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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.

Not much has changed in the euro / US dollar cross in the last week – more downside is expected soon.

  • 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).
Off the usual track here: Tracking and trading the moves in the British pound / Japanese yen currency cross (GBPJPY).

  • 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.
Despite the drift higher in rates last week, my call for lower Treasury yields remains unchanged.

  • 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.
Overall, currencies and bonds continue to paint a cautious / bleak picture for the prospects for continued upside in risk assets. We may continue to see an end-of-the-year boost for the remainder of this week. However, I'm not planning on overstaying my welcome with my long (risk) positions as we head in to 2012.

Twitter: @tttechnalytics

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