Things tend to correlate until they don’t.
That’s how I ended my article last week.
RISK PAIRS
Every now and then, analysts like talking about breakdowns in correlations. And with so many factors driving the various markets, sometimes things move in ways that don’t make sense to us. Taking a look currency pairs traditionally associated with risk, we see some solid buying action. The euro/dollar (EUR/USD) moved higher last week. The Japanese yen (JPY) lost ground against the U.S. dollar (USD), euro (EUR) and British pound (GBP). And most interestingly, the Aussie/yen (AUD/JPY) has been bid recently.
WHAT ABOUT STOCKS
With all that directional movement, we’d expect to see the equity markets move higher as well.
Well, they haven’t.
CRITICAL JUNCTURE
The Dow has sold off over 350 points from its recent high. The S&P and even gold and silver have been declining. Even more interesting, the S&P and Dow are sitting on fairly strong daily support, while at the same time I would be hesitant in making any long term purchases of the aforementioned currency pairs. In other words, if equities move higher these currencies are at levels one should be cautious in buying.
Let’s take a step back.
BIG PICTURE
We should probably ask ourselves what macro factors are driving these markets. We Americans like to think it’s all about us, and with the presidential elections just a few weeks off maybe it is. Greece continues to be in the news, but when weren’t they either about to drop out of the euro zone or be saved in some creative financing program? Maybe the markets are tired of hearing about Greece. I know I am. The Fed likes to influence markets, but with rates still near zero and with QE Unlimited well underway, what else can we expect them to do, at least for the next few months, that would add to a “risk on” tone.
Bringing it together: It sounds like we should expect the markets to be confused. Well, they pretty much are. The euro and pound have been in a rather sizeable range since September 17. The Dow and S&P have been basically range trading since September 14 and the AUD/JPY hasn’t really made much progress either direction since July.
So what?
BIG RANGES
These are all pretty big ranges, and markets still move technically so there is plenty of money to be made in playing these moves. For example, the euro didn’t break into new long territory last Friday but it stopped to within pips of the September high. As far as I’m concerned, there were shorting opportunities up there. In addition, (as I’ve mentioned a few times) the 200 day SMA has been respected very well on the downside.
JUST LISTEN TO THE CHARTS
On a one hour chart, over the weekend we had a few reasons to get long. Last night we stopped on the .382 retracement of the prior minor swing move high from 1.2832 to 1.3138. We broke an hourly consolidation pattern at 22:00 NYT. We retested that trendline for a few hours after breaking, and we retested it again on a spike low at 04:00 last night. Even when fundamentals are cluttered, technically, the markets like telling us what they want to do, we just have to listen attentively.
