Can you hear that stretching sound? That's the patience of the majority of risk bears out there. All it took was a modest inflation reading out of China and FOMC meeting minutes that are somehow being interpreted as market-friendly to keep the party going in stocks. So far, though, key currency and bond charts are still mixed in their messages. Hey, at least the messages aren't uniformly bearish! The old saying in baseball is "the tie goes to the runner." Well, in the markets, when messages are ambiguous, "the tie goes to the existing momentum." Seemingly, it will take something unexpected to stop and/or reverse the momentum – neutral or mixed messages will not do (for the bears).
Let's take a look at where the S&P (^INX) stands technically.
The S&P is trading slightly above projected (monthly) resistance for the "bear case."
Heading into the close Wednesday, the S&P 500 ($SPX.X) was trading slightly above both the 2007 intra-day high (1,576.09) and the projected wave "c of B" high (based on the 100% Fibonacci projection). First and foremost, the initial reaction should absolutely be to admit the continued higher price action is bullish. Secondly, however, I must point out that the chart below is a monthly chart – so a daily and/or a weekly breakout above monthly resistance is great, but it won't mean a thing if the breakout level does not hold up as support into the end of the month. What would be real bad (for the bulls) would be if both 1,581.34 and 1,576.09 were to fail as support before month's end. Unless and until all that happens, though, the bulls clearly have the edge right now.
Even if the "bear case" is not necessarily the reality, the market should stop and correct lower before advancing much higher.
The bear case (where the 2007 peak was wave "V" and the 2009 bottom was wave "A" of an "ABC" correction to the downside) is one of two possible realities that I've laid out here recently. The other scenario is far more bullish and has the S&P ending up in the 1,700s within the next couple of years. Even in that scenario, though, we should be at or near a short-term market peak.
The daily chart of the S&P 500 below shows the S&P in wave "(v) of v". The question is whether it's "(v), v and B" for the bearish scenario or "(v), v and 1" for the bullish scenario. The reason I feel that the market is near a short-term top even in the bullish scenario is that 1,589.63 represents the projected peak for wave "(v)" in either case. This is based on the idea that wave "(v)" will roughly match wave "(i)" in magnitude. (For the record, Wednesday's intraday high was 1,589.07).
Assuming I'm correct about this being a short-term top, the possible pullback targets will be approximately 1475 (over 7% lower), 1403 (over 11.5% lower), 1,345 (over 15% lower) and / or 1288 (almost 19% lower). Those are all Fibonacci retracement levels and all of them correspond pretty well with horizontal line support lines. I must also mention that in this scenario, the S&P could possibly even retrace 100% of the rally that started in October of 2011 and that has lasted until now (meaning it's feasible that 1,100 could be tested).
Now, that we've checked in with the S&P, let's take a look to see if any clear messages are being sent by the currency and bond markets.
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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.
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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.
Treasury yields are bouncing – as they should. But this chart doesn't appear to be signaling much higher yields yet.
The yield on the 10-Year US Treasury Note ($TNX.X) has bounced – as the bulls would hope. However, it's is bouncing out of an oversold condition and appears to merely be setting things up for another quick shot lower (for wave "(v) & iii". At this point, the support for yields should initially be the recent low at 1.677% or perhaps just below that level. I show this chart because it's important for us to be aware of what's going on with interest rates. However, we all know the rates are being affected at least in part by the FOMC's QE operations, so any messages being sent must be taken with a grain of salt. That being noted, this chart's bearish tone is still giving me a "risk off" message.
Emerging markets debt has suddenly spiked in price – a short-term boost for the bulls.
One bullish development in bond land is the very short-term action in the iShares Emerging Market Bond ETF (EMB). The fund exploded higher recently and blew right through the 14-day moving average line resistance. It has stopped, though, right at one level of horizontal line resistance at just under 121.00. I cannot label the overall chart as bullish until I see a series of higher lows develop – but this short-term action is encouraging if you're a risk bull (especially considering how miserable all things related to emerging markets have been over the recent months).
US high yield debt still struggling to recapture its former bullishness, though.
The iShares High Yield Bond ETF (JNK) has been trading more bullishly as well. Wednesday's close was another step in the right direction (for the bulls) as short-term resistance was taken out. Now, the next step on the upside for JNK is the January peak at $41.13.
Here's a summary of today's findings:
I am forcing myself to be flexible with my market opinions – but it's not that easy. It feels like every fiber of my body is warning of an imminent pullback in risk asset prices. I will definitely be singing a more bullish tune, however, if the Aussie can break to new all-time highs and if the euro and Canadian dollars can take steps toward turning their charts bullish (from bearish currently). If I see anything in the next several sessions that gets me more bullish, I promise to share it on the Buzz & Banter (subscription required).