Markets have soared this morning, the catalysts appear to be a rather benign response at the G20 to USD weakness, plus a Goldman's article suggesting QE2 may be much larger than some think. Despite this early rally, I can't help thinking we are likely to see some more volatile and messy action this week, we have a heavy data week this week, then next week we face a landslide of major events, including US Mid-Terms, the FOMC meeting plus the QE2 announcement, and as a side show more economic data including the US payrolls.
With so much facing the markets, despite this morning's strong move, the remainder of the week could be volatile. This should continue to provide short-term trading opportunities for scalpers and intraday traders, as per last week. - Bigger picture the major trend on the SP500 since early September remains on track, however momentum is showing some signs of waning and turning a touch, though at this stage this is secondary to the bigger trend.
The chart below shows the EURUSD, I have highlighted some price action which I believe suggests, that we may see an extended period of consolidation in the EURUSD, even though short-term further gains are possibly likely in the wake of this morning's news.With the rallies in the EURUSD and the SP500 since early September having been pretty well co-ordinated, any consolidation/corrective EURUSD activity could see a similar price action in the SP500 .
My old risk barometer AUDJPY still gives me cause for concern on risk. Whilst this is not a clear signal, it is another factor to keep an eye on (See chart below). Essentially the rally in the SP500 has not been supported by the AUDJPY since mid-Sept. Whilst this is no doubt down to expectations of QE2, this has a strong correlation going back to 2003, see my article on this posted last week, (Can be seen by clicking here).
Overall a strong up day on stocks and weak USD will likely be the theme for the day, however I think markets will remain cautious and patchy this week, I do not think we will see clarity until at least the early November events are out of the way.
An ex-colleague asked me yesterday why I have not committed to the short-side of the market considering my recent bearish posts, I responded by showing him that I have also had a number of bullish posts and arguments too, and that I considered both have their merits right now even if I do not trust the upside. He countered with his claim that the upside just did not make any sense in his book as it was totally irrational. -- He walked straight into that one really; -- cue John Maynard Keynes famous quote: 'Markets can stay irrational longer than you can remain solvent'. - He politely backed down.....
Today's post is going to look at the relationship of the SP500 and the AUDJPY fx cross. The AUDJPY fx cross has been one of my favourite barometers of risk appetite, its moves have been very closely correlated with moves in broader US equities for some time now. The first chart shows this close correlation has existed since around 2003 now. There have been some periods of directional divergence though these have been few and far between, the most obvious being H1 2008, though this eventually came back into line.
Over the course of this year the directional (not magnitude) correlation has remained strong. This can be seen on the daily chart below. However over the past two weeks there has been a strong divergence between the two. The AUDJPY has remained very benign lately moving in a tight sideways band, meantime the SP500 has gone from strength to strength. I assume that what is happening is an adjustment due to expectations of QE2, however if this is not the case, then should the AUDJPY fail to break out sharply to the upside soon, then perhaps the SP500 may realign itself with a sharp correction (one to watch I suppose).
The next chart shows the AUDJPY on its own with the MACD over the past year. I have highlighted the current sideways consolidation and the 2 prior similar consolidations from this year, together with their MACD indicators. There is no guarantee that just because we have 2 previous similar patterns, that a third similar pattern will produce the same result, however I think it is worthy of consideration. Note; the strongest similarity is with April this year. - I would point out that there is no hard and fast rule as to which way these sideways correlation typically breakout (absent of a an extended prior trend), or how long they can last.
I do not have any sort of recommendation based on the above, but I do think it is something else to keep an eye on in trying to gain an understanding of the bigger underlying picture.
On Friday I mentioned that my bias on the SP500 is to the upside based on the weight of Technical Arguments, however I also said that I have not been participating in this rally as I had a number of concerns. I did not think Friday's payroll produced a set of data worthy of the reaction, though the market seems to favour poor data almost more favourably than better data as it suggests more likelihood of QE2.
