Risk on or Risk off? AUD/JPY has a clue?

I have been looking for clues as to whether this equity rally will sustain itself long term or have the last few months just been a big bounce in an even bigger range. The SPY is at resistance, the EUR/USD has been ranging around $1.32, Gold is at channel resistance, OIL is in a range - what indicator could be helpful to uncover whether the markets are truly risk on or risk off? How about AUD/JPY? The AUD is a proxy for growth whereas JPY is a proxy for safety. AUD/JPY is at resistance - sooner rather than later this market will reveal its true appetite for risk and AUD/JPY is a good place to watch. See the charts:

Major ETFs at Resistance - Euro not in Sync

Markets have been rising since October and are now pushing against highs since May 2011 and July 2011.  The enthusiasm of a better jobs report on Friday seems to open the possibility that markets could rise higher on economic optimism while corporate earnings have been slowing.


Meanwhile there has been a noticeable disconnect between the EUR/USD relationship and SPY.  While the Euro has been moving lower since August US equities have been moving higher.  This contradicts the conventional wisdom that a higher Euro and a higher stock market move together.  While this relationship return with either a higher Euro or lower stock market or are we seeing a structural change in these relationships?


See the charts:

EUR/USD reverses at Fibonacci cluster resistance

We have been looking at EUR/USD closely for the last week since it has been running into an area we have identified as significant resistance. Another tool we can use are Fibonacci retracements and locating areas of Fibonacci "clusters" where multiple levels converge to form strong resistance. From a fibonacci perspective we use the low of 1.2625 and swing highs of 1.3857 and 1.3431 each of represent an important swing in the move lower. These swing moves are the best places from which to measure retracements to the low. The "cluster" are forms between 1.3246-1.3242. We will continue watching this area and see if price respects resistance and then talk about how we can project prices forward with fibonacci. See the charts.

EUR/USD confirms Dark Cloud Cover

With the definitive move lower today and the concern over Portugal EUR/USD's move lower marks a change in momentum and we believe prices will continue lower potentially to 1.20-1.21 area. See the chart below.

What about Greece?

This conversation between Kudlow and his guests on Europe, Greece, and the presidential race is good listening. Enjoy.

Bearish Engulfing finished as Dark Cloud Cover

EUR/USD could not hold the lows but still finished as a Dark Cloud cover which is a similar pattern with a similar market psychology. In the end we need confirmation to see this as a turning point in the currency pair. See chart

Bearish Engulfing on EUR/USD

We have been writing about EUR/USD running into our resistance area and waiting for a sign the market would respect it. EUR/USD's sell off today is forming the candlestick pattern most resembling "Bearish Engulfing" which is a reliable signal. Bearish Engulfing requires the entire body of today's candle consume the body of the prior day's candle and in this situation the criteria is satisfied. Friday's open was 1.3108 and close was 1.3217. At the time of this post today's open is 1.3229 and the last price is 1.3101 so at the moment the downward white body today engulfs Friday's body completely. The psychology is important to understand here as well. Ideally the candle bodies in the rally would thin out as the rally comes to a top showing a lack of conviction by the bulls to continue pushing higher. The bears would come in after a weak higher open and push prices down hard thus ending the bullish momentum and reversing momentum for the bears. In this example the candle on Friday is still substantial in size and there is little evidence of them losing interest in pursuing the rally. On the other hand we are pressing beyond our first Keltner Band and approaching our second which is an overbought signal and this is an area of strong resistance on our Point&Figure Charts. I would like to see this Bearish Engulfing confirmed with a lower close tomorrow to make me a believer. See the chart below.