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Correction In Risk Assets: Is There Still More to Go?


Downside targets have yet to be hit in the euro and the Aussie dollar, and the bond markets aren't telling us anything bullish to counteract the negativity in currencies.

MINYANVILLE ORIGINAL My narrative over the last several weeks has been that we should be seeing downside in equities develop to match the bearish divergences we were seeing in the "risk" currencies. Finally, the equity markets have begun to pull back for more than just a day or two.

Critical support levels will be approached soon on the major US indices and many will be watching to see if those levels hold up. I, on the other hand, will not only be watching 1,417.42 on the S&P (INDEXSP:.INX) and 3,034.07 on the Nasdaq (INDEXNASDAQ:.IXIC), but I will be monitoring the key support levels in the currency and bond charts.

Today, I am just covering currencies as there has not been much movement / change in the bond charts since my article last week. Let's go to the charts to see if we can identify the key levels in the currency markets.

The euro / US dollar cross may be on the verge of more of a short-term breakdown.

Over the last month or so, I have put forth the idea that the euro / US dollar cross (EURUSD) would come off of its September high and trade all the way down to 1.23843 (a wave "b" move in my opinion). Then, the EURUSD should, in theory, experience a wave "c" thrust to the upside that will eclipse the September highs and reach all the way up to around 1.34520. All the while, the other risk markets like the equity markets should move in tandem directionally with the EURUSD.

So, if I'm correct on my call for the EURUSD, we should see weakness in equities for a while longer – perhaps well below the S&P and Nasdaq's support levels mentioned above.

Click to enlarge

The Aussie dollar crosses still have more downside to work through.

Recently, I have been highlighting the deteriorating technical condition of the Aussie dollar currency crosses and pointing out that it may be a leading indicator for other risk assets. Now, we're seeing the downside action in stocks that one would expect given the weakness in the Aussie crosses.

Now that we're seeing the decline in risk assets, I want to see if the Aussie crosses are telling us there is much more weakness to come or if support will come into play soon.
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