Managing Trading Risk Ahead of Uncertain News

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The markets continued to rally this last week against a backdrop of uncertainty surrounding the outcome of the Greek election; the polls are indicating a close call between the two parties with conflicting opinions on whether Greece should remain a member of the Eurozone. Depending on the results, the markets could gap in either direction on Monday and this heightens the potential for whipsaw reactions and skittish behaviour until the dust settles. For this reason I’m reluctant to initiate any fresh positions and remain flat ahead of the risky weekend outlook.

All the uncertainty surrounding the Greek elections could be triggering a covering of shorts and the rally has gathered in momentum, there is also speculation of a globally coordinated central bank move which has shifted investor’s focus to next week’s FOMC and the possibility of further stimulus to help stem the debt crisis further. This bullish speculation has driven the S&P 500 higher to test the neckline of the inverse head and shoulders pattern (see below) and today in US pre-market open the neckline has been broken.

Many Elliot Wave analysts are predicting another leg-up before the bear market trend resumes and this concurs with the inverse head and shoulders target of 1404. But despite the bullish break of the neckline today I will not be going long; the trend remains down so my strategy is to wait for higher levels and sell the strength when I see signs of momentum waning. To determine my next entry point I’ll be watching for when my momentum indicators register overbought levels – currently the two-hourly RSI is at 59, so it’s too low to trigger a sell signal yet. Should the market surprise and gap down on Monday – I will review my system further for next week.


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