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Bulls Beware: Bond and Currency Charts Say It's Not a Pretty Picture Outside of Stocks


Treasury yields may flip the bullish switch with a rally into today's close. Shy of that, though, bonds and currencies are telling us that all is not yet well underneath the surface.



The euro is faltering.

The euro fell hard this morning on news that Italy's government debt was getting downgraded by one of the ratings agencies. The decline in the euro futures (@EC) basically gave back most of the gains from yesterday...but not all of them yet. Right now, the euro looks bad technically with a potential head-and-shoulders top formation taking shape on the daily chart. However, at this juncture we should be seeing the euro bounce to fill out the right shoulder part of that pattern. Maybe we will; maybe we won't. Adventurous longs can take their shots in the euro at current levels with hopes that the right shoulder will play out and eventually top out at around 1.32500. If you're playing that game, use stops appropriately!

In terms of what this chart means to me for my "risk-on / risk-off" analysis, I would have to label this a bearish divergence for the time being. Let's see if it stays that way.

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The US dollar is strengthening.

The US dollar futures (@DX) are on the verge of a weekly breakout above "correction resistance," thanks in part to the euro and in part to the yen. The greenback's strength has – in the recent past – been part of the "risk off" trade. If that is to remain the case, then this must be labeled another bearish divergence. However, things can and sometimes do change. Perhaps we could see a new "King Dollar" dynamic developing where the equity markets rally here in the US despite a stronger dollar. That possibility being noted, I'm sticking with the recent relationship and calling this a bearish divergence (versus stocks) for the time being.

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Aussie and Canadian dollars looking weak.

The Aussie dollar is set up for more downside although it's taking its time in following through on that set-up. Even in the more bullish of two scenarios I've identified on the chart below, the AD should be setting up for another 2% of downside (which is pretty sizeable in currency terms). Can a falling Aussie be bullish for risk assets? Not in my book.

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The other "stuff" currency, the Canadian dollar (@CD), is sporting one of the more miserable charts in currency land (next to maybe the yen and the British pound). It broke down out of the pennant consolidation pattern a couple of weeks ago and has since broken down below "correction support" in the last week or so. Nothing about this is bullish – not for itself and not for risk assets in general.

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No positions in stocks mentioned.

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