Mixed Messages: The Currency and Bond Markets Are Not in Agreement

By Tim Thielen  JAN 09, 2013 2:37 PM

Plus: While stocks have pulled back very mildly, their overall technical position remains solid.


I always note in my articles that I tend to defer to the messages of the currency and bond markets ahead of the stock market due to the size of those markets and the type of global players in those markets. It is tough for me to remember a time in recent history when there have been so many (matching) cross currents from these very large, very liquid “truth telling” markets.  

I will jump into some individual currency trades at the end of the report. However, let us first review the “risk-on / risk-off” evidence being presented to us by the bond and currency markets. 

Here is the evidence supporting the (risk) bulls’ case:

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Here is the evidence supporting the bears’ case:

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Summarizing my findings

So, you can see that the bulls have four good points and the bears have four good points (for now). This is why it is very tough to call the winner right now.  If I had to, I would give the slight edge to the bulls (given the “reaching” nature for the Treasury futures argument). But, overall, this information is a sign (to me anyway) to refrain from making heavy bets in either direction until we get some more clarity.

For your convenience, here’s a table showing all of these cross-currents:

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I came across these two trade set-ups in my chart scans over the last few days.  The trades haven’t run away yet and haven’t been stopped out yet, so…

Short the New Zealand dollar / Canadian dollar cross (NZDCAD).

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The NZDCAD has bounced right up to what may be the “right shoulder” in a potential “head and shoulders” top formation.  This set-up could / should be followed by at least a test of the neck line at .81000. More than likely, if it is a “head and shoulders” pattern developing, NZDCAD would trade as low as .78500 - .80000.
 Short the New Zealand dollar / US dollar cross (NZDUSD)

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Like the previous short play (NZDCAD), the NZDUSD has bounced in what appears to be a short-term “abc” correction higher (making up wave (b) on the chart with resistance at 0.83958).  It now looks like we will see wave (c) of the larger (abc) correction with a downside target of 0.80765.  So, here is the trade:
As always, I urge anyone trading in these markets to seek professional guidance. They are very fast and very dangerous if you don’t know what you’re doing. Always honor stops and size positions appropriately (even if / especially if you’re a pro).

That’s it for this week’s look at the currency and bond markets.  If you have questions or wish to discuss / chat about any of this information or the markets in general, feel free to email me at tim@seachangereport.com

Twitter: @tttechnalytics

No positions in stocks mentioned.

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