Risk on ???

The 'Inverse Cup & Handle' possibility which I mentioned yesterday looks dead in the water, although at one stage last night it did look a good possibility but now its dead... --- Moving swiftly on, this morning it seems that we are moving away from risk-off -- at least for the next few hours/days.... The 'risk-off ' trade of the past several weeks has been characterised by several key features in various asset markets: - Strong declines in major global stock markets, interbank lending rates (Libor) rising, strong USD, JPY and Gold + weak EUR, German and US bonds making strong gains, spreads of Non-German European Bonds widening v German Bond Yields, to name but a few... - However, it appears this morning that a number of these features have turned/ or are turning / or are threatening to turn... Below is somewhat of a chart-fest highlighting these various markets.

Firstly - The USD Index - this has seen very strong gains in recent weeks, however it is running into a major resistance line. - In the bigger picture this is the Neckline of a huge multi-year Inverse Head & Shoulders pattern, in the shorter term however it is major resistance. - Additionally, there is significant divergence between gains in recent weeks and momentum as measured by the RSI and MacD indicator. Taken together this warns of potential reversal or consolidation.The EURJPY has been watched very closely as this has had a very strong correlation with the move lower on the S&P. At first glance this is showing less sign of reversing than some of the other markets, the downtrend is still strong, however RSI and MacD is diverging from this price action. - In addition Monday's low at 108.08 was an exact Fibonacci 76.4% correction of the entire entire rally from 2000-2008, and was also .06 ticks shy of 1.618x the move from Oct 2009 to the intermediate low in Feb 2010.

Pressure on Interbank lending seems to have eased over the past couple of weeks, the rise in Libor has been minimal or stopped altogether in the past few days, whilst Libor futures which had been moving in synch with equities until late May, has seen strong gains since then. This can be seen in the following chart.
Also note how spreads within Euroland v Germany have started to sharply contract. The following 2 charts show Spain and Italy 10 year yields v German 10 year yields.Finally equities. First is the IBEX. this has been particularly badly hit in recent weeks. However, there are signs signs that this may (and I re-iterate the word 'may') be turning. The recent low was within a whisker of the 2/3rd retracement of the March 2009 - Jan 2010 rally, momentum is bullishly diverging, and thus far the breakout of the descending triangle pattern is showing signs of a failure, which could see a reversal. Today and by the latest tomorrow, should shed some further light on whether or not this is a failed breakout. - If it is a failure, this should see the Ibex making some decent gains.

The next chart is the AUSUSD v the SP500 since late April. Yesterday I highlighted how the AUDUSD spot seems to have been leading the Sp500, if this is still the case and the AUDUSD manages to hold onto its strong gains of the past 24 hours, then this would favour a strong move higher in the S&P.


In conclusion. The above charts are posted as evidence that the risk-off episode we have been within over recent weeks may be due to correct. I am not going to commit myself to saying this will happen, only there is a lot of evidence piling up against it. I also do not say this as the end of the overall risk-off trade, only that we may see a few days or even a few weeks whereby the market is able to gain some stability. I will also point out some caveats; the moves of the past 24/48 hours could be minor corrective moves which have or will soon have run their course, in addition most markets or risk assets still remain close to recent extremes. Also I would have liked to see the USDJPY perhaps moving a little higher towards the high 91s. Either way I think the markets face a couple of interesting days.

Spain v Germany - Evening Star pattern on Hourly

Something to keep an eye on. The deterioration in Euro sovereign debt over the past week has been a stronger driver of the risk-off trade of the past few days, with the main focus being the spread between Germany and Spain. However the above hourly chart shows an evening star pattern formed during the past few hours. It is a signal suggesting the first sign a possible pause/correction in this uptrend, and should be watched for any follow through. Note, at this stage the trend remains higher, however a close through the rising trendline, and a lower close than yesterday could change this.

I would also like to note that some of the other usual 'Risk-off' signals, have been fairly relaxed during the most recent sell-off. USDJPY has remained fairly stable, Gold & Silver remain 'bid to old boots', and Libors appear very relaxed. I am questioning whether the 'Risk-off' trade may be due for another pause.

EURUSD & SP500 - Interesting Junctures.

The EURUSD may be close to putting in a more significant base (at least for the next few weeks). The chart below is the EURUSD daily since early 2008. The recent price action and momentum set-up on the chart bears a strong similarity to the behaviour at the major price base in Oct/Nov 2008.
A closer look at the two bases (See below) shows an even stronger similarity between the two set-ups. This does not of course mean that subsequent price action will be the same, however it does hint that there is a risk that something similar may unfold. -- With regard to the current price action, this remains in a downtrend for now since the series of lower highs remains in place. However the break over the declining trendline of the descending triangle pattern and rising momentum patterns from oversold, suggest a strong chance that this downtrend may be broken. A break over the recent lowest retracement high @ 1.2356 should confirm the short-term downtrend is over for now.
Elsewhere similar activity across a broad range of markets hints that the episode of risk aversion may be abating. Bond yields are slowly moving higher, USD Libor has flatlined over the past week, front Libor futures have held their recent gains. In FX land USDJPY has rallied, though no doubt helped by the political situation, and AUD and CAD have also made gains. Stock Indices too made strong gains yesterday, though they remain volatile. However it is worth noting that periphery European spreads have bucked this trend by widening further over the past few days and this may still prove to be a thorn in the side of any nascent EURUSD recovery and needs watching.

One more chart which is interesting, which I will post is a comparison of the SP500 over the past year versus the SP500 2006/2007. (See below) - The similarities are stark, though as I mentioned above, caution has to be exercised as similarities can only go on for so long. The implication however, should price action unfold in a similar manor, is for a summer rally back towards the recent highs of April. Personally, as a bear on stock markets and the global economy in general I find this extremely unlikely, yet -- actually I shall say no more....