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Timing An Equity Trade With The USD

May 10, 2011 12:32 PM ET
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The LFB's Blog
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Typical headlines that all traders have heard at some stage include; “Markets are buying risk today”, “Pre-market action is to the long side”, “Traders will see a positive start to trade today”, “Prices will open above fair value”. These are terms heard every time that equity values have risen in the global market place ahead of Wall Street cash trade opening.

The headlines happened again today, as S&P 500 futures contracts moved higher in-line with increases in Asian and European equities, and in-line with precious metal and oil trade that found buyers at the latest test of support. The challenge is how to trade the potential, rather than being stuck ahead of the market open hoping that prices do not move too far before having a chance to join the action. Not being in a position to act is unfortunately what a lot of equity traders will have faced today. However, there is a solution.

Since Friday Apr 06 11 TheLFB Market Alert Service has been issuing email notes to clients that have highlighted global market movement, a sentiment change, and breaking news releases. These, showed a swing towards the buying of equity indices and commodities. Market alerts are formed from technical analysis, fundamental outlooks, and tapping into 30 years of global market trading experience.

On Monday, TheLFB trade desk sent out a trade signal, highlighting the potential for gold bullion to break 1505, with initial targets of 1515 and then potentially 1535.  TheLFB trade signals reveal price movement in a specific asset class for subscribers to act upon.

At the same time, the market alert service sent notes out to clients stating that any short positions on S&P500 trade should be closed, as a break above 1340 was likely to draw in buying activity. Gold and S&P 500 trade have moved up and through the trade signal break-out areas, and gold bullion has already hit the initial targets.

TheLFB S&P/SPY Comparison

The momentum created in futures market trade is transposed into pre-market moves that eventually develop into gaps at the open of Wall Street trade, as shown in the charts above. At worst, these moves can transpose themselves into weaker reactions in the exchange traded fund (ETF) that follows cash market momentum, than seen in the futures contract.

ETF’s are a popular way to track futures trade movement, and because of the high daily liquidity and increased leverage and margin availability than compared to futures trade they are widely followed. The downside is that ETF’s only trade with full momentum from 09:30-16:00 ET each day.

The ETF that tracks gold bullion moves is GLD, and the S&P 500 ETF is SPY.  Both tend to have divergence between futures prices and ETF values when a move has occurred in the global market ahead of Wall Street trade. In the same way that GLD and SPY track gold bullion and S&P500 futures trade, specific currencies also track gold bullion and S&P500 futures trade. But unlike ETF’s currencies do it in real-time, 24-hours a day.

TheLFB S&P/AUD Comparison

Traders who do not want to wait for the regional cash market to open are able to access the 24-hour currency market. There is potential to analyze and trade the Australian dollar (AUD) against the US dollar (USD), via the currency pair (AUD/USD). Buying AUD and selling USD is in-line with the potential seen in global equity movement above in S&P 500 futures trade.

TheLFB daily client notes over the weekend cautioned traders in committing too heavily to the long side of the US dollar, and to close out short S&P 500 positions. Buying the Australian dollar and selling the US dollar expands on that outlook with a simple process of placing a buy order on AUD/USD. The position can be opened and closed in a similar way that equity trades would be bought and sold.

Currency trading opens up a whole new market for traders that offers a way to react to market potential as it is unfolding, rather than being left with a market that may already have moved. When TheLFB clients received the gold and S&P equity indices trade signals and trade alerts above, they had three choices. They could either trade the bullion or futures markets, trade the ETF that tracks each asset class, or use the 24-hour currency market.

Having choices, making use of valuable time, and being in the trade ahead of the cash market open provides a whole new outlook for the 9-5 trader. 

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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