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Commodity-Related Currencies Suggest Possibility of More Short-Term Upside for Risk Assets


Nice action in the Australian and Canadian currencies stands alone as the only bullish signal coming from either currencies or bonds.

Some more positive messages are starting to pop up from one part of the currency markets – namely the commodity-centric currencies (the Canadian dollar and Aussie dollar). However, the problems in euro-land and a lack of confirmation of stocks' bullish action by the Treasury markets continue to haunt the bulls.

As I mentioned last week (see Stocks Continue to Ignore Warning Signs From Bonds, Currencies), something's gotta give soon!

Message of the Markets

The Aussie / yen cross has more upside potential in the short-term – a bullish sign for risk assets.

  • As mentioned last week, I'm using the Aussie dollar / Japanese yen (AUDJPY) as the global appetite for risk. Over the last several sessions, the AUDJPY has been making some nice progress toward taking out horizontal line resistance at 79.695.
  • If and when that's accomplished, it will open the way for a move to at least 82.028 (over 2000 pips from current levels – very tradable). At that point, the longer-term downtrend line (red line) will come into play.
  • If the cross stops at the 100% Fibonacci line and / or the downtrend line at 82.028, the upside move will have been merely a corrective move off of the November down move. On the other hand, if the 82.028 level is conquered, we will see AUDJPY continue up to around 84 to 85 pretty quickly.
  • Regardless of whether the 82.028 level is taken out, the short-term break above 79.695 will mean more upside for AUDJPY – and likely risk assets in general.
The Canadian dollar also looks like it has more upside ahead of it in the very near future.

  • The Canadian dollar / Japanese yen (CADJPY) also is showing some very positive signs for the bulls.
  • The chart above shows the CADJPY attempting a breakout above the long-term downtrend line – it is succeeding so far this morning, but the day ain't over yet.
  • If CADJPY succeeds in breaking above the downtrend line, the next levels of resistance will be the series of Fibonacci price projection lines at 76.082, 76.510, 76.776 and 77.894.
  • My money is on a break of the 100% Fib line and a continued move up to one of the latter three levels of resistance.
I'm not showing the Aussie dollar or Canadian dollar against any of the European currencies because of the crisis situation that is muddying the picture right now. The true strength or weakness of both of those currencies is best measured versus the yen or the US dollar – in this case I'm deferring to the yen.

Meanwhile, bounces aside, the euro remains in big trouble.

  • I could show either the euro / US dollar (EURUSD) or the euro / Japanese yen (EURJPY) and they would paint virtually the same picture – a short-term bounce is under way, but the intermediate to longer-term picture remains scary.
  • The chart above shows how there's some very modest upside being attempted right now, but that it appears that the EURUSD has a date with one or both of the Fibonacci price projection lines at 1.23294 and 1.20123.
  • At that point, the EURUSD should pause or consolidate as part of a wave (iv) corrective move. A wave (v) move would follow and could take the EURUSD well below 1.20 (which has been mentioned frequently lately in the media as the level of lore for the EURUSD).

10-Year T-Note Update

  • The action in the Treasury markets has not improved at all – meaning yields have not risen to confirm the positive action in stocks.
  • I always defer to the bond boys when it comes to getting it (the read on the overall macroeconomic and market situation) right. Right now, they aren't buying into the hype – reminiscent of the Patriots not buying into the Tebow hype leading up to last weekend's game.
  • As I mentioned last week, rates could rise up to the 2.072% level without changing the bearish technical picture. The fact that yields haven't even budged is noteworthy and should be troublesome for the risk bulls.
The sluggish action in the high-yield bond market continues to serve as a negative divergence for the risk bears.

  • Just as there has been no change in the chart of the 10-Year US T-Note, the chart of iShares High Yield ETF (JNK) above shows very little progress as well.
  • The chart below shows the JNK versus the iShares Investment Grade Bond ETF (LQD) using a spread ratio graph at the bottom of the chart. Notice that the ratio has broken down below the uptrend line – another shot across the bow of the risk bulls.

My analysis of the charts of stock indices tells me that there still may be some more upside in the very near future. However, based on those charts alone I would say the upside should be limited to the 1,340 to 1,360 area on the S&P 500. The limited upside potential for stocks is being confirmed by the fact that the larger asset markets (bonds and currencies) are not joining the bulls' party.

Twitter: @tttechnalytics

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