This morning I was over at the Nasdaq in Times Square chatting with Amber Kanwar on BNN. We discussed why I think U.S. Stocks continue to rally and which key sectors will drive prices higher. Within each of these very important sectors, there are large-cap stocks leading the way for them. I think we're closer to the beginning than the end of this move higher in the S&P500 and these other important sectors. At the end we touch on why extremes in sentiment could be the catalyst to send British Pounds even higher.
Last week I shared with you guys what I thought was an interesting breakout. Like I try and do every now and then, I deleted the labels and the y-axis so you guys wouldn't have any biases towards the charts, knowing what it was. Everyone pretty much agreed that it was a screaming buy. Today we're bringing back the legend and y-axis so you can see exactly what is it. We are also flipping it upside down, the way it was originally intended to be, so you can execute according to your specific time horizon and risk tolerance.
Yen strength across many of its crosses has been a structural theme for the better half of the past year, but today a few of these pairs look to be setting up for some mean reversion over the short-term.
Pound / Yen remains in a downtrend below its downward sloping 200 day and made new lows in April, but momentum diverged positively. Today prices closed back above the February lows to confirm the bullish divergence and failed breakdown. This suggests we want to be long if prices remain above the February lows on a daily closing basis and add to our positions if prices close above the downtrend line from the February highs.
The weight of the evidence has been building in favor of the bears over the last week or two, making the US equity weakness this week anything but surprising. Throughout the duration of this post I'll outline the evidence that I've been noticing over the last two weeks and what it means for us as market participants moving forward.
Yen Strength - The Yen broke out structurally late last year and hasn't looked back since. Tactically my upside targets were hit this week, but structurally this market has a lot more room to run. Given the high negative correlation between the Yen and US equities, this should continue to be a headwind for equity markets going forward.
From the Brazilian Real and Australian Dollar to the Turkish Lira, many global currencies have been gaining significant traction relative to the US Dollar over the past several weeks and months. These currency moves have also had significant impacts on the equity markets of their respective countries as they tend to be positively correlated.
Last week the New Zealand Dollar joined that group by breaking out across multiple timeframes.
We are super excited to announce today that we have added U.S. Dollar denominated charts of Bitcoin to our Members Only Chartbook. The charts included will be updated regularly on both Weekly and Daily timeframes. The Crypto-Currency's $6.5 Billion market-cap provides enough liquidity for many investors around the world. This has attracted huge venture capital investments in bitcoin-based companies from legendary tech investors such as Fred Wilson of Union Square Ventures and Marc Andreessen of Andreessen Horowitz.
Members of Allstarcharts.com have been asking us to include this in our chart work and discussions. So as we always try and do, we listened and added them. Starting this week, Bitcoin charts on weekly and daily timeframes will be included in the list of Currencies, along with U.S Dollars, Australian Dollars, Japanese Yen, Canadian Dollars, Swiss Franc, Euro, etc.
From late January until today, there have been tactical breakouts in currencies of countries with significant commodity exposure relative to the US Dollar. This has provided a tailwind to a number of emerging market equities that have subsequently followed through to the upside. Many of these equity markets are concentrated in Latin America, but areas like South Africa, Africa, Australia, and Turkey have benefited as well.
Whether or not these tactical moves will continue and develop into long-term trends is entirely unknown, but the risk/reward in the US Dollar/Brazilian Real looks particularly skewed in favor of the bears here.
The noise surrounding the Federal Reserve is some of the silliest and biggest wastes of time in all of the financial industry. The media loves to talk about it, because well, they get paid to talk, not to help you make money in the market. Discussing the Japanese Yen for hours on end isn't sexy. That doesn't drive traffic or boost ratings. But if you're here to try and make money in the market, it's actually the most important thing to be watching here.
Long-time readers and Members of All Star Charts know how much I've been pounding the table about watching the Yen to gain insight on the direction of the U.S. Stock Market. Notice how last month when Yen put in its top (USD/JPY bottom), the S&P500 made its low on the very same day. The Nasdaq Composite also put in its low that day, so did the Russell2000, so did the Mid-cap 400, so did the Russell Micro-cap Index, so did the NYSE Composite. I can keep going, but I think you get the point.
Last week a structural breakout in AUD/USD was confirmed. Whether you trade currencies or not, it's worth paying attention to because of its implications from an inter-market perspective.
From a structural point of view, the Australian Dollar has been in a downtrend since 2012, with the selling really accelerating in late 2014. Recently this pair met its downside target at support near 0.68-0.69 and began consolidating as momentum diverged positively. Last week, prices broke above the downtrend line from the November 2014 highs to confirm the bullish divergence and breakout. This development suggests that as long as prices remain above the downtrend line, this market is likely headed toward prior support near 0.8075-0.81.