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Risk On! Risk On! Bond and Currency Charts Are Not All in Agreement, Though


Are key bond and currency charts telling us to get involved on the long side without any cares? Not quite yet.


EURUSD remains slightly above support – not following through, though.

The euro / US dollar currency cross – which many global participants watch as part of the "risk" trade – remains ever so slightly above the 1.31716 support (previous resistance) level. Once EURUSD managed to close above that level, I would have thought that we would see a strong follow through and continued march up towards the 100% Fibonacci price projection line at 1.36294. As of yet, that has not happened – even with the news overnight that the US government is going to continue to remain on the current road of "tax a bit, spend a lot." So, one has to wonder...

Maybe the chart below is setting up like the less bullish of the two Treasury charts I highlighted earlier. In this case, the September peak would have been wave "iii" and the peaks over the last two weeks were actually wave "v" as opposed to the way the chart below is labeled. Even in that case, just as with the Treasury chart, only a modest pullback would be anticipated before the EURUSD made its way higher. Modest or not, a pullback of 1% or so in other markets is insignificant, but in currency terms can be painful if you bought just prior to the pullback beginning.

So, I believe the play here is to key off of the combined action in bonds, stocks, and the EURUSD to get the trade right. If we see bond yields take out resistance, stocks take out resistance (or put more distance between themselves and support in the case of EFA and EEM), and EURUSD remain above support, it may be safe to be long / get long of EURUSD for the rest of the anticipated upside. If any of those other asset classes fails to confirm, there still may be some danger of a short-term pullback.

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Aussie crosses acting strong today as well – one better off than the other technically.

The Aussie dollar / Japanese yen currency cross (AUDJPY – show below) is breaking out beautifully above the 90.020 "correction resistance" level. If it can hold that breakout into this weekend, look for some more upside action – likely up to the 91.998 to 94.149 range (before some consolidative action commences). I would not advise going heavy long of AUDJPY (if you aren't already) given the fact that the lower of the two resistance levels is relatively close to current levels. Instead, wait to see how high it goes, then wait for the correction / consolidation and look to accumulate AUDJPY then.

If the breakout holds into the weekend, the technical ramifications are for much more upside in the interemediate to long-term – you just have to enter your long-side trade wisely (on the dips) due to the heavy leverage involved in forex trading.

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Meanwhile, the Aussie dollar / US dollar cross (AUDUSD) is rallying hard today – but right up to the underbelly of the recently broken uptrend line. If I didn't know anything about how any other charts were looking, I would say this is very nearly a perfect set-up for short-sellers. You not only have the broken uptrend line, but also the longer-term, very formidable downtrend line resistance as well.

So, if you're a trader, you short the AUDUSD here with a downside target (for profit-taking) of 0.99665 and a stop-loss triggered on any close above today's high of 1.05233 (that's about $350 - $500 at risk with about $3,000 of initial margin required and over $5,000 in profit potential). If all you have is a small forex account ($10,000 or less), don't do the full $100,000 notional value on the trade. Do a fraction of that; the reward to risk is still 10:1 even if you're trading a fraction of that ($100,000 notional value).

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No positions in stocks mentioned.

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