Analys från DailyFX
What to Watch as USD/Yen at Critical Levels and S&P at Potential Turn
Summary: Strong declines and sentiment extremes in the Dollar/Yen exchange rate and SP 500 suggest that both may be at a major turn. What factors are we watching?
– USDJPY exchange rate tumbles and lack of upside conviction warns against buying
– US SP 500 at similarlycritical levels, and the next move in stocks could prove pivotal
– Strong correlation suggests next Yen and SP move could be decisive, we’re watching key factors
Traders have sent the US Dollar sharply lower versus the Japanese Yen as stock markets decline, but key technical and sentiment-based factors suggest we might be at a major turning point.
The USDJPY chart tells most of the story: despite sharp declines, the pair has stopped and reversed higher at potentially pivotal price levels.
USDJPY Holds Key Support at 100-day Simple Moving Average, Nears key Trendline
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
The US SP 500 trades at similarly significant price levels, and a strong link between the JPY and stocks suggests the next move could mean big things for forex and equity markets.
In fact the correlation between the USDJPY and SP trades near its strongest since the height of the global financial crisis in 2008-2009. What else are we watching?
USDJPY Correlation to SP 500 Suggests Both Could Reverse or Continue Lower in Tandem
Data source: Bloomberg, Prepared by David Rodriguez
One of the critical factors worth watching is potential sentiment extremes in both the USDJPY and the SPX500, which tracks the fair value of the SP 500 futures contract.
A look at FXCM Execution Desk data shows that retail FX traders are their most net-long the Dollar against the Yen since fairly significant turning points. And though we typically go against the crowd—we often sell when most are buying and vice versa—positions are often their most one-sided at key turns.
Retail FX Trading Crowds Have Aggressively Bought into USDJPY Weakness
Data source:FXCM Execution Desk data, Prepared by David Rodriguez
A look at Retail CFD speculative positions shows similarly substantial swings in stock market sentiment; traders are now net-long the SPX500 contract for the first time since a key SP turn in December, 2012.
A Potential Sentiment Extreme in the SPX500 Warns of Big Moves for SP
Important turns are only clear in hindsight, and it seems risky to buy into such sharp declines. What could provide the decisive sign?
Our Senior Technical Strategist sees evidence that the USDJPY may continue to trade sideways or to fresh lows before resuming its longer-term uptrend. We likewise see the SP 500 continue to trade at critical 12-month trendline support.
A huge week for financial markets suggests we could see decisive US Dollar and stock market moves in the days ahead, and it will be critical to watch price action on two major central bank decisions as well as US Nonfarm Payrolls data.
Follow any updates on the US Dollar and other currencies via this author’s e-mail distribution list.
Forex Correlations SummaryView forex correlations to the SP 500, SP Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R SEE GUIDE ON READING THE ABOVE CHART
— Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.
Contact and follow David via Twitter: https://twitter.com/DRodriguezFX
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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