One issue with using global equity markets to make forex trading decisions is figuring out which leads which.
It’s like answering that age old question, “Which came first, the chicken or the egg?”
Are the equity markets calling the shots? Or is it the forex market?
The basic idea is that, when a domestic equity market rises; confidence in that specific country grows as well, leading to an inflow of funds from foreign investors. This tends to create a demand for the domestic currency, causing it to rally versus other foreign currencies.
On the flip side, when a domestic equity market performs terribly, confidence falters, causing investors to convert their invested funds back into their own local currencies.
So in this intraday video I review the JNK and some of the high beta currencies to take a further look into who is leading who.
SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK)
I’m going to start off with JNK, which is the SPDR, or the ETF, for Barclays High Yield Bond. Again, this is just a daily chart of it zoomed in from let’s say, from now until last May. There is a high correlation between what happens with JNK and what happens with the broader market throughout history.
So of recent memory, many of you remember the lows of last summer which occurred right around June 4. JNK had bottomed one week prior to the broader market. A lot of you remember when the broader market put in an initial top the day of Fed. Well, JNK put in its top one week prior to that event. Then a lot of you remember the bottom that was put in right prior to Thanksgiving in the S&P 500 in the broader market but one week prior to that, JNK had put in its bottom before rallying to new highs just like the broader market. Well, about a week and a half ago, JNK topped again and is now on the 2012-2013 uptrend line, signaling, or let’s say displaying, a bearish rising wedge. If you were to look at the indicators and oscillators, you can see they’re parabolic down and all negative.
Could this be signaling a major warning sign in the market? Well, of course I think so, but let’s move on to the next chart.
Australian Dollar (CURRENCY:AUD)
Now while we always have warning signs, both positive and negative, a lot of times throughout history, it’s easy to dismiss them when there are certain times when certain correlations don’t appear to work. For example, the broader market, in terms of the S&P 500 would strongly follow, you know, if the Australian dollar would rally, the broader market would rally. If the Australian dollar would sell off, the broader market would sell off. And then we’ll go through little periods of times when it appears that correlation has broken down. Or has it?
In my opinion, there’s just some times in this case when we have the Australian dollar, that topped back here in 2012, that the correlation hasn’t broken down, it’s just that we’re not seeing, let’s say throughout the past couple of months, an immediate effect where the Australian dollar gets slammed down on the day. Maybe a year ago that would affect the market instantly. Now we appear to have more of a delayed reaction. Correlations aren’t breaking down, it’s just that people’s reaction or perception to a lot of these correlations is delayed.
New Zealand Dollar (CURRENCY:NZD)
Next we have here the New Zealand dollar. This is the highs of 2012. These are the highs of 2013. What you’ll be able to see is almost like like a quadruple top. We have a little top here; we have a little top here; we have a little top here; and we have a little top here. What is going to be interesting to find out probably within the next 24 hours—and also we have bearish divergence that’s not only been going on since here, but let’s say also all this right here, bearish divergence, and this is a daily chart with the MACD or the PPO, whichever you choose to use, is now about ready to go negative as this yearly uptrend line is being tested.
It is the opinion of this technical analyst that this is going to be a failed ascending triangle and the emotional reaction will send price like this. And that is your intraday update on JNK, the high yielding ETF that I first covered and then the breakdown we’ve already seen in the Australian dollar to new multi-month lows and the potential breakdown of what we shall soon see in the New Zealand dollar. Conversely, I might add, the US dollar is at new one-month highs as of right now.
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.