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Monday Technical Review: Credit and Currencies

  • Written by Syndicated Publisher 349 Comments349 Comments Comments
    January 10, 2012

    There is an interesting battle going on right now in the capital markets. You have the USD and treasury in the process of breaking out to either 52 week highs or all time highs in the case of treasury. At the same time you have equity markets pushing up against key resistance levels and attempting a breakout as well.

    I’m not a believer whatsoever in the concept of decoupling from credit and or foreign currency here. At least not in the current economic environment. I also don’t believe the US economy is either decoupling from the global economy nor sheltered from shocks facing Europe. The USD as the world’s reserve currency is simply too important to be ignored here.

    So if there is no decoupling the divergence between these asset classes at some point will break. One will be forced to acknowledge the other and reverse course. The magical question is who is right here? Stepping back from the macro data and the credit event and looking purely at price action, here is what I see.

    Equity Looks Tired

    I don’t say that because I am short this market. If you take an honest look at the internals you see a market that is showing no leadership. It is showing divergence within various sectors. Most problematic is the weakness among mid and small caps which are failing to lead this market higher.

    Breadth or net advancing issues has been unimpressive. There simply is less participation in advancing issues.

    Volume today on the SPY for example was lower than that of December 30, 2011. That speaks “volumes” to the simple lack of buyers at current levels.

    Mid and small cap futures have underperformed ES (SPX futures) for a few months now.

    The ES is now starting to underperform “cash” (SPX).

    The past few days mid and small cap futures have tried to rally intraday day and have failed to create a bid in ES. As the session comes to a close mid and small cap futures have then shown relative weakness. More indicative of people chasing yield through higher beta or simply intraday traders versus new long positions being initiated.

    Credit Looks Strong

    Treasury futures are breaking to new all time highs across the entire curve. It’s not just 10 or 5 year futures but 2 and 30 as well. Five year futures look the strongest right now but the rest of the curve is not far behind. There is a lot of breadth to this advance.

    Below is a six month daily of the 5 year futures. Notice how it closed above a final trend line and took out recent highs intraday. All that awaits is the all time highs about 1% away.


    The USD is in a very powerful move right here contrasted with the EUR which is struggling to find support at important levels. The AUD looks to also be in a reversal pattern on a daily chart after failing at key resistance.

    USD – The USD broke out of an ascending wedge pattern and tested November 2010 highs intraday. Caution is warranted right here until 81.44 is taken out on a closing basis but considering the powerful moves the prior three days a pullback was probable here.

    Some will question the validity of the move including that from an ascending wedge and see it more as a double top versus a clean break which may have contributed to selling pressure. A break of 81.44 though will lead to a quick move to the 83-84 area as little resistance remains above.

    AUD – Look at the intraday move in the AUD/USD today. It moved up again to resistance that had failed late last week. Notice the complete lack of momentum in the move though as indicated by the bearish divergence on the MACD. Since January 3 the AUD has put in a series of lower highs and lower lows on the daily chart.

    Images: Flickr (licence attribution)

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