We are seeing the first few down days in a row for the S&P in some time. Should the markets correct significantly from here the “experts†will tell us that it’s not surprising because the equity markets are beginning to price in the possibility of higher rates in 2015. Obviously the opposite is true which is that should the equity markets continue to go higher the “experts†will give us a plausible reason why this is logical too.
I will nail my opinion to the mast right now and say the correction is sooner rather than later. I wonder are the European markets the canary in the coal mine. The reason I put this out there is because I’ve been continually able to make money selling the FTSE. Every time the FTSE manages to get close to 6900 it’s been sellable. Looking around at the DAX it seems 10050 seems to be the equivalent level where we are starting to see markets find it difficult to push higher. So what about the S&P?
We are certainly overdue a pullback in my opinion but let’s not get too far ahead of ourselves. We have not had a lower weekly candle since May. Last week’s low in the SPX comes in at 1955. Let’s first see can we break this. If we do then the weekly 20 period moving average has provided significant support since 2012. That level comes in at the 1895 region. In other words without looking for a home run there is significant distance between 1954 and 1895. However should that 1895 level get breached then we will know that correction has begun.
Naturally if that penny about interest rates does drop you have to wonder about USDCAD, and many of the dollar pairs. USDJPY and EURUSD would seem to be particularly vulnerable because here you have two central banks conducting quite contradictory policies to the Federal Reserve. I will continue to look for long USDJPY trades and again the significant levels are the yearly low at 100.74 which I would expect would be less and less likely to be breached. Then looking higher 102.20 is a fairly good level. Oddly enough as the markets dropped yesterday you saw the Yen strengthen so it won’t be a straightforward trade. I will continue to take long trades below 101.50.
If any central bank out there is ahead of the Federal Reserve the Bank of England would be a good candidate. Again you could hardly find another central bank more contradictory to the BOE as the ECB so I will wait patiently for an opportunity to sell EURGBP on rallies.
Then essentially linking the three paragraphs above is GBPJPY. The trend here has not surprisingly been up but we have seen some considerable sideways action (just like USDJPY) since late 2013. Significant support comes in via the rising moving averages and here the weekly 20 period weekly MA at 171.50. My bet is that USDJPY is going to break higher and due to the convergence of the moving averages I would speculate sooner rather than later but such a move up towards the 100 mark will likely put GBPJPY above 200.00. Now that would be a nice trade.
Guest post by Gary Corney of www.fxlight.co