One other concern I have, which I did not mention last week, is the most recent performance of the EURJPY and the AUDJPY FX crosses. I consider these two crosses as key barometers of risk-on v risk-off. They fell sharply with the stock market in 2008 and rallied well in early 2009 as the stock market turned, though the EURJPY rally fizzled out through the remainder of 2009. Through this year their moves have been quite well correlated in direction (if not magnitude) with moves in the SP500, however as the SP500 has rallied recently, these two crosses have started to stall out again. This can be seen on the next couple of charts, the first charts show the SP500 v EURJPY, note how the price has fallen out of the recent rising channel on the EURJPY, the second charts show the SP500 v AUDJPY, the AUDJPY has been in a big sideways consolidation for three weeks now.
I make these points as observations at this stage rather than suggesting we are about to go into full scale reverse on the SP500. The AUDJPY though is interesting in particular, and I think any sustained breakout of this consolidation may offer some clue as to which way the SP500 may head, and should therefore be watched closely.
Just to reflect my confusion as to the bigger picture, I am posting the some charts of 5 year Credit Default Swaps form Italy,Spain, Ireland and Greece. These seem to be suggesting that fears with regard to these may be easing, given the recent Euro strength this is probably not surprising, still if this continues it should suggest less risk aversion. It is however possible that fears surrounding the PIIGS issue could be a red herring, as in general this has not had a high correlation with the fortunes of the SP500 other than during the period of May-June this year.
Equity indices have reached key levels. The SP500 index is running into 1130/1132 key resistance band, I favour the first shot at this area as likely to see an initial failure, however I have to consider that there is a risk we could see it burst through here leading to heavy stop action, or we could see a small stop induced break and failure. Bigger picture however, I think there are increasing bullish signs and a successful break over 1132, either now or after an initial setback, will I believe be a signal for further gains in the weeks and months ahead. I do however consider all options open, and can not rule out that a failure here could be the beginning of a sharp decline which could accelerate below 1090.
My view that we may be heading higher eventually relates to the price action and the pattern formed over recent months. - I posted an article back on the 3rd August (can be seen by clicking here.) where I suggested that the larger formation occurring could be a Falling Wedge pattern which may have a bullish outcome. In support of that I posted the following chart, where I identified different types of Falling Wedge patterns (This is a repeat of earlier exercises I have carried out in Fixed Income markets).
A list of the four types of 'Falling Wedge' can be seen by clicking here. At the time I identified the pattern forming as a 'Type 2 - Falling Wedge', though I did add the following caveat - 'Just to add a layer of confusion (The market does not like to make it too easy). Though I have labeled the recent wedge as a 'Type 2', it is not out the question that it is a 'Type 3' or even part of a larger non-wedge pattern.' - Price action since then has if anything re-enforced my belief that we have a 'Type 2' pattern, if this turns out to be the case, this would suggest that we should have a bullish resumption, with a strong possibility that we are heading back to the highs of April at a minimum. - By the way though my confidence in the 'Type 2' call is increased, the above caveat still remains. - The chart below show the current pattern labeled as a 'Type 2 Wedge', I have also shown below that the two previous 'Type 2 wedges' from 1998 and 2006. - Note the 2006 example bears a stronger resemblance to the current pattern.
Further to the above this Type 2 Falling Wedge pattern can be seen across a host of US Equity Indices. The following charts shows the Dow Industrials, Nasdaq and NYSE index.
The Bank Index (See Chart Below), did start to follow its own path on the last low, however it appears that this may have moved back to becoming a 'Type 2' set-up, this is one to be watched...
The Dow Transports Index also shows a similar set-up, however price action created a Type 1 rather than a Type 2 Falling Wedge, this also tends to have a Bullish Resolution (See chart below).
At present none of the above indices have yet made a break above the previous high from early August. This should be watched, since a clear and sustained break over these levels are likely to be the confirmation needed to suggests higher levels ahead, a failure (which I think is most likely short-term) will be lead to further consolidation for now or possibly a deeper decline (which I favour as least likely).
Elsewhere there are other signs which I believe continue to point to an eventual favourable resolution for US equities. The chart below shows the VIX Index v the SP500 index over the past few years, the VIX index continues to trend lower in a similar way to how it moved in early 2009.
