While John Noyce covers his usual fare of weekly FX technical developments, with an emphasis on the EURUSD, the AUDUSD, the USDSEK, the NZDUSD, and broadly the extremely low level of implied vol in FX (unlike commodities - we expect a switch from commodity implied vol to FX very soon), as well as a very curious collapse in correlation between G10 FX implied vol basket, the VIX and the EURAUD spot. But the most notable observation is what may happen to stocks now that the 55 Day Moving Average is in danger of being breached for the first time in 123 days. The two key support trendlines are the August uptrend since August, which is at 1,300 and the 55 DMA, which is at 1,284. Should both of these be taken out, there is no technical support until the Jackson Hole level of mid 1,000s.
- The S&P has so far done the absolute minimum correction, in terms of it has tested the uptrend from the August ‘10 lows at 1,300
- However, as discussed in a number of updates and client meetings over the last couple of weeks, the thing which “concerns” us in terms of it being a warning of a larger move is the fact that the market has been above the 55-dma for such an extreme period on a daily close basis.
- With Wednesday’s close above the market having spent 123 consecutive daily sessions above this particular moving average (it hasn’t made a daily close below since 1st September ‘10). This is very extreme by historic standards and takes the S&P to a greater period above its 55-dma than that which equity markets in other regions (particularly Asia) managed before they began to correct over recent weeks.
- The other notable point about the recent price action is the extreme move seen on Monday where the market posted its largest one-day %age decline since the recent rally began in earnest on 27th August ‘10.
- In terms of levels from here;
- The uptrend from the 27th August low’s at 1,300
- A similar size correction to that which took place from the 5th November high to the 16th November low (in point terms) would target 1,290
- The 55-dma stands at 1,284
- In conclusion we’re by no means making an argument for a real “downtrend” in equities to begin, it’s too early to make that type of statement, but, the risks of a larger correction developing do seem quite high.
Also, the US is now more overstreteched than any other world markets:
- The charts opposite show the same count of the number of days the market achieved above the 55-dma for the Kospi and Taiex (the Korean and Taiwanese benchmarks)
- These two markets, from their lows in May ‘10, developed some of the cleanest and most steady trends of the various national benchmark indices in the Asian region. However, even given that backdrop, they only managed to achieved 111 and 109 consecutive daily closes above their respective 55-dmas before breaking back below on a daily close basis and correcting further.
- With this in mind, just in pure comparison terms, the chances that the S&P achieves a daily close back below its 55-dma which stands at 1,284 seem quite high (as a reminder, up until Wednesday, the S&P has made 123 consecutive daily closes above its 55-dma).
On the other hand, with the market correlating about 0.9 with the size of the Fed's balance sheet, as was first demonstrated on Zero Hedge, to say that charts, technicals, fundamentals, or anything besides central planning matters, can seem naive to many.
Another interesting chart for those who still believe the VIX is still relevant (we believe the SKEW is much more important than the VIX, but that is a different story).
- As always it’s difficult to calculate targets for the VIX, but the way the index is breaking quite impulsively higher from its recent wedge like consolidation against the April ‘10 lows and the fact that you can argue some sort of double bottom pattern is in place certainly warns that we could see further upside.