No Sweating Bullets for Versatile Equity Traders

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheLFB-Forex.com ) -- U.S. equity trade extended the 3-year high levels in early trade this week, but failed to hold gains going into the close, and left S&P 500 futures contracts at the mercy of an Asian session that was happy to sell S&P 500 (1353) futures contracts. The activity in stocks was broad based and ended with a 60/40 decline to advance ratio in U.S. equity trade. Earnings numbers offered no real surprises, yet sentiment easily turned negative when volume levels dried up after the S&P tested upside resistance at 1373.

Yet again, just as happened over the weekend, traders who only operate in the 9-5 world of pre-market, cash market, and after-market would have been sweating bullets and wondering where the European session would take equity values. SPY(SPY), the exchange traded fund that tracks S&P 500 valuations, has close to a 1% drop to make up when Wall Street finally gets around to opening on Tuesday.

As U.S. equity values moved lower in Asian trade the natural hedge that would have allowed traders and investor the chance to hedge portfolio and position losses was offered to TheLFB subscribers via an emailed signal that highlighted the potential to trade the great British pound (Gbp) against the U.S. dollar.

When equity risk is being sold the natural move is into cash, or into U.S. dollar based Treasury markets. The safe-haven aspect of the dollar (Usd) may make some scratch their heads, but the dollar is deemed safe in the near-term whenever stock profits are being banked, or short stock positions are being built.

Rather than join the bullet sweating club of equity-only traders waiting for the cockerel to rise, global market traders were able to place a trade that hedged the S&P dropping. As the market went lower signals was generated at 1360 on the S&P, with initial targets of 1355 and then lower towards TheLFB trade plan numbers at 1349 and 1342.

The corresponding forex signal was to trade Gbp short against the Usd by selling the Gbp/Usd currency pair, which was well correlated in afternoon trade to S&P momentum. The update sent to clients was to sell Gbp/Usd at 1.6635, which would cost under $2000 of initial margin to control a 10,000 currency unit trade that would pay out at a rate of $1 per unit (pip) of movement.

Initial targets were 1.6620, then 1.6615, and 1.6695. The initial 20 pips (price interest points) would have generated a 1% return on the margin used, and would have offset the 1% drop in SPY values that looks like being implemented at 09:30 ET on Tuesday if things stay as they are. As things transpired the pair moved lower to the 1.6595 target area, generating 45 pips of movement and over 2% in return in Asian trade. It then went on to hit 1.6480, in a move that covered 150 pips, or a potential 6% return on the initial margin requirement.

>To order reprints of this article, click here: Reprints