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How to Trade the Coming Volatility in Risk Assets


Technically, risk assets are near the end of a wave. Here's where stocks, high yield bonds, and the risk currencies might go and how those moves might play out.

Risk assets appear to me to be nearing the end of a wave iv correction higher. That should be followed by a wave v move lower that should take stocks, high yield bonds, and the risk currencies back down to around the recent lows. I will be looking to buy into that dip in anticipation of yet another shot to the upside. Low volume volatility is the name of the game during the summertime – fading the extremes in such a scenario may be the way to play.

Let's take a look at how things are looking right now:

The Aussie / yen currency cross is basically mirroring the chart of the S&P 500.

Click to enlarge

Click to enlarge
  • Currently in a wave iv higher, the AUDJPY (top chart) has already touched possible resistance at 84.774; the maximum upside for this correction is 85.568 (the closing low for wave i);
  • S&P futures are also in a wave iv higher. Their possible resistance has also already been touched at 1,389.50; the maximum upside for this correction is 1,400 (translates to 1400.32 on the S&P 500 cash index).
  • The next move (wave v) lower should take the AUDJPY down to just above 82.00 – making putting a short-side trade on at or near wave iv upside resistance a very favorable reward to risk scenario.
  • The S&P futures version of the trade would have wave v downside to the 1356 – 1365 range (actual target will depend on the actual high point of wave iv).
High yield bonds continue to bounce along with other risk assets.

Click to enlarge

The SPDR Barclays Capital High Yield Bond ETF (JNK) continues to move higher as part of what I believe is a correction.

If I'm correct, JNK should run out of steam soon as it faces resistance in the form of the underbelly of its broken uptrend line.

Additionally, the maximum upside for JNK based on the current wave count will be the $39.41 level. This would match up well with what I'm seeing in other risk assets (like AUDJPY and the S&P futures shown earlier).

JNK's next move should be another move lower next as its wave (v) and iii plays out. From there, I'm expecting another corrective move higher… and then another decent move lower.

Similar to what we're seeing in other risk assets, I am clearly expecting a number of volatile swings in JNK throughout the next few months – down, then up, then down again. That last shot down in JNK – and in the rest of the risk assets – will be the point where I look to push more chips to the center of the table. Until then, tread lightly and don't be afraid to take profits when you have 'em.

The sovereign debt issues overseas make big headlines, but yields are nowhere near as high as they were during "crisis" times over the last couple of years.

For all of the stress the media likes to inject into our days – first in the mornings while Europe is in the heart of its trading day and then toward midday as Europe is closing – the net effect of it all seems to be choppy action and muted net movements over the intermediate term. To be sure, there may very well be a major price to be paid in the long-term, but reacting emotionally to the news in the short-term seems to me to be a losing strategy. If you're trying to game the market off of this news flow, perhaps fading the extreme moves would be the more intelligent play.

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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