AUDJPY vs S&P 500

6 Month comparison of AUDJPY and SP 500

3 Month comparison of AUDJPY and SP 500

From Sept 17th to now comparison of AUDJPY and SP 500

The correlation appears to breakdown around the first week in October.
The 6 month return difference is ~8.5%
The 3 month return difference is ~ 2%
Since Sept 17th return difference is ~4.1%

It seems that a correction to this broken correlation is over due and maybe in the works.
Scenario 1) AUDJPY Rises
Scenario 2) S&P500 Falls
Scenario 3) They meet in the middle AUDJPY Rises and S&P500 Falls

Previous slides have Analysis of S&P 500 So here is the AUDJPY pair

Daily chart

Looks like this pair is at a critical juncture. It has reached the top of this bear channel.  It is now below the 20,50,200 MAs.  If there was a serious break down test of the Cyan line is expect.  Any serious breaks of that might find support at the 72 level and then ultimately the bottom of the channel.

Slow Stoch appears relatively bullish as it is currently over sold.
MACD signal is a sell as we have just crossed the 0 level this week. Stronger negative tick on the histogram = shorter timeframe momentum is down.
ADX is signally strong trend to the downside.

4 hour chart to see short term levels clearer.

I did some quick correlation calculation on the AUDJPY and S&P 500.

Approximately a 7.5% change in correlation between the bottom in 2009 to now and Sept 21st to now.

Here is a graph I generated by calculating the 20 day moving correlation.  (NOTE: 20 days was just a time window to smooth out the data, any time sample could work and even improve this graph.)

What I can see from the graph is that above a 60% correlation appears to be the norm, however breakdowns do occur.  In our current situation the correlation looks like it is trying to strengthen.  The breakdown peaked during the 20 days spanning the last week in September to the first two weeks in October.

S&P Triangle and Ciena update

10 min chart that shows the symmetrical triangle that we are in.... and guess what?  The ultimate end of the triangle (the point) is...... *drum roll*  November 3rd FOMC Meeting and expected QE2 announcement isn't that a coincidence?

The Daily has basically not moved for 4 days.... today we had a nice doji candle that continues to signal indecision in the markets.   The Slow Stoch shows clearly bearish divergences that predict a breakdown in price action. The line in the sand appears to be that 20 MA that the market doesn't want to let go of.... not just yet as the Midterm elections are early next week with FOMC meeting.

Lets analysis tomorrow...

The Market mover will be the GDP number.
This is a trick situation, lets look at 3 scenarios.

Better than expectations: Good news the economy is recovering, Bad news how can the FED justify the injection of potentially 1 trillion (range from 500 billion to 2 trillion likely), More bad news, the market has already priced a massive amount of the potential QE2 into the markets already.

Worst than expectations: Bad News stimulus QE1, QE-Lite have been failures, should we attempt to do the exact same thing and progress with QE2? Markets will be forced to sell off in this case, this results in QE2 being forced to be massive, this risks a continued currency war as emerging nations realize that they have to combat the falling USD.

Exactly what the market expected: This to me is the only viable option.  However since this GDP number has been revised lower 2-3 times it is a wonder how coming in at expectations is a good thing.  But at least it will not be a major factor in the determination of the amount for QE2

Fed asks primary dealers (banks) to estimate size impact of debt purchases (QE2)
"The amounts dealers chose from were zero, $250 billion, $500 billion and $1 trillion"

An update on my options position in Ciena.
The arrows point to the days that I purchased options.  First time price was around 15.75ish and the second time was when we bounced up to test the 50 MA.  I expected the stock not to be able to recapture this remaining level of support and today was proof that picking up more options at that pivot high was a good call.  We will see how the next few weeks play out however, unless massive QE2 is announced making every market and stock rally on free liquidity then I think a likely target for this stock is $12.50 market initially and then I will gauge how it reacts to this level (bottom of a massive triangle).

AUDUSD pair and what it means to the markets

To see Oct 26 market review click here.

I want to show a graph of the correlation between S&P 500 and the AUDUSD pair. 

From this it is pretty clear that they are highly correlated.  The way this currency pair works is that you would buy AUD and sell USD.  So if the AUD becomes more valued versus the USD the price goes up.  If there is strength in the dollar for example, the price will decline.

Below is the Currency pair and look at how the price action mirrors the current S&P 500.

The was a VERY strong break down today.  This was due to Australian CPI information that came out, see Article.  As I am not a forex trader and just began to look into currency pairs because of the currency war brewing, I will point to this article that explains the drop in the pair, see Article.  Basically a CPI of 0.6% vs a 0.7% expectation resulted in a quick reversal that started at 8:35 pm EST.

