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Are Stocks in the Last Stages of This Rally or Is This Just the Beginning?


Bonds and currencies are sending us clues.

The euro chart is setting up very bearishly for the intermediate to long-term.

The chart of the euro futures (@EC) below is busier than I would normally like it, but I have to show you several things that have already occurred, are occurring now, and that may still occur going forward. First, EC seems to have completed an "abc" upside correction at the end of January (see royal blue lines and labels). What has followed since may be the beginning of the next big wave lower, which would make the bears happy. Or, if the 1.3030 "correction" support level can hold up, maybe this is just a short-term correction lower in the euro. Much of the overall risk trade will depend on what happens at this fork in the road on the euro chart, so pay attention to the action here over the next several sessions.

Then again, even if support holds up temporarily here in the short-term, the bounce that could occur may just be a "right shoulder" of a "head & shoulders" top formation. See the obvious labels on the chart below. So what the bulls need is for EC to hold support here at 1.3030 and for EC to break and close convincingly above the 1.3321 resistance level ("shoulder" resistance and the underbelly of the broken uptrend line). If the euro futures can do both of those tasks, I'll be the first to turn more bullish. However, a failure at either / both of those could mean a decline down to 1.23000 for EC – and bad news for the risk bulls.

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The Aussie dollar is also trying to hold up above support.

The Aussie dollar futures (@AD) have traded a bit more bullishly than the euro, but not by much. AD is sitting right at key horizontal line support at 1.0190. Any breakdown there on a closing basis will likely mean that AD is headed at least down to 1.0006 – and this will spell bad news for risk bulls. For the bulls to win this battle, just as with the euro, they need not only a hold of support, but also a break above resistance at 1.0353. At this point, I wouldn't be banking on the latter occurring, though (not with the action we're seeing in China and Canada).

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The Canadian dollar is on the verge of yet another bearish technical development.

The chart below shows the Canadian dollar futures (@CD) on a daily basis going back to mid-2012. The recent trading here has been abyssmal. First, we had the September failure at the upper edge of the pennant formation. Second, we have the breakdown below the lower edge of that same pennant – strike two. Now, CD is right on the verge of breaking down below the "correction support" level at 0.9731. If that occurs, it's strike three for the Canadian dollar and the risk bulls out there will have lost this battle. Whether that translates to the Aussie and euro breaking down as well is obviously not known at this point.

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The US dollar has been ripping higher, but the bears need it to do a bit more work on the upside.

The greenback futures (@DX) have clearly been on a short-term tear to the upside thanks to the craziness going on over in Europe, and Italy in particular. I guess the globe really feels like we have our act together over here, which I find laughable. Regardless, for the bears to claim victory here, they will need the DX to break and close above 82.340. So they really need the euro to break down and the greenback to break out.

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The Japanese yen has bounced meagerly, but still may have more room to the upside in the short-term.

The Japanese yen futures (@JY) have "bounced" if you want to call it that. If there was ever a picture of a "dead cat bounce," this may be it. The Fibonacci lines tell me that the yen can and should bounce further, but will the Bank of Japan allow it to do so? A rally in the yen despite the BoJ's wishes would be quite something – for the bears. Nothing would surprise me here – so take everything you see on the yen chart with a grain of salt.

Click to enlarge

Overall for currencies, things have been bearish recently, as readers of these articles know. But the euro, Aussie dollar, and US dollar are all at important potential inflection points. A breakdown in the euro and Aussie will obviously be bad news for the risk bulls out there. On the other hand, a hold of support by either will have the bears running for cover – even more than they have over the last two days.

So what's the overall message from the markets?

Watch carefully to see what happens as stocks test their key resistance levels. At the same time, we need to monitor whether we are getting confirming messages or divergent messages from the bond and currency arenas. Right now, bonds are divergent and currencies are teetering on the fence. Stay tuned!

Twitter: @seachangereport

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