Interesting Pivotal Juncture for the 'Risk-off' poster boy.

During the entire period from 2007 to the present, the JPY has been the poster boy of the 'Risk-off' fraternity. Falling sharply from late 2007, trying to rally several times, but these ultimately fading away into a long continual downtrend which has ultimately seen it move from near 125.00 versus the USD to around 75.00, a drop of around 40% (or a gain if you were a JPY investor).  

There are signs however that USDJPY 'may' be basing. One has to be aware however; the world is full of traders with severely damaged trading accounts who have tried to call a base in the USDJPY over the past couple of years.

I am not going to go into detail in this at this stage, however I would like to present the longer-term USDJPY charts and highlight the pivotal nature of the current zone, in terms of major trend-line resistance at 78.70/85, which sits just above today's high at 78.66. - It is worth noting, the trend-line connecting the start of this decline had been broken in the past month, however the resistance line which is currently under threat may be more significant as it connects a number of key highs.  Also worth noting is that at the same level there is a minor line connecting a couple of significant highs from the past 6 months, giving this level a greater significance in terms of being pivotal. First attempts a key levels such as this may be repelled, but this is definitely a key level to keep an eye on with possibly deeper repercussions longer-term. . 

 

The deeper repercussions would be that a breaking of the trend-line may be a significant step on the way to a major change of trend in the USDJPY. This would not of course confirm a change of trend in itself, however, it could be an important event which could trigger some USDJPY buying activity, and longer-term could be a significant marker on the way to a major trend change. If that major trend change is occurring, does that mean that the risk-off mindset which has been the dominant feature since 2007 may be on the wane? The chart below highlights significant differences in the characteristic of the market in terms of USDJPY and SP500 in risk-on v risk-off phases, I know this is highly simplified, but it is nonetheless worthy of consideration going forward.

Fear and Risk-off v Risk-on.

         Last week I wrote a blog about whether fear was abating (can be seen here), I used an Investors Intelligence piece highlighting how Newsletter writers were at a level of bearishness which had previously seen the market rally strongly, I also pointed to the correction occurring in Japanese Government Bond yields, after their huge summer rally. - However, as I look at the bigger picture, this does not yet to me reflect a climate in which fear is abating, last week's stock market bounce, strong though it was, is just one of many sharp moves in recent months as equities have continued to gyrate in a wide range. Also the jump in Japanese Government Bond yields from 0.90% to 1.20% last week was a large move in a very short term, however it had dropped from 1.40% over the past 5 months. At the moment, a move such as this appears to me to be corrective (See chart below), though how it unfolds from here going forward will determine whether this is merely a short-term correction or the start of something more meaningful in a positive direction.

 

However when I look at various other indicators of fear I start to question whether fear is abating, or whether it is getting ready to re-assert itself.  The initial fear has certainly abated, in this case the fear that led to a sharp increase in volatility (as measured by the VIX index) through May and June, however US equity markets have not recovered, they have remained range-bound (though now nearer the top of the range) since initially rebounding in early July. 

Elsewhere, other measures of fear remain high. By this I mean the measure of fear as gauged by where investors are willing to park their capital. Over the summer, we have seen investors favouring a number of very low yielding products and markets, this surely would only occur if fear was high and people seeked certainty over return: Looking at 10 Year Government Bond Yields for most major western economies, these have seen yields drop sharply over the course of the summer; 

Japan      1.40% to 1.14%  (Low 0.90%) 

US          4.00% to 2.60%  (Low 2.41%)

Germany 3.20% to 2.23%  (Low 2.11%) 

UK         4.08% to 2.91%. (Low 2.79%)

Amongst FX markets, Japanese Yen and Swiss Franc (The traditional safe haven, and lowest yielding currencies) have been 2 of the strongest currencies over the summer. The charts below show the performance of the USD, AUD and EUR versus the JPY and CHF fx crosses.

 

Gold, Silver and Copper have remained strong over the course of the summer, and are currently pushing up against recent highs. But most strikingly the European PIIGS issue has failed to go away, in fact it has continued to trend higher, though it remains shy of the May and June spikes higher. See charts below; top chart is Greek 5 Year Credit Default Swaps (CDS), middle chart is Spain 5 year CDS over the past few months, lower chart is Spain 5 year CDS over past 3 years. (Note; I have highlighted a possible bullish Symmetrical Triangle on the Spain 5 Year CDS chart, which may be a precursor to this breaking out to a new higher level)..

I think it is still fair to say that 'risk-off' remains very much in vogue when it comes to the major western economies. This is probably holding back stock markets, which despite a number of attempts to rally and try and retrace the May/June losses (DAX excepted), become dizzy every time they try to break higher above the top of the recent range. - I would guess that until the fear of risk starts to abate, stock market will continue to struggle to make gains and hold on them. -- I would also be slightly concerned that the PIIGS issue continues to stir in the background, and is showing some signs that it may be preparing to move to a new accelerated level. Another major flare up of the PIIGS issue, could lead to a new flight from risk going forward.