Great thing about techincals is that the analysis is the same for any chart pattern.  We have momentum from MACD and slow stoch pointing down, a cross on the AXR, the DI- crossed above the DI+ which is a bearish cross over and to finish it all off we broke the 20 day MA.

This, therefore, based on the correlation should imply a drop in the S&P 500 tomorrow.  The reasoning is obviously the correlation as demonstrated above but it is the strengthening of the dollar that was pointed to in the previous post (Oct 26).

The Asian markets also at this time had a sharp sell off on the strengthening of the USD in addition the Future market has priced in a 5 point drop so far in the S&P 500 tomorrow.
Stay tuned....

Volume today: SPY and volume

For some reason the index data only has daily volume compared to stocks that have 1 minute volume.  I am using an ETF that tracks the S&P 500 called SPY.

I was interested in seeing how the volume was today.  Strong selling in the morning with mostly selling second half of the day with the exception of the last 5 minutes.  This strong sell volume seemed to have a mandate to close today in the green. Well played bulls.

Below is the S&P 500.

Yesterday we had a Bearish Gravestone Doji
Today we have a Bearish Dragon Fly Doji

MACD: The histogram had a larger negative tick today, meaning that the distance between the MACD line and Signal line are diverging.  This signals a momentum shift towards the bear side.

Slow Stoch: As expected once the 80 level was broken the Slow Stoch has had a hard time getting back over it.  This means that the market is currently overbought.

All signals point to a breakdown however with more POMO, occurring Thursday then Mon/Wed/Fri next week, this market could continue to drift up to sideways.  What is really on peoples minds is Nov 2-3 FOMC meeting where QE2 announcement is likely to communicated.  The market has priced in alot of QE2 already so the FED would have to have a massive injection or miss market expectation with the intent to allow the market to correct, before announcing additional QE measures.  The language will be important when the meeting announcement comes out.

Also Mid-term elections are on November 2nd as well.

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Update: Vix

So... VIX runs opposite to the overall markets.  Up in the VIX should result in a down in the stock markets.  In two days, the VIX is almost up 8% as the S&P 500 have stayed basically flat.  With this change in the Vix, all indicators and volume confirming bearish behaviour, I will reaffirm my previous call yesterday that I believe monday was our turn date and the high will not be taken out. There is always a but.... the GDP numbers coming this friday and QE2 / Elections next week it seems that anything could happen.  These are massive events that could shape the next few months of economic activity.

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Update 2:  Dollar index

On the 19th I mentioned that the spike in the dollar index was a result of China's unexpected rate hike.  Today we have seen a similar spike, with no real news story backing it.  The fact that the 19th broke the trend line and today we have retested and broke above it again indicates that a potential bottom in the dollar index has been reached.  The Dollar has moved in the opposite direction to the overall markets as seen here.

A bottom in UUP would be bearish for the markets, but the FED QE2 talk has been hammering the Dollar over the past 2 months.

S&P 500 October 25th note

As expected, markets rallied to new highs today then quickly reversed in the later stages of the day.  This formed a candle stick pattern called A Bearish Gravestone DOJI. 
This is a reversal pattern and something that I would expect to see around this price.  Confirmation tomorrow with a negative day is required however, I took a speculative oil short again.  I prefer not to trade oil however, I haven't found an etf with the same liquidity for the overall markets in Canada.  However, I might start looking into some listed on of the NYSE such as SDS.

Another note is that the slow stoch has again fallen out of the 80 level.  This is continuing to signal that this uptrend requires a pull back to correct the overbought condition.
This action has done exactly as I expected and this week I do expect to see a substantial reversal, however, from that reversal will be an up leg that will fail to make a new high resulting in a bear market for the next month or so.  The only caveat to this is what will happen Nov 2nd with both the midterm elections and the FOMC meeting.  I do expect QE2 to be announced however with much reserved language and not the @1.5 - 2.5 trillion that I think many are expecting.  The market has priced so much QE2 in that the boost has already been realized and hence no need to actually follow through with the amount expected.  I believe the markets will be allowed to correct however they will be pumped up again with more QE2.1 talk.

Remember that the US are not in a bubble and international pressures will continually mount against them. In addition to this, once the people in the States realize that prices have started to go up substantially due to the devalued dollar they will start to mount pressure as well. 

This will be an interesting conclusion to the year and everyone with a computer has front row tickets.

QE2 = manipulation, market update

There are some interesting results that came out of the G20 meeting however nothing very concrete.

German Economic Minister Rainer Bruederle said: "An excessive increase in (the quantity of) money to me represents indirect manipulation,"  Article
This now lays the foundation for other countries to jump on this bandwagon.  However, it will all be in vein as I don't think the US cares to listen to international pressures.  Not just the US, but other countries like Japan mentioned that they will take necessary action if it is required.

