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Currencies, Bonds, Stocks, and Cyprus: Charts Say One More Upside Attempt Is Due


I was surprised as many were last night when I tuned in to check out futures and currencies. Fortunately for the bulls, the market gods are giving them a reprieve in the short-term.

As you'll read below, the reprieve may be stimulating enough to turn the bulls' brief trepidation into overconfidence here in the next ten days. Right about then is when it will behoove the wise to cash in their chips. This is a conclusion I draw from my observations of the charts of currencies, bonds, and stocks.

Sometimes, the narrative falls in-line with the technicals.

Before I get going with my analysis of the currency and fixed income markets today, I wanted to piggyback on Mr. Harrison's article (the aforementioned "narrative") from last night – and try to add some technicals to his very well-thought out, well-written article. Todd mentioned that he felt the hungry dip-buyers would be in action very early today (as "old habits die hard"). As we call can see, he was 100% correct.

So, what does last night's and today's action mean technically? As the chart below shows, it appears to me that we have been in a wave "v" rally since the short-term bottom that was put in at the end of February. Based on the Elliott Wave principle that fifth waves often match their corresponding first waves in magnitude, I would normally estimate that wave "v" should terminate at around 1,578 – 1,579 (since wave "i" was 93.47 points in magnitude and since wave "v" started at 1,485.01). To be even more precise, it looks like the overnight selling that spilled over into this morning may have been the start of the fourth sub-wave "(iv)" of wave "v." If I use 1,578.48 as the target and subtract the distance of wave "(i)" -- which was 40.33 points -- I can estimate that the beginning of wave "(v) of v" should occur down at 1,538.15. We didn't quite get there in this morning's weakness, so either we won't get there or we'll see some more selling in the next couple of days.

Just as I've suspected and shared with my readers, though, the end of the month should bring about window dressing activity on the part of hungry portfolio managers and traders. That should, in theory, coincide perfectly with wave "(v) of v" over the next 10 days or so (as March 29 is the last trading day of the month and quarter). We can and probably should see 1,578.48 tested near the end of that wave (is that close enough to 1,580 for you, Todd-o?). One additional note on the chart's labeling, I have included the red Fibonacci line of the very macro "ABC" correction from the monthly chart (as highlighted here recently). That line represents the key monthly closing resistance level for the theoretical correction that has been taking place since 3/2000. Now onto the currency markets.

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The euro was a nasty long overnight, but there's still a chance at a short-term "right shoulder" bounce.

When I turned on the screen early last evening and saw the sharp sell-off going on in equity futures and "risk currencies," I thought I might have to abandon the idea that a head and shoulders top was forming on the euro chart. Given this morning's rebound, however, that formation may still play out. Any bounce here – presumably the "right shoulder" – should peter out at no higher than 1.3273 or so. Of course, there's no rule saying this bounce has to occur. We could simply see things escalate over in Europe immediately and see a technical breakdown in the euro sooner rather than later. Right now, though, as I'm thinking we may see a wave "(v) of v" bounce in the equity markets, it would seem to make sense that we see the euro show a little life before really collapsing.

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The Aussie dollar has also rebounded from the overnight weakness.

Just as with the euro, the Aussie dollar looked pretty bad overnight but has done a nice job of recovering those losses today. The chart below shows a potential "abc" correction higher playing out (in fact, it may have already played out – depending on how you plot the Fibonacci projection lines). By my calculations, if this is merely a corrective move higher in the Aussie dollar, the highest the futures should go is 1.0348. Any close above that will signal to me that the Aussie dollar has much more work to do on the upside.

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The Canadian dollar seems also to be in a short-term upside correction.

Just as with the Aussie dollar, the third of my "risk currency" tells, the Canadian dollar, also seems to be in the latter stages of a corrective move to the upside. With the Aussie and Canadian dollars correcting higher recently and the euro continuing to flounder, it should have served as an effective warning of bad news to come out of Europe (of course, hindsight is 20/20). Based on the Fibonacci price projection lines, the highest the Canadian dollar should reach on this move (assuming it's only a correction higher, which I feel is the case based on the rather ugly technical action leading up to this bounce) is 0.9811.

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My proprietary franc / krona tell still looks OK for the bulls – for the time being.

I have mentioned this indicator here before, and it once again has proven to be fairly reliable as a "risk on / risk off" indicator up to this point. The key to observe on the chart below is the middle graph which shows the spread ratio of the euro / Swiss franc versus the euro / Swedish krona (EURCHF: EURSEK). When that line is trending higher, all should be well in risk-land (one day sell-offs not withstanding). Right now, the trend is still higher for the indicator, so all seems to be well. However, it is easy to see where it would not take much to see that uptrend line broken, so it will certainly pay to stay alert.

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Treasury yields served as an effective warning sign. Was anyone listening?

The yield on the 10-year US Treasury Note (^TNX) failed to break out above the 100% Fibonacci price projection line for what may be an "ABC" upside correction. I have been harping on this lack of confirmation from bonds for a while now – eventually it matters. As I am (and as many in the 'Ville are) expecting another upside try by the bulls, it will continue to be part of the plan to closely monitor Treasury yields to see if they confirm or diverge from the action in equities.

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So the plan over the next 10 days or so will be to watch for a fifth wave move to the upside in stocks beginning just below 1,540 on the S&P (INDEXSP:.INX). That move should, in theory, coincide with modest bouces (continuations of bounces in some cases) in the euro, Aussie dollar, and Canadian dollar as well as in the yield on the 10-year US Treasury Note. Oh, only if things played out as perfectly as I lay them out in my mind. Whatever wrinkles are thrown at us will be handled by our own diligence and discipline. Stay alert out there!

Twitter: @seachangereport

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