Not Everybody In The Pool... Yet!

From Nic Lenoir of ICAP

Just a quick update following last night's observations. AUDUSD has confirmed the break of the support of the ending triangle here, and Gold has also broken through channel support.

Remember even though some people like to think of Gold as an alternative to stocks, it really is not. From a very big picture standpoint when it comes down how liquid the system is, they both obey to the same rule. That's why Gold sold off in 2008 until the government stepped in and added liquidity to the system, and subsequently even though Gold had a head start (Gold is until proven otherwise in a structural bull market while stocks are in a structural bear market) both rallied as the central banks reflated the system. That is when it comes to the Fed's decision to start QE2 or not, both Gold and equities should react in tandem. In fact while they can diverge during transitional periods, in an over-leveraged financial system like the one we are experiencing it is liquidity driving everything so every time there is a broad macro trend you should expect the correlation of equities and Gold to be well positive.

Back to our charts, EURUSD has been a bit less clear than AUDUSD or S&P futures but building onto our observation of AUDUSD it seems EURUSD has broken through its support, and failed to post a daily close above the main resistance we had identified around 1.3285 (it came very close). I have less convictions when it comes to EURUSD because the pair has been driven by the Libor/Euribor spread which is pointing higher still, but the parallel to AUDUSD is worth noting.

On the flip side AUDJPY is still within its consolidation triangle which is in theory a continuation pattern: text books indicate there should be one last push before a big bearish reversal. Similarly to AUDUSD S&P futures seem to be in an ending triangle but they haven't validated the break of support yet. I apologize if my comments on VIX were not clear yesterday. My point was that the strongest bearish technical signal for equities has been a bullish reversal in VIX outside of Bollinger bands. Usually that happens after a period of subdued volatility where VIX itself is a lot less volatile and Bollinger bands concentrate close to the spot price. April 26 is absolutely text book in that sense and had allowed us to perfectly catch the top for equities and the low in volatility. Looking at the Chart of VIX here, we see that a last break-out higher in S&P futures, likely followed with a drop in VIX could easily take us outside the bollinger bands and ripe for a key reversal: bullish for volatility and bearish for equities.

Good luck trading,