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.
Before I get into the currency and bond markets, let's take a look at the current status of the US equity markets.
S&P e-Mini Futures indicating it may be time for a counter-trend bounce in the very short-term.
So, with this week's volatility, what might we expect as we head into the weekend? The chart of the S&P e-Mini Futures continuous contract (@ES) is shown below on using 10-minute candles. From my perch, it looks like stocks may have finished up a first sub-wave lower (wave "i of c") with this morning's spike lower. There may be a re-test of those lows, but I would expect that either later today or tomorrow morning that we'll see a wave "ii of c" bounce. My best guess as to upside potential for the anticipated bounce is anywhere from 1,553.25 to 1,570.75 on the e-Mini futures. That being noted, our firm got long of SPY and/or SSO for various accounts near the lows this morning and we're planning on taking profits on that position starting at about 1,555 – 1,556. Why take profits? Because we absolutely feel that there is more downside to come, which leads us to the next chart.
Remember my longer-term bearish outlook, though.
The daily chart of the S&P 500 (INDEXSP:.INX) (cash) chart is shown below. This is the same chart that I showed last week. I have not changed my outlook one bit. We should still get more of a pullback for equities – at least enough to bring the S&P down to approximately 1,480. Frankly, I would be surprised if that is all the downside we see, but I put in out there as the first possible downside target for this correction. A 5% drop from here is not that big of a fall, but based on the reaction in the financial news to the volatility we've seen thus far into the correction, one can only imagine the histrionics we might see from the talking heads as we drop to my support levels.
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).
The Aussie dollar is pulling back from its long-term resistance once again.
Even the relatively more bullish chart of the Aussie dollar futures (@AD) – which I've highlighted in recent weeks – is seeing a pullback this week. This chart will remain bullish as long as the lower edge of the long-term pennant (what the bulls are hoping this is) or wedge (what the bears are hoping this is) formation. Based on the long-term wave count, my money would be on the more bullish set-up for the Aussie dollar, but I am not married to that opinion and will be quick to change my opinion if the evidence dictates that I do so.
The Canadian dollar's chart is unambiguously bearish.
If you want a clearer message of future direction, look to the Canadian dollar futures (@CD). That very clear message is that the Canadian dollar is headed lower in the short to intermediate-term. This should be read as bearish for risk assets as Canada is heavily levered to the both the natural resources and financial services industries. The Canadian dollar will remain in "sell the rips" mode until at least the 100% Fibonacci price projection line at the bottom of the chart is approached / tested – and that's a long way from current levels.
The British pound – while not a regular "risk tell" for me – may be presenting some interesting trading opportunities.
Another potentially bearish chart set-up in currency land is that of the British pound futures (@BP). If we see the 1.5222 level taken out on the downside on this chart, it will confirm for me that the pound is headed lower – a lot lower. If you couple the anticipated weakness here with the anticipated strength in currencies like the US dollar, you may have a very nice trade set-up (read more on this below).
So, here's one trade off of that analysis...
If I couple the British pound's anticipated weakness with any of the stronger charts (US dollar, New Zealand dollar, and Swiss franc come to mind), some nice profits should be available for the taking. The chart below shows the British pound versus the US dollar (GBPUSD) on a daily mode going back to 2011. Right now, it looks like this cross just completed a wave "iv" move and is in the midst of a wave "v" move to the downside with a target of 1.45675 (from 1.52819 currently). You'll know I'm wrong on this bearish call if 1.54085 is violated on the upside. That's about 1,300 pips of risk and over 7,000 pips of profit potential, which is a very favorable reward to risk ratio.
Treasury yields have fallen – as one would expect – this week, but should be set to bounce soon.
The yield on the 10-year US Treasury Note ($TNX.X) has come down this week – as one would expect given the weakness we've seen in stocks and other risk assets. Based on the chart and my current wave count (wave "iii" just completed?), it looks like yields may be at or near a short-term low. I'm not calling for a major bull move in rates, just a wave "iv" correction to the upside. Based on the Fibonacci lines in the chart, I wouldn't expect much more than 1.858% on the upside from any bounce we see. Make no mistake about it: I am bearish on bond yields overall, but bounces do occur in bear markets.
The macro trends in most of the charts we follow seem to be singing a bearish tune in unison. Even the relatively strong chart of the Aussie dollar could be spelling short-term weakness. So, it is my opinion that while traders can take advantage of sell-offs to add short-term trading longs, those not as nimble should be using rallies to sell into for the time being.
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