“…faith is the substance of things hoped for, the evidence of things not seen”
We are in the business of evidence gathering with PRICE being the final arbiter. With bulls and bears fighting over a 25 pt SPX range for the past 12 trading days there is a lot of pent up energy building for a fast move. Equity markets continue to make new highs impulsively and higher lows correctively. There is no evidence yet of a market reversal. I’m focused on the Yen carry trade and US bond yields as my sentiment guide for equity markets here. The USD/JPY has declined in a clear 3 waves from recent highs and rallied impulsively from the 102.85 lows. We have clear points of ruin for near term bull and bear cases. My base case is for a continuation of new highs for the USD/JPY while it remains above 102.85 and equity markets in a 5th and final wave while SPX remains above 1815. The decline in the DJIA from ATH’s is clearly corrective and my base case requires new highs. This is NOT a time to be complacent as equity markets are in 5th and FINAL waves for the current structure and Bond markets have signaled a change in trend. To the charts…
SPX continues to rally impulsively and decline correctively indicating the trend remains up. Bulls need to hold 1815 to maintain positive momentum. While there is the “possibility” that we have seen the highs and we are now in a larger decline, we trade in probabilities, and I believe the higher probability is that we see new highs towards 1875/80 near term. I prefer the red count shown below but we require more price action to provide further EVIDENCE.
The DJIA’s decline from ATH’s appears corrective with new highs required to complete wave [v] of 5. You “could” count a “truncated 5th” but this too low a probability to trade. As we get closer to an intermediate top, I would expect the generals (SPX and DJIA) to outperform the higher risk indices (NDX and RUT) as the rally fades.
The recent exponential nature of the NDX rally is warning of a large decline to come as momentum indicators are failing to support each incremental new high. I am alert to a sudden reversal in the higher risk indices.
As mentioned earlier, the USD/JPY is my risk guide and remains bullish above 102.85 looking for new highs. Trade above 105.30 will “lock in” a 3 wave decline and increase confidence of new highs towards 107+.
The following chart highlights the near term structure for the USD/JPY which effectively mirrors that of ES futures. Ideally, a wave (c) of (2) decline would find support in the 103.65/80 area before launching higher in wave (3) of circle 5. A decline into this support would provide good r/r for longs. The red and blue lines indicate critical near term support and resistance.
As mentioned in last weekend’s update, I was looking for a reversal lower in US bond yields and the market has provided a clear impulsive decline from recent highs. This warns of an intermediate term change in trend for bond yields as it corrects the 5 wave rally from all -time-low yields to at least 3.5% in US 30 yr Treasury Bond Futures. This change in trend adds to evidence of a potential near term high in equities.
The AUD/USD has reached important support in the 87/88 buy zone and I expect Chinese GDP numbers on Monday to drive near term sentiment in this pair. The Aussie is oversold and unloved and ripe for a ripping rally from strong support. Front-running the data may be hazardous but I like the r/r for longs here.
The EUR/USD has continued its decline as expected but I’m wary that Friday’s decline below 1.355 may be wave (b) of an expanded flat (red count). Critical resistance for a continuation of this Euro decline is 1.3650. Above this and we likely push higher towards 1.375 for wave (c) of [ii]. I am alert to a reversal higher from this 1.35 support area but ultimately, I’m looking for lower prices in this pair.
The EUR/AUD provides a great potential r/r short with a 5 wave decline followed by a deep 3 wave advance where a = c. I’m short from 1.5466 with stops above 1.551 as trade to new s/t highs would indicate a 5 wave impulsive rally.
EUR/AUD bigger picture perspective… large r/r potential as the decline targets 1.40 ish at previous 4th wave support at a minimum. A also like the positive carry of this trade and sentiment extremes. Short term risk for long term gain.
The GBP/USD has rallied impulsively from a declining wedge Leading Diagonal (preferred bearish black & red counts) or Ending Diagonal (bullish blue). Importantly, trade below 1.631 will lead to an accelerated decline. Trade above 1.652 invalidates the immediate bearish nested red count while trade above 1.6605 invalidates the black count and proves the bullish blue count. We have clear points of ruin and opportunity for this pair.
I have been tweeting an explosive potential setup in Dr Copper through the week with nested intraday rallies and corrective declines. Not surprisingly, this coincides with China’s GDP data to be released on Monday (Sunday US time). My immediate bullish count has key support at 3.308 while a push above 3.377 and then 3.425 would lead to an accelerated advance towards 3.60+. The lower probability red count (triangle B) shows another potential long setup from the 3.25 area should we break below near term support. Long from 3.310
That’s all I have for now. While the US markets are closed on Monday, the potential remains for China GDP to drive near term sentiment with surprises being to the upside. Trade safe 🙂
Addendum: Please find below the updated January Liquidity Schedule. Lots of green…