Trading The Next Asian and European Sessions

by NewstraderFX
With the S&P 500 having its biggest move up in 4 years, all signs point to an Asian recovery and to an extension of the European recovery in their next sessions. However, it's not the type of slam-dunk that you may think and it will take careful observation of what we always are looking at when we trade: equity futures and bond prices.

While I do believe that the trend in the markets will eventually be up (no big brainstorm there), what I also believe is that volitility will remain high and that wild swings in price will be common, making trading a bit more difficult then in a typical market that does not have all these additional issues to deal with. A simple fact of trading is that when more issues are on the table, there is more that needs to be considered. This is true for all market participants.

Let me pose a scenario to you that illustrates the complexities now. Let's say there is some more bad news regarding the current situation. This news up until now has been taken as a negative and has caused the big sell off's we've seen. But now, something else is on the table: the rate cut. It's certainly possible that The Fed will not see the need to cut rates if stock and credit markets stabilize, because they will view that as a lowering of the risks to their growth forcasts. So the question is, what will bad news do now-cause markets to get further depressed (fear) or will it further implant the inevitability of the rate cut and cause markets to go up (greed)? The answer is that we don't know what the reaction will be. All we know is that the potential for a different reaction exists.

Until we can make further observations in market behavior we should trade very carefully and conservatively while staying ready to be more aggresive when the psychology is better understood. It all comes down to the three states the market exists in: greed, fear and confusion. Fear might very well diminish and morph into greed very quickly. We saw the first signs of this Friday. Let's be sure the typical signs of greed (increasing equity index prices and decreasing bond prices) on a global scale remain firmly in place before we get aggressive.

I will be on-line Sunday at 20.00 GMT. If SKYPE is working we will use that and if not we'll use Yahoo. Have a great weekend.