Currencies and Bonds Indicate a Bounce May Be Near

By Tim Thielen  NOV 13, 2012 12:10 PM

While we may still be in a "sell the rips" mode on an intermediate-term basis, the short-term may bring us a tradable rally in risk assets once certain support levels are reached.


MINYANVILLE ORIGINAL For weeks now, the key risk gauges in the currency and fixed income markets have been telling this analyst that preserving capital was the right move.  Well, while we may still be in a “sell the rips” mode on an intermediate-term basis, the short-term may bring us a tradable rally (for those happy with a few percent on a trade) in risk assets once certain support levels are reached.

EURUSD nearing short-term support.

The euro / US dollar (EURUSD) currency cross is now nearing its potential wave (((iii))) support levels at 1.26289 and 1.25419 (the 138.2% and 161.8% Fibonacci price projection lines).  One of those levels will likely hold up as support for the EURUSD in the short-term and will likely produce a wave (((iv))) upside correction / consolidation.

The magnitude of the bounce is the big unknown at this point.  I would tend to believe that any rally we see in the short-term will be very modest in magnitude – perhaps up to 1.27490 or 1.28223 based on some preliminary retracement estimates.

The wave counts in the equity markets seem to be pretty much in sync with this wave count on the EURUSD – so I will be looking for a modest rally in stocks as well.  

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EURGBP setting up for a nice long-side trade entry.

I was just scanning through some of the other euro-based currency crosses and came across what appears to be a nice long-side trade setup developing in the euro / British pound cross (EURGBP).  The chart below shows the EURGBP on a daily basis going back to May of this year.  Notice that the cross looks like it put in five waves higher from July to late October.  Then we seem to be in the midst of an “abc” correction to the downside.  The downside target for this correction comes in at the 100% Fibonacci price projection line at 0.79421 (from 0.79926 when this report was written).  Once we test that level of support, I believe we will see the EURGBP commence an upside move that will roughly mirror that of the July to October move (roughly 4,000 pips).  I’ll share more on this upside in the next section.

I must opine here that things must be pretty bad indeed if the British pound is to show this type of relative weakness versus the euro (if the 4,000 pip move occurs).  Everyone mentions Europe as the center of the world’s problems, but don’t discount what may be brewing elsewhere.

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Here’s a better look at where EURGBP may be headed.

The chart below gives a wider view of the EURGBP set-up.  Again, notice that once the support at around 0.79444 is tested, the minimum upside (even if this is merely a larger “ABC” correction and not a new thrust higher) comes in at 0.83218 or so.  To me, that’s a trade worth taking!

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Was the recent breakout (krona strength) a head fake?

I’ve been touting the merits of my newly discovered tell in the currency markets – the “franc vs. krona” indicator.  Last week, the EURCHF / EURSEK spread ratio crossed above the short-term downtrend line (indicating a possible change in trend from franc strength to krona strength).  That change may still be happening, but the ratio has fallen back below that trend line – which is not good, but not a deal breaker in and of itself. 
There are still lower highs in place on the ratio (bearish for risk assets) but the ratio has not yet set a new lower low (hopeful for risk assets).  If we see 0.13942 on this ratio violated on the downside on a closing basis, a new lower low will have been made and the signal coming from this indicator will remain a bearish one.

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Treasury yields nearing critical support level.

I have put forth for a while now that I’m expecting a decent move higher in interest rates.  By decent, I mean that even a corrective move in rates to the upside could take yields up to 2.031%.  If the up move were to be something more than a correction, obviously the targets for rates would be much higher (2.21% to 2.321% by my current calculations).  Thus far, my call has not come to fruition as the “risk off” trade has been in play for the last several weeks and the Fed is likely leaning all over rates to keep them as low as possible for as long as possible. 

As long as the downside support at 1.562% to 1.573% holds up, my call for rates to rise sooner than later may come to fruition.  However, a break of 1.573% will be a major shot across the bow and a break of 1.562% will be a deal breaker for this call.  Pay close attention to this battle!

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Emerging markets debt still just below resistance.

The iShares Morgan Stanley Emerging Markets Bond ETF (NYSEARCA:EMB) was highlighted here in the last couple of weeks for having broken down below its support level (the 14-day moving average line) – which was to be read as being bearish for risk assets. 

Today, EMB is still just slightly below the 14-day line, but it is working hard to re-capture it.  Until it does, however, we have to continue to assign this tell a bearish label.

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High-yield debt nearing critical support as well.

The SPDR Lehman High Yield Bond ETF (NYSEARCA:JNK) broke below its own moving average support (the 60-day moving average) over the last week – yet another bearish tell from the bond markets.  The last hope for the bulls on this chart is for JNK to hold up above the 100% Fibonacci price projection line (“correction support”) at $39.80.  If it does manage to hold that level, then JNK can easily regain its bullish footing and start sending us more positive messages for the rest of the risk assets.  If not, look out below!

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I am starting to see some potential for risk assets to bottom out soon (today’s bottom and rally is not the one of which I speak) and give traders a modest rally.  That rally, unfortunately, will be one that is to be sold into in advance of yet another drop (not as bad as the recent sell-offs, however).

Twitter: @tttechnalytics

No positions in stocks mentioned.

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