Some thoughts on the SP500, EURJPY and Risk-on. Plus RBS trade idea.

US equities took a breather yesterday, and though I believe daily charts continue to support the recent bullish breakout, the failure to make a meaningful assault on 1130, shorter term momentum divergence patterns, plus rather poor volume, all hint that we may see some further consolidation and possibly warrants a little caution.

The Eurostoxx 50 has broken above the upper line of the symmetrical triangle which I referred to in Monday's post (see here), though thus far it is balking at resistance at the Mid-May and Mid- June highs at 2793.5 and 2787.5, these levels may prove pivotal, and until they are broken, a period of consolidation may ensue below these pivots.

With regard to the risk-on trade possibly coming back into favour, I first referred to this in a piece a couple of weeks ago (this can be seen here). Since then the aversion to the PIIGS countries has strongly receded, the large July funding issues have been overcome, CDS prices have dropped significantly, and the spread of PIIGS bond yields over German Bond yields has eased for all countries but Greece, though even the Greek spread has settled down into a range. The charts below show the 10 year v Germany yield spreads for the PIIGS since the start of 2010. (CLICK ON CHARTS TO ENLARGE).

Another measure of risk aversion has been the EURJPY fx cross. The EURJPY dropped sharply earlier this year as the flight from the Euro and risk took hold. Over the past couple of months this appear to have been forming a base, and in the past 24 hours it has attempted a push above the upper boundary of this basing pattern (Rounded Bottom Pattern). The top chart below show the bigger picture of EURJPY over the past 3 years, highlighting the 2 periods of  'Risk Aversion'. The lower chart is a close-in look at the past year.

One note of caution: I keep alive the possibility that this apparent bottoming process, with regard to risk, could morph into a new bearish phase. - Though I do not favour this outcome, as of yet none of the major risk-on trades have cleared or significantly cleared key pivotal or psychological levels. For example 1.3000 on the Euro is clearly a key psychological level for the market, more significantly the sharp drop following the announcement of the Greek bailout occurred from around 1.3100, I also have some key levels around 1.3100/1.3150 which I consider pivotal. The above mentioned Eurostoxx levels are pivotal as is 1130 on the SP500, many other risk-on trades remain close to key pivotal levels but have yet to have made a clear break. 

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Finally a quick look at an individual Stock trade idea. RBS has been a bit of bellwether for the Financial Crisis over this side of the pond. The top chart below shows the Weekly performance since 2006. I have highlighted a possible Ascending Triangle pattern formed over the past couple of years, though this is not yet complete. The chart below that shows BT (British Telecom) for the years 1999 through to 2007, this was a bellwether stock for the Telecoms and IT crash of the early 2000s. I am trying to show how RBS is evolving in a similar way to how the BT price evolved as a base in the years following the Telecom's crash.  
(CLICK ON CHARTS TO ENLARGE).

Looking closer at the basing phase on BT (See chart below); when the price broke above the triangle top, after a lengthy period of consolidation, the stock eventually climbed towards the triangle target and then the base of a significant consolidation zone, - before eventually falling away.

The next chart (see below) shows a closer look at RBS. The price behaviour is similar, and may portend a similar evolution to the BT chart. However there are two significant differences: Firstly the RBS 'Ascending Triangle' pattern is potentially a more bullish pattern than BT's 'Symmetrical Triangle', since resistance at the top of the 'Symmetrical Triangle' pattern is pushing lower, whereas this does not occur with an 'Ascending Triangle' pattern. - Hence any RBS breakout may be more bullish than the tortured breakout which occurred on the BT chart: Secondly, there is a large 'vacuum' of resistance above the RBS triangle which occurred as a result of the price downdraft in Oct 2008. - If the RBS price can clear £0.72 then £0.85 it could see the opposite effect of the downdraft, whereby the price rises rapidly (though not as rapidly as the decline).

Of course the above is all largely academic at this stage, and will remain so until the top of the triangle pattern at £0.60 has yet to be broken. The current price is around £0.50 and still £0.10 points shy of this key level, so it has some work to do to get there. However, I like this trade as it provides a potential nice Risk/Reward. The downside is £0.11 (stop below the recent low). The upside target, if it breaks £0.60 (where one could also add), would be £1.07 for the Triangle target, making a gain of £0.57 (Risk/Reward 5.7/1). Potentially though it could move much higher to the highlighted resistance lows around £1.40/1.50, or even to around £2.00 where the downdraft in October 2008 began, offering a much greater potential Risk/Reward.





 

SP Index , EURUSD, and German 10 Year Yield.

The advance in US equities continued apace yesterday, the SP500 index has now had 6 solid days of gains. However, it is now running against some key levels which may check its advance in the short-term, and could even be pivotal in the bigger picture. These can be seen in the chart below: The top of the wedge and the 50 day SMA both coincided with last night's close around 1095/96, additionally short-term momentum studies (60 & 30 minute) are showing some minor divergence up here.  Also the round number 1100 possibly adds some weight to this, particularly with the 76.4%  SP Sep 10 future retracement at 1099.5.

