Corrections don’t always happen out of the blue. Sometimes it is related to different times in the day, week, month or quarter. Being aware of these corrections can help you trade.
The beginnings of trading sessions tend to see sharper moves. This is best seen in the beginning of the European / London session. In many cases, these sharp moves occur also towards the end of these sessions and in the opposite direction of the day’s trade. Why?
Some big traders are closing their trades for the session, and cashing in a profit. Others are cutting their losses. In any case, they don’t want to be exposed after they leave their desks. This is also seen at the end of the US session, but in a smaller scale.
The effect is stronger towards the end of Friday’s London session. As news often breaks during the weekends, many don’t want to stay exposed – they don’t want to bet on the trend two days later. This is also a time when rumors tend to fly at a rapid rate.
The motivation isn’t only to avoid unwanted exposure, but also the need to rebalance their portfolios. Some are committed to holding a strict portion of dollars, euros, pounds, etc. Other are committed to certain exposure to stocks of various countries.
At the end of the quarter, they need to produce a report that reflects their current holdings, and it needs to meet the commitments. So, if the quarter saw interesting moves but no big net change, the rebalancing is insignificant.
But when the markets go in the same direction during the quarter, there will likely be some correction towards the end. Why? The funds have higher than desired proportion of some asset class and smaller than desired proportion of another.
This usually doesn’t reflect a change of trend, but only a seasonal correction.
In case of Q3 2011, stock markets crashed and the dollar strengthened during this period. So towards the end of the quarter, some funds need to replenish their stock of stocks and their stock of currencies different than the dollar.
This phenomenon can repeat itself if there is a clear bias during the next quarters.
The beginnings of trading sessions tend to see sharper moves. This is best seen in the beginning of the European / London session. In many cases, these sharp moves occur also towards the end of these sessions and in the opposite direction of the day’s trade. Why?
Some big traders are closing their trades for the session, and cashing in a profit. Others are cutting their losses. In any case, they don’t want to be exposed after they leave their desks. This is also seen at the end of the US session, but in a smaller scale.
The effect is stronger towards the end of Friday’s London session. As news often breaks during the weekends, many don’t want to stay exposed – they don’t want to bet on the trend two days later. This is also a time when rumors tend to fly at a rapid rate.
End of month / quarter
The phenomenon seen at the end of the month and especially at the end of the quarter can sometimes take a few days. Here, it isn’t only the big traders, but also the big funds, which move slowly but have a huge impact.The motivation isn’t only to avoid unwanted exposure, but also the need to rebalance their portfolios. Some are committed to holding a strict portion of dollars, euros, pounds, etc. Other are committed to certain exposure to stocks of various countries.
At the end of the quarter, they need to produce a report that reflects their current holdings, and it needs to meet the commitments. So, if the quarter saw interesting moves but no big net change, the rebalancing is insignificant.
But when the markets go in the same direction during the quarter, there will likely be some correction towards the end. Why? The funds have higher than desired proportion of some asset class and smaller than desired proportion of another.
This usually doesn’t reflect a change of trend, but only a seasonal correction.
In case of Q3 2011, stock markets crashed and the dollar strengthened during this period. So towards the end of the quarter, some funds need to replenish their stock of stocks and their stock of currencies different than the dollar.
This phenomenon can repeat itself if there is a clear bias during the next quarters.
Editors’ Picks
EUR/USD holds firm above 1.1900 as US NFP looms
EUR/USD holds its upbeat momentum above 1.1900 in the European trading hours on Wednesday, helped by a broadly weaker US Dollar. Markets could turn cautious later in the day as the delayed US employment report for January will takes center stage.
GBP/USD recovers losses despite rising UK political risks, BoE rate cut bets
Pound Sterling advances against the US Dollar after registering modest losses in the previous session, trading around 1.3650 during the Asian hours on Wednesday. The pair could extend losses as the Pound Sterling faces pressure from rising political risks in the UK and growing expectations of near-term Bank of England rate cuts.
USD/JPY remains heavy around 153.00 on firmer Japanese Yen
USD/JPY is sustaining its three-day rout at around 153.00 in the European session on Wednesday, awaiting the closely-watched US NFP report. Rising bets on Fed rate cuts keep the US Dollar depressed. In contrast, expectations that PM Takaichi's policies will boost the economy and allow the BoJ to stick to its hawkish stance bolster the Japanese Yen, weighing on the pair amid intervention fears.
Editors’ Picks
EUR/USD holds firm above 1.1900 as US NFP looms
EUR/USD holds its upbeat momentum above 1.1900 in the European trading hours on Wednesday, helped by a broadly weaker US Dollar. Markets could turn cautious later in the day as the delayed US employment report for January will takes center stage.
USD/JPY remains heavy around 153.00 on firmer Japanese Yen
USD/JPY is sustaining its three-day rout at around 153.00 in the European session on Wednesday, awaiting the closely-watched US NFP report. Rising bets on Fed rate cuts keep the US Dollar depressed. In contrast, expectations that PM Takaichi's policies will boost the economy and allow the BoJ to stick to its hawkish stance bolster the Japanese Yen, weighing on the pair amid intervention fears.
Gold sticks to gains near $5,050 as focus shifts to US NFP
Gold holds moderate gains near the $5,050 level in the European session on Wednesday, reversing a part of the previous day's modest losses amid dovish US Federal Reserve-inspired US Dollar weakness. This, in turn, is seen as a key factor acting as a tailwind for the non-yielding yellow metal ahead of the critical US NFP release.
US Nonfarm Payrolls expected to show modest job gains in January
The United States Bureau of Labor Statistics will release the delayed Nonfarm Payrolls data for January on Wednesday at 13:30 GMT. Investors expect NFP to rise by 70K following the 50K increase recorded in December.
Dollar drops and stocks rally: The week of reckoning for US economic data
Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.
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