The Fork in the Road for Stocks Is Right Here, Right Now!
Currencies and bonds still mixed in their messages.
The euro is at the first of two possible stopping points for this rally.
Euro futures (@EC) have been rallying sharply over the last two weeks, but this rally may have just been a corrective wave "iv" that has taken the euro up to one of two possible resistance levels (the 50% retracement of the wave "iii" decline). The next resistance if this level does not hold up will be 1.3186. Overall, this chart still appears to me to be in a bearish condition. The only thing that will change that is a close above the wave "i" closing low of 1.3364.
The Aussie is right on the verge of a major upside breakout. Will it break through this time?
The Aussie dollar futures (@AD) give us a much more bullish chart to consider. I showed this chart here last week and it's worth highlighting again here today. The Aussie currently sits right on the precipice of a major dual breakout on the weekly chart. First the long-term pennant formation that has been in place since late 2011 may be toast as the Aussie has already closed above the upper edge resistance on a daily basis. If the Aussie can hold that breakout on a weekly closing basis, it would be a very bullish sign.
The next bullish development would occur for the Aussie would be if it can close convincingly (and on a weekly and/or monthly basis) above the 100% Fibonacci projection line at 1.0495 (AD was trading at 1.0492 as of 5:19pm on Wednesday). Overall, I give the bulls the edge here and will give them outright victory if 1.0495 is taken out on a weekly closing basis.
How to trade the Aussie? Look for Aussie currency pairs where the other end of the pair is showing clear technical weakness (now and going forward) and make the appropriate trade using the Aussie and that currency (i.e. going long of AUDJPY).
The Canadian dollar is still struggling below resistance.
As potentially bullish as the chart of the Aussie dollar is, I thought I might see some more bullishness emanating from the chart of the Canadian dollar (@CD). That is not the case (yet). The Canadian dollar appears to be stuck below wave "c" resistance at 0.9868. As long as that resistance level remains intact, my downside target for the Canadian dollar futures is 0.9672. If you were operating a hedge fund, or if you're playing at home, the idea would be to get long of the Aussie and short of the Canadian dollar somehow (the easiest way is by going long AUDCAD). Overall, the "risk off" message here conflicts with the potential "risk on" message from the Aussie dollar – but it fits well with the "risk off" message of the euro futures.
The US dollar is nearing one of two possible support levels (nearly opposite image of the euro).
Moving on to the "safety" currencies, the US dollar futures (@DX) chart is not surprisingly (considering where the euro is trading versus resistance) trading right at the first of two possible / likely support levels. Either one of these may end up acting as support, but the synergy with the S&P nearing what I think is a short-term top makes me think the greenback futures will hold support at 82.330. So, while the very short-term decline in the DX futures has been "risk on" in nature, the likely future direction of the DX futures stands out as being "risk off" in nature.
The yen is clearly still in a bear market – with plenty of room to fall.
The Japanese yen futures (@JY) are unambiguously "risk on" in their trading recently. They've declined a lot already and are almost certain to continue lower – at least to the 261.8% Fibonacci price projection line at 0.9309. The chart below speaks for itself.
The Swiss franc is moving further above recent support and should continue higher.
The Swiss franc futures (@SF) chart is also bullish, but a "safety" currency having a bullish technical set-up is a "risk off" message. Right now, I can see the Franc working its way higher to the February of 2012 peak at just under 1.13. That February 2012 peak coincides well with the 100% Fibonacci price projection line at 1.1281.
The Franc's strength may in part be reflective of more stability in the euro region. But, the fact that the US dollar is also setting up for more upside makes the franc's existing and likely strength less of an anomaly worth dismissing.
My firm's krona / franc indicator still tells me to be on the lookout for a short-term market top.
As I've mentioned here recently, my firm has a proprietary indicator that shows relative strength or weakness of the Swedish krona against the Swiss franc. Up until recently, there was a clear trend higher (meaning Krona strength). That trend line was broken in the last two weeks and the chart now reflects modest franc outperformance. When the franc is outperforming, it is typically a precursor for weakness in other risk assets. Nothing has changed since I brought this up in last week's article. The clock is now ticking for a top in equities – if recent historical patterns are to continue.
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