As a technical analyst, I can tell you that the inter-market relationships between currencies and commodities never really changes. As the currencies go, so go commodities and inevitably so go equities. Right now, the picture currencies are painting is a bearish one.
First, the Australian dollar keeps making new lows and is in danger of taking out all of the lows from September and August. While there is a support area around 1.01, I don’t think it’s going to hold. On the daily chart, you can see the persistent downtrend which is signaling that currencies are fixin’ to get their comeuppance.
When indicators and oscillators turn like they have on its chart and go parabolic south, that’s when we see the biggest declines. It was a similar situation in the April/May 2012 timeframe, and you can see the huge waterfall in the chart below.
During that seven week period while the Australian dollar dropped, at the same time the S&P 500 went from 1420 down to the 1260s largely due to what was happening with currencies. Since then, the Australian dollar has been able to stabilize for the most part, but something’s got to give.
Resistance has held and the Australian dollar hasn’t been able to bust above it. It’s tried several times to break resistance, and it’s not happening. At some point this week, it will give out and it’s going to get ugly.
But the currency clues aren’t just limited to the Australian dollar. Looking at the New Zealand dollar, it has been a little bit stronger because it’s in a little bit different of a pattern, but it also is headed to new 2013 lows. This week, it really got hammered, when it made a huge outside bearish reversal – like we’re seeing across multiple charts – but the New Zealand dollar has followed by trading in a tiny range.
In the currency world, you don’t really see tiny trading ranges. The moves are either parabolic up or parabolic down. Very seldom do we see a currency go nowhere, especially when they’re breaking down out of these types of chart patterns, so that’s something to take note of.
In addition, we’ve seen the euro get clobbered, which broke down out of a similar pattern in the midst of all of the Italian election news, but now we’re seeing it also just languish. Now the euro remains at support but my forecast is that all of these currencies are going to give way at the exact same time.
Support in the euro will break at the same time the Australian dollar and the New Zealand dollar break. So, what’s next?
The pecking order is essentially currencies fall first and then commodities, including silver and gold, drop next. So, if currencies break down as I expect, it’s “look out below” for gold and especially silver, which is currently in an oversold situation on its daily chart.
All of this leads me to purport that what I’m seeing on the currency and commodity home front means we’ll see some “not so fresh” activity in the equity markets in the United States and abroad in the short term. Traders should set tight stops on longs and, if you’re like me, you’re biased to the bear side.
InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123. For more information on which service is for you click here.