Finally a number of key FX markets, which have been strong barometers of Risk-on versus Risk-off over the past few months continue to shows signs of potential bullishness suggesting a return to Risk-on may be on the cards. The top chart below is the EURCHF, the trend remains lower, however there is strong bullish momentum divergence between the low of July and the September lows, as well as within the recent September low. This may be flagging up a risk of a correction higher in the EURCHF cross. The lower chart shows the AUDJPY cross, this has been one of my favoured risk barometers, this has made a decent breakout of the symmetrical triangle, suggesting further gains ahead.
Finally the AUDUSD has a potentially very Bullish 'Big Picture' pattern, this can be seen on the chart below the Pattern is a 'Right Angled Expanding Triangle'. This suggests a strong bullish move eventually for the AUDUSD. A rising AUDUSD, is something I equate with 'Risk-on'. - However, short-term, it is up against strong and significant resistance, in the same way as the SP500 and other US equity indices. I would be very surprised if the AUDUSD was to make a successful break over this resistance on a first attempt for many months, particularly in light of the 6+ big figure rally over the past three weeks, without any real consolidation or correction.
- To summarise. I feel that the technical outlook for US equity is starting to look brighter, I am seeing what I consider increasing signs of an eventual Bullish resumption for the next several months (though I still feel that this will be a precursor to a much more severe eventual bearish move). In the short-term I still feel a corrective setback may occur, though possibly on a failure at 1132 or on a stop induced breakout above 1132.
The USD is suffering a fresh bout of weakness this morning pretty much across the board. The chart below shows the USD index, this shows a short-term Head + Shoulders pattern, which suggests further weakness may lay ahead.
EURUSD FX shows a similar pattern, though inverted, and also this has not yet broken through the potential neckline of the pattern (See chart below). I do however have concerns with the above mentioned Head + Shoulder pattern on the USD Index and the inverted pattern on the EURUSD . My concern is that these H+S patterns are not 'End of trend' patterns, ideally Head + Shoulders patterns work best at the end of a significant trend, however the moves prior to these H+S patterns are sharp corrections rather than trending moves. - This does not mean it is invalid, since the essence of the formation exists, however this leads me to question how reliable this particular signal may be.
USDJPY FX
The JPY appears to be the strongest currency this morning, the short-term chart below shows the USDJPY has broken out of a 'Descending Triangle' pattern this morning, if this can be maintained then this could see a move to the low 81s. Note - the strength of the JPY is something which should be watched, as it would still suggest that 'Flight to Safety' fears remains strong, however over recent days stock markets have certaintly not reflected this. - As an observation, the EURUSD posted a very similar pattern in late May (can be seen on second chart below), this proved to be the 'Last Hurrah' of the large 6 month bearish trend in the EURUSD, of course that does not mean we will have the same here, but it is worth remembering nonetheless, in case this breakdown shows signs of stalling.
AUDUSD FX
The AUDUSD has reached a significant level. Which may have big consequences for the Risk-on/Risk-off trade. The first chart I will show you is a comparison of the AUDUSD v SP500 Index. It shows how over the past year every time the AUDUSD has failed following each approach to the 93.70-94.00 key resistance, at the same time the SP500 has also found key resistance. The initial approach in late 2009 saw the SP500 hit a temporary wall of resistance, it eventually overcame this, however the next approach in January, saw a firm correction in the AUDUSD and a sharp correction in the SP500. The subsequent approach of this key level in the AUDUSD occurred in late April 2010, this was very firmly rejected, and this also was the start of the very sharp correction in the SP500. -- Nearly 6 months later, and the AUDUSD is once again approaching this key level, the SP500 has lagged strongly, however as the AUDUSD moves close to this resistance, the SP500 is also approaching the key resistance which I highlighted yesterday at 1130/32 (Click here to see yesterday's post). - The next chart below shows the AUDUSD weekly chart, this time I am highlighting a pattern which has strong Bullish potential, it is a 'Right-Angled Expanding Triangle'. This pattern is in my opinion amongst the more reliable of patterns, and suggests strong bullish potential on a confirmed break over 94.00/10, however until this occurs the risk of failure/rejection remains high.- If it does make the confirmed break over the 94/94.10 area, then perhaps this could also see the SP500 index make a significant break over 1130/32.
