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Technical Implications to risk sensitive assets
The SPX Looks “Toppy,” So How Will FX React?
As we enter a seasonally tough time for US equities (think of the popular “Sell in May and Go Away” market saying) the SPX has set up some very distinct, and alarming, technical setups if you are a stock market bull. Keeping in mind this last week the US/China trade war was ratcheted up a notch, it makes perfect sense to be on the defensive.
If you look at the chart below, you will notice a possible false breakout attempt, which in turn could set up a longer term double top. In addition, the ascending wedge breakdown this week also should trigger some warning alarms for the bulls. One last point I would like to make about the chart below is we have an AB=CD pattern that also completed at the beginning of the year, and in essence is still valid.
If it looks possible that the SPX may have a period of a correction, the first question we (as FX traders) ask is “what is the FX response to the SPX?” My first inclination is to look at the JPY to see if the JPY is the beneficiary of a “risk off” move, which is typical in an environment when investors shun stocks. The JPY has been viewed as more of a safe haven type of currency when investors are looking for a safe place to park their monies. Whether it is a strong trade surplus, or just a common perception that the JPY strengthens during periods of uncertainty, we have to keep a close eye on it in this environment.
What you will notice in the chart above, the SPX (orange) has turned lower and the JPY futures is strengthening towards 2018 highs.
Since the trade war has intensified between the United States and China, another pair we should be looking at carefully is the AUDJPY. The Australian dollar is the currency proxy for China at times, and coupled with the safe haven status of the JPY could be an interesting pair to trade if stocks continue to sour and the trade war continues to be tumultuous.
The Harmonics Perspective
The AUDUSD is inside one descending structure suggesting more downside momentum, below the weekly fractal support printed at 0.70528 and now threatening the daily support positioned at 0.69630.
Eventual bullish bat pattern on hold at 0.6790 – the 88% fib and default completion point, with the major monthly fractal positioned below at 0.67250.
By default, the bat pattern should search for the 38% fib retracement as first target, for now projected at 0.6883, with a second target at the golden fib at 0.71025.
The NZDUSD is inside one descending parallel channel, below the weekly fractal support printed at 0.67450, rejecting for now the most recent resistance forged at 0.66144 which may force the price to trade lower.
Daily support is positioned at 0.65267 with one default bullish gartley pattern on hold at 0.64778 at 127% fib extension, above the major fractal monthly support printed last October 5th.
The completion of the pattern will suggest a pullback, by default and as a minimum expectation, the price should search for the 38% fib retracement projected at 0.6666 and also the 200ma approaching from above, with a second target at the golden fib at 0.67813 – the weekly and broken fractal support, now as resistance.
The DAX has found support at 11840 after printing the weekly and daily fractal resistance at 12450, a couple of points above the golden fib at 61.8%.
Bullish hidden divergence between the most recent weekly and daily support levels suggests more upside momentum, but without ignoring the possibility to break below the daily support searching for support at the 200DMA approaching from below, without invalidating the existent bullish hidden divergence, which will vanish if the price trades below the weekly support.
Eventual Cup n’ Handle formation, with the “handle” for now rejecting the very first Fibonacci retracement level at 0.236%.
The Elliott Waves
AUDUSD is coming down to 61.8% from early 2019 highs where we see wave (A), first leg of a three wave corrective recovery that is most likely incomplete. (B) waves will very often be complex and maybe even deep, especially after sharp first wave (A), like in our case up from January 1st. As such, bulls have to be patient here but that may not take long if we consider that the 61.8% can be a very important and interesting reversal zone. At the same time, we monitor stocks (SPX500) that made a very nice and deep pullback in the last few weeks which so far looks overlapping, thus corrective from the highs. If we get a nice break above the upper line of a corrective channel then price may start accelerating which may help the Aussie to find a buyers, especially against the JPY.
I may consider some Aussie longs if AUDUSD gets back above 0.7000 and AUDJPY above 77.20 to confirm a reversal.