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The Euro Jumps Aboard the Bull's Train, but the Aussie Dollar Is Being a Wet Blanket


The euro-US dollar cross was finally able to conquer its short-term resistance over the last few days. But that's not the end of the story.

MINYANVILLE ORIGINAL Since my last piece for Minyanville, we've seen the S&P (INDEXSP:.INX) and Nasdaq (INDEXNASDAQ:.IXIC) each take out their key short-term resistance levels on a daily closing basis. We've seen the yield on the 10-Year US Treasury Note blow through its short-term "correction resistance" level like a hot knife through butter. Now, we've seen the EURUSD take out its short-term key resistance level as well.

All of those occurrences are nice wins for the bulls. However, if risk assets are really telling us the global economy is on the way up, shouldn't a commodity-centric currency like the Aussie dollar be exploding through resistance as well? What about emerging market bonds – shouldn't they be remaining as buoyant as they've been during the market's rebound over the last 30 days? What about the Swiss franc – which some are saying is the global safe harbor currency right now – shouldn't it be weakening as money flows out of safety? The answer to those questions is "Yes," but the action in those specific instances is painting a picture of non-confirmation / bearishness at this point in time.

Let's go to the charts to review the evidence...


The EURUSD finally broke out above short-term resistance! It's still not a bull market for the cross, though.

The EURUSD managed to take out the horizontal line resistance at 1.31716 with which it had been struggling for the last month or so. Assuming that breakout holds into the weekend, I think we can safely say the cross is likely headed up to the 100% Fibonacci price projection line (a.k.a., "correction resistance") at 1.36294 – over 4,000 pips higher than Thursday's levels. If you plot the Fibonacci lines using the slightly more optimistic pivot points, the 100% "correction resistance" line would come in at 1.38295 – around 6,000 pips higher than Thursday's levels. Either way, it appears to be a nice long-side trade in the EURUSD – assuming, of course, that the breakout above 1.31716 holds into the weekend.

Such upside in the EURUSD would almost certainly be a tailwind for other risk assets around the globe like stocks and certain "risk on" type of commodities like copper and perhaps crude oil.

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The Aussie dollar is not (yet) confirming the bullish action in the EURUSD.

So, with the EURUSD breaking out above short-term resistance, the bulls have the "all clear," right? Well, there are some concerns and questions being generated by the very recent action in the Aussie dollar currency crosses.

The first one we will look at today is the Aussie dollar / US dollar cross (AUDUSD) – see the first chart below. Notice the very clear rejection at the red downtrend line (the upper edge of a longer-term pennant formation). Any trader or experienced investor will tell you to wait for a break of the pennant formation and then wait further for a re-test of that broken trend line before pulling the trigger on a new trade. We did get a daily close above the red downtrend line, but that was a very minor break above resistance and it was quickly given back. Now, the black candles are showing up once again and a test of the dark blue uptrend line seems to be in the cards. Again – wait for the breakout or breakdown to occur and then wait for the re-test to occur before getting involved in a trade.

Click to enlarge
No positions in stocks mentioned.

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