AUDJPY FX
Just a quick update on the AUDJPY cross, this failed to hold yesterday's intraday break (See below). This could be a bearish development for this cross, and could also have implications for stocks, since as previously mentioned, this cross has also been well correlated with equity markets.
The past couple of weeks have seen some very sharp corrective activity on Rates markets. This corrective phase has occurred in the face of very sharp drops in Government Bond yields over the past few weeks and indeed months. There have been a number of events which have helped contribute to the large drop in yields over the summer, chief amongst these have been 'Flight to Safety' fears regarding the Euro Periphery (PIIGS), Double Dip fears as US economic data disappointed over recent months, poor economic data in other G7 countries, and the increasing belief that Central Banks were going to increase Quantitative Easing in response to fears of further economic pain. - Is this the beginning of a real turn in the rate environment or a mere correction? - Personally I think this is too early to come to any firm conclusion, however it is something I am going to try and focus on over the next few days and weeks as this is likely to be a barometer of the level of fear and/or confidence running through the global economic environment.
My initial feeling is that this is a correction in rates for now, which probably still has further room to run. - Regarding the issues above, the PIIGS issue has not gone away, Credit Default Swap (CDS) levels remain elevated, though price levels have eased a touch over the past few days. Double Dip fears have eased slightly in the face of marginally better data over the past couple of weeks, (but still remain elevated), stock markets have recovered there poise and QE2 has not yet materialised, though it remains a very strong possibility. - The charts below show US 2 year and 10 year yields, German, Japanese and Australian 10 year yields. --- I have highlighted the Japanese 10 year yield level of 1.20%, this has been a pivotal level for the past few years, the recent collapse in yields across the G7 really accelerated upon the confirmed breakdown through 1.20% in June, and the rebound of the past couple of weeks in JGB yields moved from 0.90% to 1.20% before easing back to current levels around 1.6%
SP500 Index
Last Thursday's 'Shooting Star' candle failed to turn the markets down, with futures levels currently suggesting cash trading around 1118/19, it would appear that this signal is a fail. Unless today's likely stronger opening turns round to produce a weak losing close, then the focus is likely to switch back towards the 1130/32 key resistance area from June and early August.
The chart below shows the patterns which I think are likely to have the greatest influence on the market going forward. I believe the market may be preparing for a breakout higher, I have listed below my reasons for this below. However, as long as the 1130/32 continues to offer strong resistance, and until we see a clear and sustained break over this level, the risk of further consolidation or a move lower remains a possibility.
Clues as to why a breakout higher may be due soon :
1) The large 'Falling-Wedge' pattern (highlighted above): I covered this many times over the past couple of months, including this posting from the 2nd August (Click here). I am re-posting some work I have done on 'Falling Wedge' patterns below.
I have long favoured that we have a Type 2 pattern (as per the above), though I have had doubts, which have led me to question that we may actually have a Type 3. However the re-test of the breakout, which has held well, does lead me to once again think that this is a Type 2 pattern, which has bullish connotations whereas a Type 3 has a very bearish connotation. - Note: Type 2 patterns usually morph from failed Head + Shoulder pattern, which in its own right is a Bullish pattern.
2) The Higher Low (highlighted in above chart) is another supportive factor.
3) The internal 'Inverted Head + Shoulders' pattern. - I am loathe to actually call this a true 'Inverted Head & Shoulder pattern' as these would normally occur at the end of a sustained trend, however when combined with other signals, these can act as continuation patterns.
4) My own Long-Term trend following system remains in Bullish posture, it failed to produce a sell signal on the May/June sell-off. I posted a blog on this a couple of months ago (can be seen here). This system is not a forward looking system, hence I do not consider it as a trading signal, however it should not be ignored either.
