Expect More Weakness in Euro and Risk Assets Despite Last Week's Action
Risk assets caught a breather last week as the news flow out of Europe slowed down. Don't expect that to last, however.
- The EURUSD has been waffling around for the last week – giving stocks a chance to trade on their own merits for a few days (quite a refreshing difference).
- I don't anticipate that the quiet action will continue, however. The chart above shows (reiterates from last week's report) that a wave "v & 5" move lower should (if I'm correct in my wave count / observations) occur taking the EURUSD down to around the 1.29052 level.
- This down move may or may not occur during this week, but when it does, it may weigh a bit on stocks. (Note: As I'm typing away here, I'm noticing some very big moves in the currencies, so I'm sure some news has just been released that is affecting things).
- The GBPJPY was in a pretty clear downtrend until it bottomed out in late September of this year.
- We saw a thrust higher off of that low followed by some corrective action. The most recent identifiable pattern on the chart is an "abc" correction that took place for most of the month of December. The next move off of the "c" peak several sessions ago will be lower – and that has already started. We now need to figure out how low it can go.
- "ABC" patterns are always corrective patterns, so my job is to try to identify where in the wave count this correction is occurring so that we may then extrapolate target prices, etc.
- The chart above shows a close-up picture of the GBPJPY with wave labels. This is merely one possible wave count, but I feel pretty confident in this count's accuracy.
- The "abc" correction that I highlighted on the first chart comprises the wave "iv" correction that takes place during December on this chart. The "abc" isn't shown here due to the busy nature of the chart.
- Based on this wave count, GBPJPY is in the midst of wave "v & a" of a larger "abc" correction. This correction followed what I'm seeing as a five wave thrust off of the September lows. That thust was likely a wave 1 move, although it could also be a wave A move. Regardless, we are seeing an "abc" correction playing out. Again, it is the "v & a" wave that GBPJPY is in now.
- Based on the "5 = 1" principle of Elliott Wave Theory, this wave "v & a" should approximately match wave "i" from early November in magnitude. Using Fibonacci lines to show the matching moves, we can see that wave "v & a" should terminate at around 119.312 (from the recent level of 121.546). That's a nice little downside trade – catch it if you can. Clearly, if the wave "iv" peak at 122.748 is violated on a closing basis to the upside, you've got to stop yourself out.
- What comes after this downside target is met should be another nice trade – this time to the upside. See the chart below.
- Once the wave "v & a" move terminates at around 119.312, I'd be looking for a wave "b" move higher up to around 125. I arrive at that target by figuring out where wave "c" may terminate and working backward off of that.
- Assuming the September – November thrust move was a wave 1, I know from Elliott Wave Theory that wave 2 (which this "abc" correction would be) cannot close below the origin of wave 1. So, I can use the September lows as an approximate target for the bottom of wave "c" of this "abc" correction (AKA wave "2").
- If I use 119.312 as the bottom of wave "a" and approximately 117 as the bottom of wave "c", all I have to do is use Fibonacci projection lines to be able to eyeball where the peak of wave "b" should be. As you can see on the chart, b should come in at around 125.
- So, look for a nice little downside trade to the 119.312 area and then an even better potential long-side trade up to around 125. If you want to get ahead of yourself, you can anticipate the third ver nice trade in the form of wave "c" of "abc" from 125 down to 117. Take it a step at a time, though, and see if you can catch the rest of the move lower for wave "v & a" down to 119.312.
- The yield on the 10-year US Treasury Note ($TNX.X) drifted higher last week on better-than-expected economic news here in the U.S. as well as the afore-mentioned slowing of bad news out of Europe (for the time being).
- I do NOT expect the bad news out of Europe to remain missing from the picture, however. The question is whether the continuing improvements here in the States can overshadow the nasty systemic issues "over there." From my perch, I don't think so.
- The chart above shows the drift higher that occurred last week. However, it also shows that no real technical improvement took place off of that action. So, I would continue to look for rates to move lower – at least down to the 1.64% area. We'll have to take a look at what's going on once rates get down there.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter