Market Report: Who is Leading Who?
The US stocks markets continue to chop around, although if you look under the hood there are some startling clues which either will correct themselves or they are suggesting that some markets have already topped and will head lower. Thus I suspect eventually the US markets will follow.
The US markets have held their ground recently but other markets that are interlinked and closely follow US stocks are starting to peel away, so if that continues I suspect US stocks will follow, it's just a matter of time.
It was my idea/thesis that when the FX risk pairs started to head lower from completed ideas, that US and European stocks would follow.
The 1st part I got right, the risk FX pairs have indeed headed lower, for the past month or so AUDUSD and NZDUSD have pulled lower, however stocks, especially those in the US have managed to hold up, but there is increasingly more clues that are suggesting that some markets are ahead of the curve and if the declines continue then imo the US stocks markets will break lower.
AUDUSD, AUDJPY Vs ES
You can see how the AUD crosses have been part of this rally from the Dec 2011 lows, now what is so important about these FX pairs.
There both represent the carry trades that have been part of the fuel to lift risk markets higher.
So if the AUDUSD and AUDJPY pairs are slowly breaking lower, the carry trades are going to unwind in the USD and JPY.
If you look at what happened last May 2011 you will see that the AUDJPY pair start to break lower with stocks and the divergence is growing daily between all 3 markets, so much as I think this could be a vital piece of information that is probably being overlooked by most traders.
Europe VS US
Well what about the fact that European markets appeared to have broke ranks already, so it's the US markets that are out of sync, how long the US markets can hold up on their own? If the AUD crosses continue lower as well as the European markets, well that is anyone's guess.
I think the bulls need a strong upside move to kill these divergences, as if this risk pairs continue lower, I suspect that the US markets will head lower and eventually play catch up.
We have some setups in all markets that we are watching early next week to either confirm or negate the declines we have seen in these markets already.
Precious Metals Vs AUDUSD
It even goes as far into the metals, whilst we are working some clearly bullish setups atm, we are not going to mess with any markets should they start to see further downside in risk markets.
For the past 3 months you can clearly see that the precious metals have been tracking the AUDUSD pair.
If the AUDUSD pair gets any traction to the downside it's going to put pressure on our ideas, and potentially invalidate them should we see this correlation continue, so it's vital for the metals traders to watch this clue as well.
HUI Vs Gold
That's nothing compared to the HUI Vs gold idea.
Is the HUI actually telling us a message?
Back last year I used the HUI for the idea of finding a high in gold, it was a major clue in finding that high and being very vocal about it, it was not just a plain old simple guess, it was an actually predication based on a number of factors.(It paid off well I might add)
I have been watching the HUI lately and frankly I don't like it one bit, we have broke what I call the "granite floor" and if that level is resistance on the way up, I think it might just be a warning sign for gold stocks holders.
Being bullish is fine; having a bias is fine, but as long as the clues confirm that bias.
So we will be watching carefully next week our signals to negate or confirm our ideas.
If you're interested in finding out what we are looking for, then join up and start trading profitably instead of looking inside the box, starting looking outside the box.
Until next time.
Have a profitable week ahead.