5) 1970's redux. I posted about this in July, the price action since then has actually re-enforced this even further. Below is an updated chart of the near-term comparisons, note history does not repeat itself, but it does rhyme. (Click on the Highlighted link at start of this paragraph to see full item for bigger picture).
6) AUDJPY -- This has been one of my main risk barometers over recent months. I have previously highlighted the Symmetrical Triangle on this FX cross. The price appears to be breaking out of the top of the pattern (see chart below), if this is maintained, this would be bullish for the AUDJPY, who's moves have been well correlated with moves with the SP500 over the past couple of years.
Of course, all this will be 'by the by' if the SP500 fails to clear 1130/32, or makes a short-false break. In the meantime, I would not be surprised if selling pressure was to emerge ahead to this key area.
Last week's very aggressive move on the SP500 has taken this back to near the top of the range of recent months, but as far as I see this it has not resolved anything, the market still continues to gyrate within a broad band with little or in fact no direction. Myself I prefer not to commit too much to this market until or unless I see favourable opportunities. - The bigger picture weekly chart below shows this recent range. I have highlighted two of the features which may provide some clue as to future direction. Firstly the large potentially bearish 'Broadening Pattern' on the SP500, this in my opinion is the dominant feature, thus far the S+P continues to consolidate in the lower half of this pattern, which is a slight negative, though it has not yet been able to push lower through the base of the bigger pattern and it remains possible the SP500 could still push to the upper part of this pattern. - Another feature of this chart is the Bullish 'Falling Wedge' pattern, which continues to exert its influence, the past two weeks have seen a test of the upper line (support) of this pattern, with a solid rejection sending this higher.
The following chart is the AUDJPY this is one of my favourite barometers of risk, the big picture on this also continues to show a potential bearish 'Broadening Pattern', this too has continued to consolidate in the lower half of this pattern, a potentially bearish development. Also noteworthy is how the AUDJPY has developed as a 'Symmetrical Triangle' pattern over recent months, it is worth keeping an eye on this, as a sustained break on either side is likely to point the way ahead. (Note: Symmetrical triangles tend to be continuation patterns, however this is usually the case within a trending move, and since this is not a trending move, there is probably a pretty equal chance as to which side of this pattern this breaks out). - One thing which appears apparent, is that this Symmetrical Triangle is coming to a head, last week it touched the upper line, whilst the prior week it bounced from the lower line, I think if this is going to make a meaningful breakout, then this may happen in the next couple of weeks.
One final matter, with regard to US equities, the Yelnick blog carries an article regarding seasonality (which can be seen here). The article refers to September historically being the worst month for Stocks, although the first three days of the months have historically been very strong, which considering how the first three days of September went last week, could make things interesting.
Well, after a day away from the market (UK Public holiday yesterday), it appears as if Friday's moves never happened. The SP500 rapidly gave up Friday's big jump, as did the EURUSD, and the JPY crosses (Seems like the BOJ are not really interested in a stronger JPY). - Last week I had been highlighting some bigger picture bearish patterns across a number of markets: US Equities with the huge multi-month 'Broadening pattern', the same on the AUDJPY cross as well as the symmetrical Triangle over recent months, and the recent Head + Shoulders patterns on the EURUSD within the bigger picture Bearish trend. - The 4 charts below highlight these bigger picture set-ups: The first chart shows the big Broadening Pattern on the SP500, the second chart shows an Andrews Pitchfork on the EURUSD, which highlights the bigger downtrend (Credit for highlighting this AP to the excellent Chartramblings blog), the third chart shows the recent Head + Shoulders pattern on the EURUSD and the final chart shows the big bearish Broadening Pattern on the AUDJPY and the recent Symmetrical Triangle.
