Macro Picture From Currencies and Bonds Remains Bearish
My overall message is to "sell the rips" in risk assets for all but the most nimble of traders.
The US dollar should move higher in the short-term and then correct lower again.
Last week, I put out that I felt the US dollar futures (@DX) should be nearing wave "iv" support and that we should anticipate a wave "v" rally – and theoretically a weakening in risk assets at the same time. Well, the greenback did manage to hold support and turn higher and risk assets (stocks, crude oil, and certain currencies) have come under pressure. Based on the Elliott Wave principle that fifth waves roughly match first waves in magnitude, I'm calling for a wave "v" top to occur for the greenback futures at 83.48 (from roughly 82.72 currently). Risk assets should remain under pressure until that point, but should see a relief rally once the dollar peaks out.
The krona / franc indicator is very clear in its bearish message for equities right now.
Sea Change's proprietary krona / franc indicator – which I pointed out last week had turned from signaling more upside for stocks to signaling a turn lower for stocks – remains a bearish tell for equities. The chart below shows the spread of EURCHF / EURSEK accelerating on the downside after breaking below the short-term uptrend line. Based on the recent history, the market pullbacks have lasted anywhere from two to five months once a top had been made following this indicator's warning signal (red vertical lines show the bearish signals and the yellow circles on the bottom graph show the SPY tops). This tool is not to be used as a stand-alone timing tool, but I will be watching the indicator for any signs of turning the trend back to the upside.
The euro futures should move lower and then higher in the short-term.
We now move from the "safety" of the US dollar to the "risk" of the euro, Aussie, and Canadian dollars. The daily chart of the euro futures (@EC) is shown below and shows that it may have completed a wave "iv" to the upside in the last day or two. I would expect a move lower in the euro futures to approximately the 1.2782 level, which matches up well with the wave "b" and wave "iii" lows on the chart. So, until we see the US dollar make a wave "v" peak and the euro make a wave "v" low, I wouldn't expect anything more than a very short-term rally in risk assets in general (and stocks in particular).
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