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Have the Bulls Finally Hit the Proverbial Wall?

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Targets have been hit in equity indices and key currency pairs. Now it's time to evaluate whether this is a new bull market in risk assets.

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The "stuff" related currencies and one of the global risk guages, the euro / yen cross, have all run squarely into critical resistance on their respective charts. Meanwhile, messages from the bond markets continue to be less than bullish.

MESSAGE OF THE MARKETS

CURRENCIES

The Aussie dollar / Japanese yen cross has hit its upside target. Now what?


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  • The Aussie dollar / Japanese yen (AUDJPY) reached the target that I laid out here over the last several weeks at just above 84.
  • That peak appears to me to be wave "c & II" – which means that the dreaded wave III is to follow. Typically, third waves are the "thrust" waves where the biggest moves occur. So, if I'm correct in my analysis, we should get ready for a powerful move lower in the Aussie / yen cross.
  • Given the AUDJPY's status as the new go-to gauge for global risk appetite, the thought of big downside for the cross should be a concern for risk bulls.
  • I will need to see a close above 84.309 to change my view that this recent upside was the last leg of an abc correction higher. Unless and until that happens, I will be strong in my opinion that this cross as well as risk assets in general are in for a substantial down move.
The other "stuff" currency pair is the Canadian dollar / Japanese yen cross – it, too, may be set for some renewed weakness.


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  • Like the Aussie / yen cross, the Canadian dollar / Japanese yen currency cross (CADJPY) has hit its 100% Fibonacci price projection line for what appears to be an abc correction higher (see bright red lines on the chart). The key resistance is 78.713 – any close above that will invalidate this wave count and open up much more upside for the cross.
  • That abc correction was wave (ii) of v of 1 in the overall wave count. The next move should be a wave (iii) lower with a downside target at around 73.328.
  • The possible reversal today corresponds with the downside reversal in AUDJPY and probably signifies a change in the overall trading environment from bullish to bearish.
The euro / Japanese yen has been on a roll recently but is also now running right into major resistance.


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  • Until recently, I would always look to the euro / Japanese yen (EURJPY) for guidance on the global risk appetite. As mentioned here not too long ago, I decided to move my focus to the Aussie / yen cross due to the very specific problems going on in Europe.
  • However, it is still helpful to keep an eye on the EURJPY as a gauge for how things are progressing in Europe. Right now, the chart is telling me that optimism regarding potential fixes over there has been on the rise.
  • The chart also tells me that all that progress may have hit a wall. The long-term downtrend line (one of them anyway) for the EURJPY comes in right at around 103 (just above current levels). While I would expect to see some stabs above that line on an intraday basis, I would not expect to see a close (especially a weekly or monthly close) above that line unless the problems over in Europe were truly minimized or eliminated.
  • Even if the downtrend line is taken out by the bulls, the 100% Fibonacci price projection line for the EURJPY's abc correction is just above that line at 103.93.
  • Overall, while it's possible that we'll see a broad-based breakout above resistance in the AUDJPY, the CADJPY, and the EURJPY, we must play as if their respective resistance levels are going to hold – which means to take profits on longs and/or initiate some short positions.
BONDS

The 10-Year Treasury Note Yield has started to fall after making a wave (ii) peak, and there appears to be more to come on the downside.


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  • The yield on the 10-Year US T-Note ($TNX.X) spent the last week drifting lower after topping out with its wave (ii) peak.
  • The downside targets for this down move (wave (iii) of 3) are 1.661% and 1.589%. Today is the first day where risk assets are acting in line (meaning they're falling) with what we'd expect given the fact that yields have been falling for a week now.
  • As my targets for the 10-year are clearly lower, I do feel that a correction lower in risk assets may have begun last Friday and continues as I type this out.
High-yield bonds have been neutral / negative over the last two weeks even as stocks have continued higher – a warning sign for the bulls.


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The high-yield bond market – represented above by the iShares High Yield Bond ETF (JNK) – has been a little sluggish over the last two weeks or so. Perhaps it was forecasting a consolidation / correction to come in risk assets.
  • This sluggish action in JNK has brought it down to the 21-day moving average (light green line). A break below that moving average would be the first since early December – so that moving average is clearly pretty important to monitor.
  • Weakness in JNK should be expected if we are also seeing the risk currencies and the equity markets reversing lower.
What I will be watching for is any signs of bullish divergences from JNK, TNX, or any of the risk currencies as equities sell off. I don't really expect to see them for a while as I feel there's a good chance that we've seen the highs in stocks for quite a while.

Twitter: @tttechnalytics

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