(CLICK ON CHARTS TO ENLARGE)
Against all these were shorter-term price action which suggested possible short-term reversals, which I hinted could morph into bigger corrections. - I discussed the SP500 on yesterday's posting (see here), the EURUSD had been struggling to make a clean breakdown of the recent short-term Head + Shoulder pattern, the right side of this pattern has unfolded as a 'Falling wedge' pattern and the recent low occurred with Bullish Momentum Divergence (See above). Meanwhile the AUDJPY continues to consolidate within the range of the past couple of months, and last week bounced off the support from the symmetrical triangle line near 74.00. --- The quick failure of these markets to maintain Friday's rally, leaves these shorter term scenarios in a very weak position. Unless these markets can hold on close to current levels and start to rebound in the next few days, then I fear that we could see some real ugly price action soon with the bigger picture trends coming into play.
Over the past few days the EURUSD FX pair has broken down through the neckline of a Head + Shoulders top pattern. The Head + Shoulders top pattern is one of the most familiar Technical Analysis patterns, though I also find that it can be one of the least reliable, possibly because it is so familiar. I do however have a few concerns with regard to this breakdown, and though I would prefer to be on the short side for now, I would also watch for the risk of a failed breakdown.
The Diagrams below show the typical type of set-ups associated with Head + Shoulder patterns. The basic set-ups are a 'Head + Shoulder Top' at the end of an uptrend, or an 'Inverted Head + Shoulder' ( 'Head + Shoulder Bottom') following a downtrend. There are also the 'Failed Head + Shoulder' patterns, these, in contrast to the traditional H+S patterns, are overlooked by many, yet are amongst the most reliable of patterns when they occur.
The chart below shows the EURUSD FX current 8 Hourly Chart. I have highlighted the current Head + Shoulder pattern, and an Inverted H+S pattern from May/June. One of the reasons for my concerns is the potential Bullish Momentum Divergence which has occurred with this move lower. Note how there was no Bearish Divergence when the break of the neckline occurred on the prior inverted H+S. - It must however also be remembered that Momentum is a secondary indicator, and price direction takes priority. The EURUSD currently remains in a downtrend, and is bolstered by the break and re-test of the H+S neckline today, plus the recent flight from risk. However, I believe that unless the EURUSD takes a sharp turn lower over the next day or two, therefore overcoming this potential Bullish Divergence, then there is a decent possibility that this could morph into a 'Failed' pattern. - (Mid-morning update. In the wake of strong German economic data, the EURUSD has shot up to 1.2710 (currently), resistance from the neckline of the H+S occurs at 1.2730/35. If the EURUSD can break over here and hold the break, then the odds move strongly towards the Failed H+S pattern, - initial target would be the top of the right shoulder in the low 1.2900s, a break over the top of the right shoulder, would strongly favour a move back to the early August high. - Note, if the EURUSD is not able to successfully break over the neckline at 1.2730/35, then the downside remains favoured.).
(Click on Chart to Enlarge)
Following the sharp moves lower on risky assets over the past 24 hours, the risk is firmly towards further losses in the SP500. I covered the main arguments for and against the SP500 in Friday's post, which can be seen by clicking here.
Friday's post also mentioned that the AUDJPY cross, which has a good correlation with moves in US equity indices, looked technically in very poor shape, and maybe forming a Bearish 'Symmetrical Triangle' pattern within the lower half of the larger Bearish pattern. Since then this has moved sharply lower, and yesterday hit the lower side of this potential Bearish 'Symmetrical Triangle' pattern. A breakout through here would be a very Bearish development, with a measured target around 64.00 (See chart below). The breach of a the shallow rising momentum trendlines on the RSI and Momentum, is a potential warning shot that a breakdown in price may be due to occur.
Yesterday's sharp sell-off in equities has gone some way towards tipping the scales in favour of the Bearish Case. - The Clash of the two wedges, which I have been banging on about for a few weeks now, is not quite over, but we seem to be close to a resolution.
