD volatility but it was fairly contained.
Looking at the 4-hour chart, the price moved below a lower trend line (currently at 1.1118) but stalled just above 1.1100. Moves below those levels and traders will be targeting the 1.1070 area and then the low from August 5 at 1.1045.
On the topside, the 200 day MA (at 1.1165) and the 100 day MA (at 1.11788). A move above those levels will next target the 1.1202 and 1.12115. That is where 100 and 200 bar MA on the 4 hour chart are found.
For the USDJPY, the pair is trading around the 100 day MA at 103.61 today. ON the topside the next major target is the 104.33 high from September. ON the downside, a weak report will look toward the 100 hour MA at 102.989 (call it 103.00). A break below will look toward 102. 78 (swing high from Sept 20.
As for the GBPUSD.....Category 5 trading potential already. I don't know about you but I evacuate from that type of storm for the time being. There are levels to attach to, but event and liquidity risk can make technical levels - well ineffective.
Sometimes the markets get battered with a hurricane out of no where. Sometimes the hurricanes (i.e..events) are known. We do not know the extent of the category level as liquidity risk and the event risk are more or less unknown (there are surprises in the event numbers). When a hurricane approaches, you can take cover. Or you can have a posiition and ride it out. When the event happens, the risk should go down, but the liquidity risk -(this time) may last a little longer.
