Financial Market Direction by Jay Norris
EURUSD
The Euro reversed the course of its monthly trend in November to lower against the Greenback in sympathy with higher U.S. long-term rates – see bonds page 8– but is still currently above the 50% retracement of the 5-month up-move. The positive correlation between the Euro and asset class markets is still in-place, though direction on the weekly and monthly charts is lower for the Euro, and higher for the S&P 500. The Euro is the whipping post for “global risk” developments, while still benefits from U.S. risk developments – yesterday’s U.S. disappointing non-farm payroll coming in 100,000 less than expected for example left the Euro up sharply.
The current long-term bearish pattern of lower highs and lower lows on the Weekly Euro chart below spells out the obvious problem of holding long positions for long-term traders; throw in negative long-term demographics and the daunting task of economic rule by committee and it does not get any better.
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The trade signals – green and red arrows –on this Weekly Euro chart are set to give trade alerts only when in-line with the Monthly trend. We can see that the last signal given was a buy signal so we cannot rule out a rally to the top of the current 2-year bear channel. The Euro is a good market for shorter-term traders because of the higher volume and volatility.
USDJPY
USDJPY just did fail to reverse its bearish Monthly trend in November, and still shows a stubborn pattern of lower highs and lower lows on the daily chart. Today’s sharp reaction lower highlights Japanese and global investor’s concern with the continued slow pace of job growth in the U.S. with today’s nonfarm payroll coming in 100K less than expected. A weaker yen — stronger USDJPY – would likely be a boost for stock markets as it would show that Japan’s powerful investor class is investing globally again. That’s off the table for today, though this market is now in a position to move down and put in a higher low following the test of 80.00 in late Oct. 
Over the past few years long USDJPY positions has been such a losing proposition for professional trader’s that it’s often called the “widow-maker”. At the very least it shows market’s penchant for trending longer than even experienced traders think. The consensus among many hedge-fund traders is that bullish reversal for this market is likely once the U.S. economy can prove itself by adding jobs. Currently the Yen is still a flight to quality currency any time the markets glimpse weakening economic numbers in the U.S. and globally.
This Weekly USDJPY yen chart shows this market bouncing off the 1995 low at approx 80.00, and gives us scale. In trading parlance we can say ‘there is a lot of room on the upside”. The price pattern on this chart however – lower highs and lower lows – is bearish.
AUDUSD
AUDUSD is an asset class market because of the high carry, and benefits from a bullish monthly trend, bullish price pattern on the Weekly chart, and a strong correlation to stock indices. Aussie also still benefits from U.S. risk – negative US financials – but can suffer from global risk and current correlation to the Euro. The green arrow buy signal you see under today’s candle on the Daily chart is set to only signal if in-line with both the monthly and weekly trends.
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The Aussie is in the enviable position of enjoying a bullish price pattern on the Weekly chart, the most favorable demographics of the majors, and a leading asset class market with a tight correlation to stock indices.
Stock Indices
The green and red arrows on the S&P 500 Daily chart below are set to only flash a signal if it is in-line with the trends on both the Monthly and Weekly charts. The maroon line identifies the Monthly trend and the white line represents the Weekly Trend – both are higher. The red line at approx 1274.00 is the 66% retracement of the ’07 to ’09 sell off. The significance of that level is that in Dow Theory a close beyond that level for 3 sessions spells an end of the previous primary move. This market looks to be in a position to test that resistance level.
The S&P Weekly chart below highlights the current 1-3/4 year rally which is either one big correction, or the first half of a rally back up to the previous decade’s highs.
Given that the current rally from the March ’09 low is now longer/older than the 2007–2009 sell-off we can make the observation that the 2000-2002, and 2007-2009 bear markets, may not have been bear markets at all, but down-legs of a very large correction of the 1980 to 2000 bull market. Momentum on this Weekly chart favors a continuation of the rally. Demographics – long-term population growth – favor’s U.S. corporate growth over many of her European, Canadian and Japanese competitors.
U.S. Treasury Bonds
Bond also are showing coordinated trends on the Monthly, Weekly and Daly charts following last month’s bearish reversal of the Monthly trend, and showing a sell signal on the Daily chart in-line with the trends on both the Weekly and Monthly charts. Plenty of room below with the 2010 low all the way down at approx 114.00. A sell-off that large — uptick for U.S. interest-rates –would be U.S. Dollar bullish and EURUSD bearish. U.S. Treasury bonds are still arguably the globe’s leading risk indicator market. Bonds up: risk on. Bonds down: risk off. Arguably because the S&P 500 is a pretty good risk barometer, as is the Japanese Yen. Nothing would put investors at ease like a modest downtrend in bonds.
While we can’t say it just yet we are very close to being in a bull market for stocks and a bear in bonds which by most investor’s standards equates to happy days ahead. Nothing rewards smart money like higher interest rates and a vibrant stock market.
Jay Norris
jnorris@clovernest.com
Jay Norris is the Chief Market Strategist at Clovernest Financial Group and the author of Mastering the Currency Market, McGraw-Hill, 2009 which is the text book for the intermediate level trading course offered though Trading-U.com see: Trading Courses Jay’s second book Mastering Trade Selection and Management, McGraw-Hill will be in book stores in 2011.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Any charts shown here represent market conditions at a particular point in time. Such conditions may not be replicated in the future. Past performance is not indicative of future results.