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Assorted forex, index charts; stock correction round the corner

These charts of DXY, EURUSD, AUDJPY, SiMSCI and the IWM, SPY and DJT all say this message to me: that the USD will continue higher and a stock correction is just round the corner.

 

DXY up before the hike and down after

As if trading itself is not complicated enough, traders have to deal with nonsense like ‘hawkish non-hikes’ and ‘dovish hikes’ and every shade in between.

DXY is now doing it’s up down over again again just like it did between 2015 – 2016. I am going to stick with up/throwback until proven otherwise for my own trading.

DXY weekly chart 2015 to present

DXY weekly chart 2015 to present

 

EURUSD mirror image of DXY

For the same reason as DXY, I see EURUSD is a pullback in what is still a down trend – until that trend line that is acting as current resistance is completely defeated.

EURUSD weekly chart from August 2014 - present

EURUSD weekly chart from August 2014 – present

 

AUDJPY two trends collide

Depending on your personal timeframe, AUDJPY may or may not be a big deal. If you are concerned about big levels however, there is a reason to keep an eye on the currency pair.

AUDJPY weekly chart from November 2011 - present

AUDJPY weekly chart from November 2011 – present

That is because year-on-year AUDJPY is still down although quarter-on-quarter is still up. Now the two trends met at the current level which is the former 52-week high. This is a headwater where the ‘water’ has to decide which way to flow. If you are bearish, then the current location is merely at 100% retracement of last year’s loss but NOT a reversal yet so it kind of the best place to short.

Now what AUDJPY is doing is important not just to forex traders but to stock investors as well. This pair has previously demonstrated it’s strong correlation with Asian stock indices like HSI, SiMSCI and even EEM.

So if AUDJPY is going to correct, it is likely for HSI and SiMSCI to do as well. Recall I wrote here a month ago.

AUDJPY has a very special quality to me – it has strong positive correlations to Asian stock indices like HSI, SiMSCI and also the venerable EEM. I have brought this quality up before. Because of this special quality, turning points in AUDJPY can be an accurate prediction for turning points in Asian stock indices. It doesn’t work all the time – I have a blog post here that describes this correlation and, it also turned out that the divergence in this post did not work out – you can take a look.

The point is IF you believe that AUDJPY is indeed at a potential point and IF the strong positive correlation remains valid, then it is time the next few weeks to pay attention to local stock markets.

AUDJPY-HSI-SiMSCI correlation

AUDJPY-HSI-SiMSCI correlation | Chart: Tradingview.com

 

Just give it a thought. I wrote about this story back on 21 February (4 weeks ago) and 4 weeks later, AUDJPY is finally getting softer and so is SiMSCI which is a nice coincidence or shall I say nice correlation. Since we had generally bullish conditions, despite 4 weeks, both AUDJPY and SiMSCI has gone nowhere – where do you think it would be if markets decide to really go a little more bearish.

SiMSCI weekly chart

SiMSCI weekly chart

 

To make it really simple to visualise, take a look at this AUDJPY-SiMSCI overlay. I won’t talk about HSI it was covered here yesterday.

AUDJPY - SiMSCI daily chart overlay

AUDJPY – SiMSCI daily chart overlay

 

That narrative about Trump rejuvenating US domestic economy is over

If you recall, one of the big stories about Trump’s presidency is how he is going to rebuild US economy which caused a big rally in Russell 2000. This chart below of IWM says story is over. Because while S&P500 (SPY), Nasdaq and Dow Jones Industrial Average has done very well this quarter, Russell 2000 (represented by IWM here) could not even beat it’s own former 52-week high set in December last year. In my opinion, this is a glaring bearish divergence.

Let’s recall the Dow Theory.

Stock market averages must confirm each other

In Dow’s time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow’s first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers’ profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

And then recall what I wrote about DJI-DJT bearish divergence back in December 2015. And then let’s recall what happened in 2016 in January. IWM to SPY bearish divergence is right on the same level as a divergence involving Dow Transportations index. I think we are going to see a market correction again some time this year. And since we are just coming to end of March, maybe it is convenience to speculate a correction in Q2 which is just round the corner?

IWM SPY DJT bearish divergence

IWM SPY DJT bearish divergence

Coming back to the narrative about rejuvenating the local economy, I say that based on the chart, the story broke apart some time at end of December because since beginning of 2017, IWM has gone absolutely nowhere. In a matter of time when IWM falls below it’s own level on 08 November, buyer’s remorse or a total undoing will be complete.

*Update 24 March 2017 * Based on discussion on Google Plus,  I have done a short translation of the salient points in this post in Simplified Chinese.

1. 美元指数因该还是上升趋势里的回调而不是翻转。欧元对美元也是属于跌势中的短期回调而已。

2. 澳元对日元是亚洲股市(例如恒生和新加坡期货指数)的重要指标(应为同步率很高)。所以澳元对日元,恒生指数和新加坡指数同时遇上强力阻力不是偶然,股民应该关注。

3. 去年川普当选后,美股飙升,罗素2000走得最快,近三个月却只是横摆,输给了道指,标准普尔500 和纳斯达克。这里有两个启示:一) 川普当选要刺激美国内经济,带动罗素飙升的故事显然失败, 二)这里罗素2000 还有道琼斯运输指数开始下跌和几个‘大’指拉开距离,做出分叉,是一种市场调整的前兆。

以上3点合起来:接下来第二季股民应该小心做好市场调整的心理准备。

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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