Looking further ahead; yesterday I discussed the possibility of the NYSE advance-decline line signalling further bullish move in US equities (Click here to see this post). Today I present a chart showing the SP500 together with its advance-decline line. The SP500 advance-decline line has broken above its the upper boundary of its declining channel, which may be a bullish signal, however it would need a clear break and close over the equivalent price line to add any weight to this. I have also re-emphasised the similarity of the  price pattern over recent months with the a smaller price pattern last May - July. It is noteworthy that the Adv-Dec line for these 2 patterns are also moving in a similar fashion.

Moving on to the EURUSD (Click on chart below to enlarge), over the past couple of days  the downtrend line from the December's high has been breached, this adds to the possibility of a deeper retrace towards a cluster of targets near 1.3100. However arguing against this is considerable resistance in the form of the neckline of the Multi-year Head & Shoulders pattern (See lower chart). The neckline of this pattern occurs in the 1.2720/1.2750 zone, which continues to cap this for now. - Note a break of the neckline would not necessarily kill this Head & Shoulders pattern,  it would need to a major corrective move over many weeks before its potential downside threat is lessened .

Finally a look at the German 10 year yield. The top chart below shows another pattern similarity, again on different scales. This suggests growing possibility of a turn higher (lower in the Bund future) in yields possibly towards 2.86%. This would fit in with a scenario in these highly correlated risk-on/risk-off markets of higher stocks and a higher EURUSD. This move higher is supported by Bullish momentum divergence on the weekly German 10 Year yield chart (See Lower Chart). Further to this, I will add that the break out of the base in Mar 2009 was co-incidental to the low in the stocks, however also note how tortured price action was before finally squeezing higher. If this repeats it may go through a similar process, before finally breaking higher.

The next few days will be critical. With key earnings reports and options expiry on equities coming up, and some key pivotal level as mentioned, I would not be surprised if we were to see some corrective activity over the next few days. How far this goes will be key as to whether the next few weeks turn more bullish, or whether my prior bearish scenarios, which I have termed as currently on life-support, manages to make a return.  

Spain v Germany widens again. - May put a dent in Stock's rally.

The spread between 10 year Spanish and German yields have widened significantly today, reversing much of the recent narrowing over the past week. This may cause headwinds for the recent stock markets gains as there has been a rough correlation between this spread and moves in the US stock markets over recent weeks.

The charts below show this rough correlation. -- Note; last weeks widening in this spread also saw a widening in Italian and French spreads versus Germany, thus far Italy and French spreads have not re-widened, perhaps mitigating the effect somewhat, however if this widening gathers steam over the next few days it could a) spill over into other European markets. b) start to affect risk appetite and hence stocks.
- Also worth pointing out that Moody's has downgraded Greece again in past hour or so. http://www.zerohedge.com/article/moodys-downgrade-greece-ba1-a3-stable-outlookand rbeen stable.

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.

A tease or a squeeze ? Something to keep an eye on - Current retracement may be part of Inverse Cup & Handle Pattern..

The retracement higher this morning on the S+P Futures seems to be gathering steam. - However, it is a possibility that this pullback higher is part of a bearish continuation pattern. - I have highlighted this in the charts below. - The pattern I am talking about is an 'Inverted Cup + Handle' pattern. In standard Technical Analysis these are powerful continuation patterns. -- however they come with a 'Strong Government Health Warning' : Anticipating patterns early in their formation can be highly risky: - Firstly, it may be an incorrect analysis, secondly even if the analysis is correct, there is no guarantee the pattern will be successful. - Most analysts advise against taking the trade prior to pattern completion.

- The charts below show the pattern on the AUDUSD Spot and the SP June Future. - Below that is an example of a successful 'Inverted Cup + Handle' pattern on the weekly Bund Future a few years ago. --- FWIW AUDUSD is pushing the upper boundaries of the maximum Hammer retracement. -- If however the AUDUSD can make a 'sustained break' over 8330/40 (with 8370/80 the absolute limit on a spike), and likewise the S+P can break and hold over 1070/75 (absolute spike limit 1080/85) the notion of an 'Inverted Cup + Handle' pattern may be dead in the water.With regard to the above analysis, I have used the AUDUSD because it has synched extremely well with the move in US stocks since late April. In fact it has been a good indicator of when a move in the S+P June 10 is likely to succeed or fail. I have posted two charts below, highlighting how the AUDUSD has diverged as key turns from the S+P future. The synchronisation has occurred as both the AUDUSD and Stocks are 'Risk-on trades', however I am not sure why the AUDUSD has been leading the S+P500 at key turns, I can only assume perhaps it displays less emotion and more rationality. - Note - at some point the AUDUSD/S+P500 synchronisation/divergence is likely to end, however if the current 'Risk-off' episode continues, then this pattern is may remain for some time.

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.