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Using quad witching volatility to find opportunities today

It is the last day of the last full week of trading before the Christmas period holiday volume really kicks in. Santa’s rally usually happens when the markets are low volume and there is no real pressure to hold the price back. Unfortunately, this year is marred by the rising Omicron infection rates so the rally may be tempered slightly. Meaning this Quad witching may be the last opportunity to hit a target or book profits and square up the positions until 2022.

Market Brief

In the Asia-Pac session, the Bank of Japan was the latest central bank to decide on rates and asset purchases. The BoJ has kept the rate at -0.1% as expected but has concluded that they should reduce the emergency asset purchases. The market response has been subdued as these announcements were largely baked in, unlike the semi-surprise from the Bank of England yesterday. The move in the US dollar markets and oil contracts as well as the US benchmark yield curves are currently larger forces on the direction of travel for the USDJPY.

Looking at the daily USDJPY chart the break in the structure before the recent return to 114.00 is looking more decidedly bearish each day. Using a Fibonacci extension tool the logical target to the downside would be 111.20-111.50. If for some reason the US 10-year yields, oil, and US dollar were all to rise, the USDJPY would most probably reverse course today and continue higher.

The bullish scenario is more likely to play out whilst the retail traders as seen on the ActivTrader sentiment indicator remain bearish. The sentiment reading is at an extreme level so these traders usually get squeezed out of their positions.

Since it is quad witching today, I expect some volatility in the indices. In quad witching, stock index futures, stock index options, stock options, and single stock futures expire at the same time. In addition to the stock and index options that expire every third Friday, all four asset classes also expire on the third Fridays of March, June, September, and December. The options strike prices with the highest amount of interest become magnets and we often see violent moves with huge volume as dealers move to or away from these levels.

Traders should be aware of movements and rising volume around 10.15(GMT) for the FTSE 100, 12:00(GMT) for the DAX, and 14:30(GMT) for spikes in the S&P, Nasdaq, Dow, and Russel futures and options. The UK FTSE100 has found decent support at the 50% retracement and is now looking bullish as it heads towards the almost double top swing highs. Whether the Omicron can undo the economic activity is still to be seen but a tight labor market and rising retail sales are a big positive for the UK. The expectations of the BoE being able to do multiple rate hikes are diminishing though.

According to the Office for National Statistics, retail sales volumes increased by 1.4% in November compared to the previous month. Retail sales increased 7.2% from pre-COVID-19 levels from February 2020, with clothing store sales topping pre-pandemic levels for the first time as they increased by 3.2%. The proportion of online sales fell to 26.9%, the lowest level since March 2020.

The better-than-expected UK retail sales have meant the 1.3300 acted as support at the start of the London session and the pound is appreciating against the dollar. On the daily chart, the price action is currently between the daily 20 and 50 EMAs, so there is still a lot of momentum to the downside that this current price action will have to fight against.

The forex heatmap at the start of the London session is pointing to a day of risk-off with flows into the yen, Swiss franc, and currently the euro.

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