Just to reiterate the case I have been making for a more bullish outcome. This argued that the large falling wedge from April through to July had broken up, and that the correction lower in the past two weeks was a retest of this breakout, if this were to hold, then would suggest a bullish resolution. - Though this did not in my opinion fit in with how I saw the bigger picture, I had put forward certain supporting analytical material, which might help bolster this case, including a comparison with the 1970s market, see Tuesday's post, and the fact that my own longer-term trend following system, (See post here) failed to confirm a bearish signal during the May-July correction. This bullish scenario is not yet dead, but is currently on major life support. Also some would argue that the ultra low rate and yield environment is supportive for equities, I actually think it reflects fears to weak growth and or deflation, which is not favourable for stocks. (Added this afternoon, I have noticed that the NYSE Adv-Decl line for stocks failed to make a new low on yesterday's price low, similarly the S&P Adv-Decl line also failed to make a new low. This may provide a few crumbs of comfort for the bulls).
The case for the bears, was based on the fact that the 'Rising Wedge' from the July low, was bearish, and that the larger Wedge pattern was a failed 'Bullish Falling Wedge'. - Support for this case was helped by the sharp breakdown last week from this rising wedge. It is also helped by the failure to make a higher high this month, falling just short of the June high, and the test of and failure to make a sustained break over the 100 day simple moving average. This argument is also supported by the 2009 - 2010 rally failing at the 61.8% correction of the 2007-2009 decline, and the Death Cross of the 50 and 200 day simple moving averages. Elsewhere, continued under-performance of various risky assets, weak and weakening US economic data, and in my opinion the fears driving long-term rates lower, all argue in support of the bear case.
The chart below shows some of the above points. The support zone from the breakout of the Falling Wedge is around 1070. I believe that a sustained trade below here favours a further push towards the July low at a minimum. - The index is yet to have made a close below 1070, or to have traded for any extended period below this zone, which just about keeps the bullish scenario alive. However, the odds now appear firmly stacked towards a bearish resolution.
(Click on chart to enlarge)
The next chart shows the strong correlation of certain FX markets versus the SP500 over the past 5 years. The chart shows the SP500 top window, the AUDJPY FX cross middle window, and the EURJPY cross lower window. The EURJPY looks extremely week, whilst the AUDJPY seems to have a very close correlation with the SP500.
(Click on chart to enlarge)
AUDJPY FX
The next chart shows the Daily AUDJPY fx cross over the past couple of years. This shows a number of developments which hint at a bearish outcome. -
- The rally through 2009 - 2010 took the shape of a Bearish Rising Wedge, the breakdown in May has been retested twice and held.
- Since late 2009 the market has formed a Broadening pattern, this is usually a reversal pattern, though these patterns can be very complex, and the failure to break down thus far may still keep bullish hopes alive..
- The sharp move lower in early May broke through the 100 day sma, and the cross has since remained below here, twice re-testing it.
- The AUDJPY has consolidated since May and may be forming a Symmetrical Triangle Pattern, if this is the case, which ever side this breaks out of is likely to see a strong move. Having occurred in the lower half of the broadening pattern, and following a sharp move lower, leads me to think that this is more likely to favour a bearish break out.
(Click on chart to enlarge)
AUDCAD FX
The top chart is the Weekly AUDCAD cross. - This appears to be on the verge of a possible move lower. The top chart shows a Weekly 'Bearish Engulfing Candle' last week. In addition this occurred close to the 61.8% fib correction of the Nov09 - Jun 10 price drop, and at a key resistance level which held the topside of price action from Jan through to May.
The daily chart (Lower chart below) shows a number of bearish developments. The rally since early June has been in the shape of a Rising Wedge. In the past week the price has broken the base of this rising wedge. Additionally the past couple of weeks appears to have unfolded as a Head and Shoulder Top. - There is some support from the old downward sloping trend-line, which the cross broke above a couple of weeks back, failure to break back below here could be damaging for the bearish case.
Note: this weekend sees the Australian general election, so there could be some noise ahead on the Aussie crosses.
(Click on chart to enlarge)
(Click on chart to enlarge)
EURUSD FX
Finally the EURUSD appears to be on the verge of a breakdown. Here is the 2 Hourly Candle chart. Showing a clear Head and Shoulders pattern, with a minor neckline break this morning. If this is confirmed and holds, it has potential down to the low 1.20s.
(Click on chart to enlarge)
Finally something for the weekend.... Bruce does the Clash's 'London Calling' - Hyde Park, London, 2009.
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