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Currencies Echoing 'Risk Off' Sentiment: Selling Almost Over or Just Beginning?

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Key global currency risk gauges are not providing the bulls with much hope in the form of divergences just yet. What are the levels to watch for such divergences to possibly occur?

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A possible collapse of the Italian government would be bad for risk in general and for the euro in particular any day of the week. The messages of instability emanating from Washington, DC, would be bad for risk in general most days as well. However, when you combine these two issues, you get what we have this morning: a general risk-averse attitude the is pressuring equities, crude oil, and several key risk gauges in the currency markets to the downside.

What matters to traders is not "what is" but rather "what will be." So is there a lot more downside potential left on the charts for risk assets? Or is there a potential floor nearby that could send risk assets flying for a profitable Q4?

Let's go to the charts.

BONDS

Treasury yields bouncing off of "minor" support; "major" support still lower.

Treasury yields -- shown below by the yield on the 10-year US Treasury Note (INDEXCBOE:TNX) -- are finding some short-term support at 2.605%. That level represents the lower edge of the upside gap that occurred in early August.

Given the recent break of the 23.6% Fibonacci retracement line last week, the next "major" support for TNX comes in at the 38.2% retracement line down at 2.467%. So, in my view, today's bounce off of the "minor" support will not last for long. With the jobs report due out Friday and plenty of data points coming out between now and then, there would appear to be plenty of opportunity for the rest of the move lower in rates to occur.



STOCKS

S&P futures testing one possible support at 1,665; next level down at 1,656 may be the floor.

The S&P futures gapped lower Monday but have rebounded at the opening of the US session as short-term traders followed the trader's playbook predictably and covered shorts into the initial sell-off. Those same traders are likely watching to see how much of a bounce occurs and are probably picking their spots for re-entry on the short side.

In terms of the technical levels to monitor, the futures tested one possible support level at 1,667.88 this morning. That level was generated by the 50% Fibonacci retracement line (orange line on the chart) as shown on the chart below. However, if you take a look at the blue Fibonacci extension lines, the real support level may be down at around 1,655 - 1,656, which also corresponds with the 61.8% Fibonacci retracement line (see dark red line). In either case, this appears (at this point) to be a nice buying opportunity for prospective bulls.



CURRENCIES

The AUD/JPY cross is bouncing off of one possible "correction support."

One of the key risk gauges in the currency markets -- along with the euro / yen (EUR/JPY) and the Aussie dollar / US dollar (AUD/USD) -- is the Aussie dollar / Japanese yen (AUD/JPY) currency cross. Today of all days, the AUD/JPY should be evaluated in lieu of the others since it is not tainted by the US or Italian crises.

Right now, it looks like the AUD/JPY tested the key "correction support" at 90.735 and is thus far holding up above that level. At the very least, it was a natural place to expect the bulls to try to make a stand. As long as that level holds firm as support -- especially on a closing basis -- the bulls will have something on which they can hang their hats. Any close below that, though, will mean real trouble for risk bulls. Monitor this one closely.



SUMMING IT ALL UP

If I had to place a bet this morning, it would be for one more thrust lower in risk assets after this morning's bounce. I'm thinking we test the "major" support in yields at 2.465% and the 1,656 level on the S&P futures before this correction is over. Such a move lower may coincide with a retest of the "correction support" for the AUD/JPY. All that being noted, breaks of the key support levels in yields, stocks, or the AUD/JPY would be a clear signal to protect capital ASAP.

Twitter: @seachangereport

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No positions in stocks mentioned.

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