Bonds, Currencies Suggest Risk Assets May Soon Be Making a Short-Term Top
Charts indicate that we are likely to see a 5-10% correction during the summer months once the next bout of selling starts.
The Canadian dollar has also corrected higher in the short-term – more downside to follow?
Another risk currency that has bounced recently after dreadful trading previously is the Canadian dollar (@CD on the futures contract). The CD appears to have just completed an "abc" correction of its own over the last two weeks. If the CD manages to break and close above 0.9812, some more short-term upside potential will open up – but it won't necessarily mean there's no more downside to come. You will also notice that the %R indicator is already approaching overbought levels. This is not normally indicative of much more upside to come on any chart.
So, if I'm making a call on CD here, I would have to go with the idea that the upside correction is over and that another round of downside trading action will take the CD sharply lower. Perhaps there will be a few more sessions of sideways to mildly positive action in the very short-term, but I would be using any such action as an opportunity to sell at more advantageous prices.
The Aussie dollar has remained under pressure despite strength in other risk currencies.
The one "risk currency" that has not participated in the short-term upside action is the Australian dollar (@AD on the futures contract). All we saw from the Aussie was a one-day rally before the sellers came back in and took over. At this point, the Aussie dollar appears to have completed a wave "iii" move to the downside. Both the %R (still close to reading "oversold") and the RSI indicator (higher high despite lower low in the price of the AD) are showing the potential for the AD to at least consolidate higher in the short-term. Perhaps this short-term wave "iv" upside correction / consolidation in the AD will coincide with the little bit of upside in stocks that I have indicated may occur.
Treasury yields should have one more push higher (at least) in the short-term.
The yield on the 10-year Treasury Note still appears to me to have more work to do on the upside before this up move (wave "c & iv" higher) is over. I can see the TNX (INDEXCBOE:TNX) moving up to around 2.283% before the macro downtrend in yields takes back over. Of course, if yields blow through the 2.283% resistance level, all bearish bets on risk will be taken off the table as a matter of discipline. Frankly, however, I believe that rates will top out at 2.283% (or slightly lower) and that rates will then be forced back down by a run to safe harbor as stocks (and other risk assets) sell off over the summer.
So, overall I'm thinking we see the "risk on" trade persist for a bit longer. However, after that we should see a month or two of difficulties for risk assets. Below is a table encapsulating the predicted activity for all of the charts in today's report:
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