Bearish Charts in Equities About to Be Joined by Bearish Developments in Bonds and Currencies

By Tim Thielen  OCT 23, 2012 4:05 PM

We are just on the verge of additional breakdowns in some of the important "risk tell" charts in the bond and currency markets.


MINYANVILLE ORIGINAL Man, do things get negative in a hurry – both in terms of price and in market sentiment. That’s the thing that has prevented declines from really taking hold in recent days, weeks, months – the run to bearishness that occurs. With a market basically dominated by institutional managers and pre-programmed machines, extreme bearish sentiment levels can quickly put a halt to a market decline, which in the old days would have had much more room to fall. 
With that dynamic acknowledged, I will note that there certainly are technical breakdowns that have occurred and more that may be on the verge of occurring today (barring a major change in the action heading into the close today). The chart of the S&P e-Mini futures is shown below. Notice that the minis have closed out their 240-minute bar below the “correction support” at 1,420.75. Pay attention to the S&P cash support level given later in the report as we head into the close to see if the breakdown in the Nasdaq is confirmed. Also, keep in mind that there’s Apple (NASDAQ:AAPL) news today, a Fed announcement tomorrow, and Apple earnings on Thursday.  Things can certainly change – especially with that line-up of potential catalysts. For my part, however, rather than focusing on the news itself, I will be monitoring all of the critical technical levels in all of the asset classes (bonds, stocks, commodities, and currencies). 

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Before I get into my usual look at bonds and currencies this week, I want to quickly touch on some observations I have on market internals.

Volume:  Bearish / neutral. Volume definitely picked up on Friday during the sell-off.  It was noticeably higher than the 10-day moving average and clearly trumped any recent spikes. Today, however, it’s not alarmingly high (yet).

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Advancers vs. decliners:  Neutral / Bearish.  The uptrend line for the advance / decline line has been broken several times now – making it a non-factor going forward. As long as we see the continued patter of lower highs and lower lows, the market has to be considered in a technically weak position.

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Net New Highs vs. Lows:  Bearish.  Notice on the upper graph on the chart below that the new new highs / lows are still solidly below its uptrend line and continuing to set lower highs and lower lows. Notice also the downside break of the uptrend line in the SPY (lower graph on the chart).

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CBOE Volatility Index:  Bearish. This just turned from neutral to bearish. The weekly chart of the VIX is shown below.  Notice that with today’s trading, the VIX is trading above the long-term downtrend line.  If we see a weekly close above that line, it will confirm the newly bearish stance of this indicator.   

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Now on to the bond and currency markets!

Potentially bullish status quo in Treasuries.

Treasury yields are in the middle of the trading range, but should, in theory, have some more upside. That would likely mean good times for the equity markets (while rates rise). We shall see if what appears likely in theory becomes the reality. Today, the exact opposite is occurring.

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Emerging market debt right at support.

Emerging markets bond prices (as measured by the iShares JPMorgan Emerging Market Bond ETF (NYSEARCA:EMB) continue to remain above their moving average support line. Today, however, EMB is trading down with risk assets and is actually testing the moving average line support at 122.21. A failure there would be a victory for the bears.

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High yield bonds failed to follow through on the downside. Are we allowed to call that bullish?

The SPDR Lehman High Yield Bond Fund (NYSEARCA:JNK) broke its uptrend line at the end of September. That breakdown theoretically should have been followed by more downside and a break below horizontal line support at $39.86.  Instead, we saw JNK test that support on an intraday basis, stabilize, and work its way higher. That failure to break support should have been a warning for the bears that things weren’t lining up the way they should for them.  Now, JNK just topped out at the 138.2% Fibonacci price projection line for what appears to have been a third wave higher (and not the “c” wave of an “abc” correction higher). As long as JNK manages to hold up above $40.28, my observation that the recent peak was a third wave peak will hold water.  What should follow once this higher low is made is another move to the upside – perhaps up to the September highs.

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The euro / US dollar seems set up to move sharply lower.

As if the negative technical set-ups in equities and crude oil weren’t enough, the widely observed euro / US dollar cross (EURUSD) may also be setting up for some sharp downside. Based on the wave count in the chart below, the EURUSD is in wave (((iii))) lower with the nearest downside target of 1.26289 (from 1.29573 as of 11:13 a.m. Tuesday). Keep in mind that there’s more downside ahead even after that target is hit; it’s just that we may see a sideways consolidation prior to that next wave lower.

Overall, this chart, which again is used by many market observers (and trading programmers), sets up very bearishly for the EURUSD, which in turn means that risk assets will also likely be under pressure.

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Franc strength vs. Krona continues to spell trouble for stocks.

In the last few reports, I’ve shared a new, potentially valuable market tell based on the relationship between the euro / Swiss Franc cross (EURCHF) and the euro / Swedish Krona cross (EURSEK), which is actually a technical way of comparing the Franc against the Krona.  As I mentioned, when the Franc shows relative strength against the Krona, it is typically bearish for risk assets (with the reverse being true when the Krona shows relative strength against the Franc). 

I further pointed out that the Krona seemed to have topped out versus the Franc in August.  Based on previous peaks in the Krona versus the Franc, the SPDR S&P Depository Receipts (NYSEARCA:SPY) should have then peaked out four to six weeks later. Well, we saw what looks like a peak in the S&P in mid-September. The next task becomes to determine approximately how long the downside in the SPY may last. Based on the previous occurrences of these relationships, we should look to see a little over two months of weakness in the SPY, which would take us to mid to late November (if the previous cycles hold up). 

I wouldn’t bet the bank on such observations, but I would certainly file them away and combine them with observations of trading conditions at certain technical levels and time frames. Meanwhile, let’s look for a break of the dark blue downtrend line as a sign that the Krona may be taking back the leadership from the Franc, as that would then start the clock on when the SPY may turn back higher.

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Weakness in the charts of equities, crude oil (which has been adequately documented here on the site and in the media), and the EURUSD along with the negative tells coming from market internals and the Franc / Krona relationship have me thinking we’ve got some more downside ahead of us in the short-term. There are some possible hopeful signs coming from the bond markets and we will see bounces. However, based on the aggregate of market evidence being presented today, bounces are to be sold into for the time being. 
Twitter: @tttechnalytics

No positions in stocks mentioned.

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