From the desk of Tom Bruni @BruniCharting
Thanks to everyone who participated in this week’s Mystery Chart.
A lot of mixed responses from this one. Some of you were buyers at support, while others were erring in the direction of the recent downtrend and looking for a resolution to the downside.
With that as our backdrop, let’s just right into it.
This week’s focus was an inverted chart of the Emerging Market Currency ETF ($CEW), so here’s the uninverted version. Here we’ve got prices flagging tightly following its sharp move off support in March.
Click on the chart to enlarge view.
So the question now is, are prices working through the overhead supply near 17.75 before heading higher? or is this pattern taking too long to play out and a downside resolution is coming?
For now the benefit of the doubt is still in favor of the Bulls, but we want to see that upside resolution soon.
Why do we care about Emerging Market Currencies? From an intermarket perspective, this basket of Emerging Market Currencies has a strong negative correlation with the traditional US Dollar Index ($DXY). That seems somewhat obvious of an observation, but it’s really when they disconnect from each other that we want to be paying attention…and recently there’s been a slight disconnect.
As a result, we’re watching the action of EM Currencies for clues about the direction of the US Dollar Index. Because ultimately if we go one level further into this intermarket analysis, we see a negative correlation with the US Dollar Index as well as Emerging Market and US Stocks.
Think about it, these currencies themselves are a risk asset. If the world is going to shit, are investors leaving their money in the Brazilian Real or Argentinian Peso? Or are they buying US Dollars?
They’re buying US Dollars and that’s why we’re paying attention to this potential inflection point. As a risk appetite barometer.
A couple of weeks ago we discussed that it was “do or die time” for the US Dollar Index and since then prices have begun to bounce and now posing a headwind for risk assets.
We think that what happens in the chart of CEW will help us identify how far this bounce in DXY will go.
If CEW is resolving its bullish pennant to the upside and prices are above 17.75, then we’re likely in an environment where the US Dollar Index is continuing to the downside and cyclical assets are performing well.
On the other hand, if CEW resolves its bullish pennant to the downside, then it’s likely signaling that the US Dollar Index has more room to the upside and will remain a headwind for cyclical assets.
And given the inflection point in CEW, it also makes sense that its correlated assets are at a potential inflection point as well.
And here are Silver and Gold, not resolving its bullish consolidations just yet which we outlined a few weeks ago. If Silver starts to get below 24.50 and Gold is below 1,870, then we’re likely in an environment where the US Dollar is continuing to bounce.
Last on our list are US stocks testing their breakout level near 3,330-3,400. If the S&P 500 is below that area, we’re likely seeing a stronger US Dollar.
To conclude: The US Dollar Index’s recent bounce has been a headwind for cyclical assets despite only rallying a couple of points. For clues as to how far this bounce can go, we’re watching for a resolution in the recent price consolidation in the Emerging Market Currency ETF CEW.
The last thing we want to point out here is timeframe. We’re talking about short-term trends that will set the tone for the coming weeks and months, not intermediate or long-term trends. The trend in stocks and other cyclical assets is still higher and the trend in the US Dollar Index is down, but counter-trend moves like the ones we’re witnessing can have meaningful impacts on assets in the short-term and are therefore worth watching.
As always, thanks for reading and please let us know if you have any questions!