The U.S. stock market dropped slowly throughout the day as the fiscal cliff situation caused an increase in uncertainty among investors. What was particularly interesting was the dump that occured in the U.S. equity indices that began roughly 5 minutes before the close. (look at a 1 min chart of the S&P). If we start to see a broad sell-off across the board, the Aussie and the Kiwi should fall the fastest, as they share a higher degree of positive correlation with the S&P 500. We favor shorting them against the U.S. dollar as long as the fiscal cliff remains unresolved and the stock market is falling.
As the year comes to an end it's very important to note that liquidity should continue to dry up the closer that we get to 2013. This means that price has the potential to get aggressively pushed in either direction. Support and Resistance levels can be easily blown through. The key to trading in illiquid markets is not to get on the wrong side of momentum - it can get ugly fast.
EUR/NZD Update
The trade worked out better than expected. The U.S. stock market continued to rally on Tuesday, but the Euro was ripping while the Aussie and Kiwi were slowly heading down. We bought into it on the way up hit both of our targets. To my surprise, it continued ripping past 1.5900 - over 100 pips past our 2nd target! We got over 200 pips out of the trade though, so we can hardly complain.
The original chart. The original post is here.
And the price inefficiency is filled. Shocking.
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