One very vague statement from G20 meeting attempted to calm the potential currency war:
The G-20 agreed to “move towards more market-determined exchange-rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies," Article

With the pressure from the international community mounting on both China and the US it will be very interesting to see how QE2 goes down.  

If they do announce a massive asset purchase program there is no doubt that the countries most hurt by this, emerging nations, will have to take serious steps to curb the rapid appreciation of their currencies. 






The US' subtle admission of flawed policies
I mentioned that i would post my article when it was completed.  It brings up an important point that is extremely relevant today. 

Front page bottom right


I will not recap the history here, but one thing is clear, with the US attempting move the world towards more balanced trade accounts, it appears that this policy is exactly what they struck down at the Bretton Wood conference.  As you can read, John Keynes proposed a system with this very ability to ensure that countries run a balanced trade account. 


From what I see the US doing right now is that they are attempting to quickly reverse their trade deficit by devaluing the USD to bring more manufacturing jobs back to the US.  This is in theory the "right" thing to do however, they are hurting everyone else in the process.  China's peg was very clever because they apparently knew that the US was planning on doing these mass devaluations and realized that the only way to keep exporting is to peg the Yuan.  I say Well played China, since this policy is a thorn in the side of the US because they don't have the flexibility as they hoped.  


What I find very interesting is the fact that the population of the US are so opposed to Taxes but apparently don't care that their dollar has been and will continue to be devalued meaning that even though they have the same number of dollars the purchasing power of those dollars falls. 

As you can see since the May Flash crash, the dollar has been hammered.  The US in my opinion now realizes it doesn't want "world reserve status" since it causes a demand for the dollar every time there is a crisis or market instability.  Which means right now they are concerned about ensuring the markets do not fall resulting in people not demanding the dollar as a "safe haven" which in turn results in more exports due to the low dollar.


What does this mean for the next 2 weeks, well Mid-term elections are coming Nov 2, as well as the FOMC meeting that should announce QE2.  Remember since the market expect QE2 then, a large portion of QE2 has been priced into the markets, if the US heed to the emerging markets calls for less devaluation of the USD then QE2 amount will disappoint the markets resulting in a correction.  If the US does a mass 2 Trillion (for example) QE, then we will see the international community turn on the US as a currency manipulator.  I believe that the US doesn't want to shoot itself in the foot just yet, so QE2 will be less than expected in the markets however they will use language to reassure the markets that more will occur if required.  


Notice on the UUP (dollar index) chart above 4 days ago the massive increase in the USD.  This was directly caused by a Chinese rate hike as the two economies are pegged to each other.  As one of the largest bond holders of US bonds it seems that China does not have an interest in seeing the USD plummet as it would result in a loss for China in purchasing power.  Ironically it seems that the interests of the US consumer and the Chinese government are aligned.

Ciena update 

    
Ciena unlike the overall markets just looks like it is in free fall. After breaking the 50MA it never had a chance to get back over it.  The price closed on Friday at $13.80  below my put options strike price.  The reason i believe the stock is chopping sideways is the Bollinger band.  The theory states that the price action will remain within the bands 95% of the time (2 STD) thus buying above the Bollinger band or selling below the Bollinger band doesn't make any sense as you have 2.5% chance of the market continuing in direction of your trade.  Now that the price action is within the bands again one could expect more downside  or even a retest of the 50 MA which i do expect to hold. 

S&P 500

The final chart I will go over is the S&P 500, I wanted to include the May flash crash again as a bottom scenario however it is impossible to predict another violent move.  It is just interesting that the patterns continue to hold as it appears we are on our way to make a final push higher before a breakdown.  Looking at the volume recently the past 3 positive days have resulted in diminishing buy volume.  I do expect a slight push higher but we could start seeing strong selling as early as Thursday or Friday.  The major line to watch is the  20 MA, once it is pierced, the market pressures will force a correction with support I think at the 200 MA which would be a logical place to see a correction.  If the selling is orderly with the bottom having strong buying volume i will consider going long the market, however, I will probably stick with gold / silver plays and maybe some Chinese tech stocks.

Above is a weekly of the S&P 500, I just wanted to note a logical top of this rally would be the 1950 level +/- a couple of points.  As this is the 200 MA, which was also the top in previous rally in May.  



The most interesting thing that has occurred since Oct 19th (UUP increase/Market break down) is that gold and silver have not recovered but the markets have.  Next week will be interesting but the following week with the midterm elections and FOMC meeting will be the major week to watch.


Lastly Fastest decline in home values since mid 2009
Might be a prelude to the upcoming housing numbers this week.