Bearish Charts in Equities About to Be Joined by Bearish Developments in Bonds and Currencies
We are just on the verge of additional breakdowns in some of the important "risk tell" charts in the bond and currency markets.
The euro / US dollar seems set up to move sharply lower.
As if the negative technical set-ups in equities and crude oil weren't enough, the widely observed euro / US dollar cross (EURUSD) may also be setting up for some sharp downside. Based on the wave count in the chart below, the EURUSD is in wave (((iii))) lower with the nearest downside target of 1.26289 (from 1.29573 as of 11:13 a.m. Tuesday). Keep in mind that there's more downside ahead even after that target is hit; it's just that we may see a sideways consolidation prior to that next wave lower.
Overall, this chart, which again is used by many market observers (and trading programmers), sets up very bearishly for the EURUSD, which in turn means that risk assets will also likely be under pressure.
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Franc strength vs. Krona continues to spell trouble for stocks.
In the last few reports, I've shared a new, potentially valuable market tell based on the relationship between the euro / Swiss Franc cross (EURCHF) and the euro / Swedish Krona cross (EURSEK), which is actually a technical way of comparing the Franc against the Krona. As I mentioned, when the Franc shows relative strength against the Krona, it is typically bearish for risk assets (with the reverse being true when the Krona shows relative strength against the Franc).
I further pointed out that the Krona seemed to have topped out versus the Franc in August. Based on previous peaks in the Krona versus the Franc, the SPDR S&P Depository Receipts (NYSEARCA:SPY) should have then peaked out four to six weeks later. Well, we saw what looks like a peak in the S&P in mid-September. The next task becomes to determine approximately how long the downside in the SPY may last. Based on the previous occurrences of these relationships, we should look to see a little over two months of weakness in the SPY, which would take us to mid to late November (if the previous cycles hold up).
I wouldn't bet the bank on such observations, but I would certainly file them away and combine them with observations of trading conditions at certain technical levels and time frames. Meanwhile, let's look for a break of the dark blue downtrend line as a sign that the Krona may be taking back the leadership from the Franc, as that would then start the clock on when the SPY may turn back higher.
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Weakness in the charts of equities, crude oil (which has been adequately documented here on the site and in the media), and the EURUSD along with the negative tells coming from market internals and the Franc / Krona relationship have me thinking we've got some more downside ahead of us in the short-term. There are some possible hopeful signs coming from the bond markets and we will see bounces. However, based on the aggregate of market evidence being presented today, bounces are to be sold into for the time being.
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