Decoding Mixed Eurozone Messages

04/24/2012 2:05 pm EST

Focus: TRADING

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

In news-driven markets, Kathy Lien says traders should use tools like CFTC data to understand how positioning is changing and can then gauge the true importance of each news release.

Europe is always in the headlines, but it’s always different points of view, and we’re never quite sure what’s going to happen next. My guest is Kathy Lien to talk about how to wade through all of that.

Kathy, we hear one thing one day about the euro and another the next day. How do you know what to trade and how to trade it?

I think that’s something that traders need to be extremely, extremely careful of, because there are a lot of mixed messages coming out of Europe. First, we had the Greece situation, but this could easily become a Portuguese crisis or an Irish crisis, and so it’s important to be able to figure out what is important and what’s not important.

I think, first of all, it’s key to be aware of positioning. The Commodity Futures Trading Commission (CFTC) releases information on how traders are positioned, and it has shown for quite some time now that traders have been net-short the euro, and aggressively so.

See related: COT Report Shows Record EUR Short Bias

That tells us that because positioning is so negative, any negative news flow will only have more of a limited impact on the euro because there aren’t as many sellers left, whereas any positive news flow could lead to a stronger short squeeze, which means a stronger rally in the euro.

I think that at this time, when the headlines are very mixed and people are not clear about what’s real and what’s not, one thing they’re going to turn to is the positioning to get a sense of which way the market will lean in terms of the news flow. That’s exactly what’s happening these days.

There is a lot of bad news, but the euro, for the most part, is still fairly resilient. And it is resilient because positioning is really aggressively short. There are very few sellers left. So, any type of good news creates a larger rally.

So that can help you figure out what type of news to pay attention to and what not to.

What about the idea that everything is in the charts; I don’t need to watch the news because the price will tell me what’s going on?

I never believe that stuff. It’s basically saying that I could be completely blind and trade in a silo. I think it’s very clear, in even the minute reactions you see in the EUR/USD in any type of news flow, that it’s not baked into the price.

You clearly see that there’s some type of reaction. Maybe not as large as you would anticipate, but sometimes it’s very large.

I think that it would be a mistake for technical traders to be completely oblivious to any types of news flow. At bare minimum, you’ve got to know what’s happening on the calendar and what’s coming up.

View the Economic Calendar here.

An example I always give is around non-farm payrolls. If you were completely blind to the economic calendar and you didn’t know that non-farm payrolls was coming out in ten minutes, you are in there and trying to range trade, and the next thing you know there is an explosion of price action and you get stopped out.

You could have avoided that loss by simply looking at the calendar, realizing that non-farm payrolls is a high-risk trade, and just staying out of it. So I think that at bare minimum, you have to at least be aware of what’s on the calendar if you’re a technical trader.

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