In addition to all the traditional technical observations on all the key crosses from Goldman's only must read technician John Noyce, which include the EURUSD, the EURCHF, the AUDUSD, the NZDUSD, and the AUDNZD, the NOKSEK, and the GBPUSD, and a quick look at 2 year USD swaps, Noyce's key technical observation has to do with a pattern emerging in the S&P vis-a-vis trendlines. To wit: "There are a few signals on the daily chart of the S&P which argue that a larger correction could be developing." The key support line according to Noyce: 1,291-1,294 on the S&P, below which the next support is the 200 DMA, which is all the way down at 1,174. The key catalyst: a market that is riduclously overbought at 129 days above the 55-DMA (128 as of the day of Noyce's report which was on Thursday). So how to play the coming correction in FX? The AUDJPY may be the best bet and the Goldman chartist explains why...
Noyce's chart of concern:
- No one development on its own is that significant, but viewed collectively, if the market were to make a sustained break below the pivot region centred on 1,294-1,291 where the interim low from 24th February and the 55-dma are converged, there would be quite a decent argument to look for a larger correction to develop. The main points are:
- Moving average stretch - As we’ve already discussed at some length in recent publications, we’re moving into pretty stretched territory in terms of the number of consecutive daily closes the market has made above its 55-dma (128 at last count)
- Daily %age Moves - The drop on 22nd February, which immediately followed the cycle high which was set on 18th February, was the largest daily %age decline since the market based in late-August last year
- 76.4 Retrace - Tuesday’s high at 1,332 was less than half a point off the 76.4 retrace of the initial 18th/24th February drop
- Daily Patterns - Tuesday’s sharp intraday turn around caused a bearish key day to be posted from that 76.4 retrace
- Overall, while the market needs to close below 1,294-1,291 to generate further confirmation signals, the risks do appear to be quite significant that this break will be achieved given the list of developments on the daily chart highlighted above.
It is not only the S&P which is overbought - so is the DAX:
- These patterns have tended to work quite well over the last three years. Eight having been posted since December ‘07, seven of which worked well.
- While as with the S&P to increase confidence we need further daily chart patterns/breaks the idea of a more material correction developing certainly seems quite feasible.
- This retrace hold adds to the initial warning given by last week’s bearish weekly reversal that the risks of a correction are increasing.
- The pivot point which should decide whether a more material correction develops or not is 7,135-7,093 where the 55-dma (which the market has been above since early-October on a close basis) and the interim low from 24th February are converged.
And in response to the technical patterns in the S&P and the DAX, Noyce is now negative on the AUDJPY. This could be the best way to prepare for the coming equity correction.
- Unlike the correlated equity markets AUDJPY has also recently run into quite significant resistance. The 76.4 retrace of the April/May ‘10 drop and the 200-wma which has been a significant pivot over the past three years being converged on 84.26-84.94, against which the market has peaked over the last two weeks. The spike low from August ‘07 at 85.94 is also not far above current levels. Negative weekly oscillator divergence has developed too. Overall a setup which warns of a downside correction developing.
- Again similarly to the correlated equity markets, we have the initial signs of a downside correction attempting to develop, but the market needs to break further levels to increase confidence in this idea/confirm a negative setup in place.
- The clearest level to watch on the daily chart is the interim low from 24th February at 81.82, which is what we often term the “pivot of the 76.4 retrace” which has been posted against the highs. A daily close below there would leave the next notable support as the converged 200-dma and interim low from 1st December ‘10 ; 80.04-79.71.
Full presentation from John Noyce: