The continuing pressure from Europe and earnings-related news here in the US have combined to keep the “safety trade” on for a bit longer than I anticipated. The charts in today’s report will show that the US dollar and the yield on the 10-year US Treasury are at points on their charts where either a major technical breakdown (in rates) / breakout (in the US dollar) may occur or
“normal” reversals into corrective moves in each may occur. Those long of risk are hoping against hope that it’s the latter that is the reality.
The US Dollar Index moved a bit higher than I thought, but it should be ready for a decent correction now
Over the past couple of weeks, I’ve put out my opinion that the US Dollar Index was at or near resistance and that a correction lower in the DXY was to be expected. Clearly, the DXY has gone further on the upside than I anticipated. As the chart shows below, however, the DXY may finally have run into the real resistance level for this move.
The blue Fibonacci lines on the chart are used to show how high wave ((v )) should go if the “wave 5 = wave 1” part of Elliott Wave Theory holds up. That target level comes in at 84.02. Meanwhile, the bright red Fibonacci lines on the chart are used to show how high wave (((v ))) should go if the same Elliott Wave rule applies. That target level comes in at 84.03.
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What should follow from here is a wave (iv) correction lower. How far down will this correction take the DXY? Let’s go to the next chart.
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The chart above shows the Fibonacci price retracement lines, which show two potential downside targets for wave (iv). The two most likely downside targets for wave (iv) appear to be at 82.68 and 81.81, which are the 23.6% and 38.2% retracement lines respectively. So, in terms of the direction for the US dollar, I’m calling for a short-term correction lower followed by yet another move to the upside (wave (v ) and iii).
The next chart shows more of a bird’s-eye view of the DXY using the weekly chart. It simply shows the DXY’s likely track over the next few months. The red line shows the maximum downside move that may occur -- a move down to 81.51 -- a level that represents the peak of wave (i) and that corresponds closely with the 38.2% retracement line. The green line shows the likely general track for wave (v ) & iii – which, if it roughly matches wave i in magnitude, will take the DXY up to 86.17.
If the correction lower and subsequent move higher come to fruition, what might it mean for risk assets? Well, it should mean a corrective rally in risk assets followed by a subsequent renewed move to the downside.
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Rates on the 10-year Treasury remain down near projected support. Will it hold?
If the message from the currency markets isn’t clear enough, we can look to the fixed income markets for either confirmation of the outlook or divergences. The first chart below shows the 10-year US Treasury Note yield ($TNX.X) on a monthly basis going all the way back to the mid-1970s.
This look at rates shows me that we are nearing the end of the macro move lower for rates as wave 5 plays out. The question is obviously: “How low can rates go?” Based on wave 5 roughly matching wave 1 in magnitude, the downside target range for TNX is 0.987% to 1.143%. Can we expect to see rates move straight down to that target range from today’s level of roughly 1.4%? For the answer to that question, we need to go to the next chart.
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The final chart of the day shows the TNX on a daily basis going back to late-2010. Here we can see that yields are on the very last stages of wave (v ) & iii. I’ve been putting out here on the site that support for the TNX should be 1.43%. Interestingly, my levels thus far have not been respected – which can happen sometimes (he typed with a smile). However, I am still comfortable in my opinion that the TNX is due for a wave iv correction higher. If I’m correct about the downside being nearly over in the short-term and that an upside move will follow, the upside target for TNX will be 1.951% (see the green line). The red line on the chart shows where the final move lower may take rates, which is the 0.987% to 1.143% range mentioned earlier.
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Both of the pictures presented by the US Dollar Index and the US Treasury market appear to be telling us the same thing: Expect a short-term correction (lower in the DXY and higher in rates). Once these corrective moves play out, however – assuming they play out at all -- we should see a resumption in the recent trend (higher in the DXY and lower in rates).
The question is whether risk assets will rally during the corrective moves in currencies and rates and whether they will fall back down in price during the resumption in recent trends.
Before I wrap up, here’s a check up on the key European sovereign debt yields:
The rates in the key sovereign rates I’ve been tracking – in Italy, Spain, and Portugal – are all up over the last week. Spain’s yields are hitting all-time highs while Italy and Portugal are higher, but not yet approaching “all-time” levels. It is the news flow out of Europe that could keep the “safety trade” in play longer than anyone expects. If it moderates, we should see the moves I’ve outlined in today’s report. If not, those moves may be delayed awhile longer.
That’s it for now! Have a great week!
No positions in stocks mentioned.
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