Analys från DailyFX
USDJPY and Stocks Look Ready To Make Meaningful Declines
Talking Points:
- ‘Risk-trade’ showing signs of a pullback nearing
- Clear technical patterns provide in Nas100, US30, JPN225 provide guidance
- Equities, rates and FX all moving in sync
Are equities and risk about to enter pullback mode? Recent price action suggest that the market is moving towards making a break lower. The Nasdaq and Dow 30, in particular, are carving out Head-and-Shoulder patterns. The Nasdaq is doing so with the possibility of a right shoulder triangle, and the Dow is doing the same with a broad ‘Triangle Top’. The SP500 is still postured the strongest, less than 1% from new highs, and small cap stocks (Russell 2000) acting the weakest, off highs by 7%. The fact that small cap names have failed to catch the same kind of bid as large cap stocks further suggest appetite for risk is waning. When investors and money managers are feeling confident about the economy and higher stock prices, they will snatch up the riskiest shares, or those companies with the greatest growth potential – small cap stocks. That is not the case right now.
NAS100 (Nasdaq 100) – Daily Head-and-shoulders w/right shoulder triangle
US30 (DOW) – Daily Head-and-shoulders, Triangle Top formation
The Nikkei is another Index of interest given its relative weakness and correlation to USD/JPY. This index has been teetering for some time now, creating a head-and-shoulders pattern. It looks as though this index will take a hit at the first sign of weakness in global stock markets. The 10-year rate, which also trades in line with USDJPY, is flirting with support. The set-up for selling risk, buying bonds is brewing.
JPN225 (Nikkei) – Daily Head-and-shoulders, leaning over
USDJPY – Daily Break of Trend-lines
Charts created by Paul Robinson using MarketScope 2.0.
Year-to-Date Overlay of Nikkei/10-Year Yield/USDJPY (All-the-same-market – Correlation is high.)
The most compelling aspect of this broad market scenario is that each market’s technical set-ups are in alignment for triggering in near simultaneous fashion. Price breaks as follows – SPX500 1860, US30 16250, Nas100 3550, JPN225 13750, US 10-yr 2.50% and USDJPY 101. If a near simultaneous break across the board takes place, look for each market to propel one another lower in a reflexive manner over the near-term.
How far of a drop could be in store? There has been little reason in recent years to suggest any declines in risk to be anything more than corrections, however; there is enough downside room before reaching significant support levels to at least give us a good trade and some tradable volatility.
–Written by Paul Robinson of FXSimplified.com
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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