No Christmas For Carry Traders After A Year Of Debauchery

Submitted by Nic Lenoir of ICAP

Well, our theme throughout October and November has been that upon a break of the 50-dma EURUSD would post a rather sizable correction as I think the EUR above 1.50 is completely mispriced against the USD. Yesterday we thought 1.4550 being reached we would see a bounce, but a flurry of stops overnight took us a fair bit lower again. We are currently in sub-wave 3 (probably towards the end of sub-wave 3) of the initial bearish impulse. Any bounce close the 50-dma should be sold as the view for a stronger USD remains intact.

AUDUSD overnight has triggered its H&S breaking 0.8965. I will only point out that on the 3-hour chart we have a potential support here on the C=A from the tops. There is a risk of failure here which would be highly contrary to our overall view but it is worth taking due notice. If you sold 0.9330 as we had originally suggested you can afford patience but I would not welcome a close daily back above 0.8965. The medium term target remains around 0.82 where we have the 38.2% retracement of the 2009 rally as well as the wave 4 of lower order which should act as support. Eventually I think there is a risk we go even lower. Also watch the 200-dma which is in that same support area.

Stocks had decorrelated from FX the past couple weeks as has been discussed previously, however there is a sense the gap might need to be filled here. We note especially that the Nasdaq has failed to take out the multi-year resistance as seen on a log scale on the attached chart. Also the Dow has completed a perfect C=A from the lows of March, which probably sets us up for hefty correction. Last but not least, the S&P has broken the support on the 3-hour chart which was at 1,097. As discussed the past couple weeks we think 1,120 was a good entry for shorts and even though the price action has been confused and confusing since, and we need to see 1,084 breached to confirm a further decline towards the key support at 1,048. The only thing that has been a possible counter argument technically to that view is the similarity on an hourly chart of the S&P future price action over the past month compared with the Dow's price action throughout the 70s on a weekly scale. I need to investigate the fractal nature more to decide whether this is a real danger or a scarecrow for the bears.

Good luck trading,

Nic