The Dollar and the Yen are the leaders on the run on the growing risk of a stock correction
The dollar and the yen were the uncontrollable leaders in the forex markets last week. While the Fed isn’t quite likely to announce a cut this week, recent solid data indicates that November is finally the date. Stocks in the US and Europe have lost a lot of their bullish momentum as central banks begin to prepare to slow down stimulus.
In addition, there are concerns about the re-escalation of tensions between China and the United States, with the latter’s close allies, the United Kingdom and Australia, added to the mix. The scale of the impact of the Evergrande unrest in China is also worrying, against the backdrop of a slowing economy.
Overall, the development of the main indices continues to indicate an increasing probability of a correction. However, Yen was still somewhat supported by the powerful Nikkei. In contrast, the Australian and New Zealand dollars were the worst performers, along with the Swiss franc.
DOW capped at 55 days EMA, S&P 500 to test soon
In last week’s report, we noted that DOW’s break in the 55-day EMA could be seen as a warning to US stock markets. Despite some attempts to recover, the DOW could remain above the EMA. Given the bearish divergence of the daily MACD, the risk of a deeper correction continues to increase. For now, as long as the 55 day EMA is maintained, we would at least prefer a hold on 33741.16 support in the near term. The firm breakout there will support that it is already correcting towards the entire uptrend from 26143.77. In this case, the next target would be a 38.2% retracement from 26143.77 to 35631.19 to 32006.99.
The S&P 500 is so far still well channeled, supported several times by the 55-day EMA as well. But the risk of a correction is also present given the bearish divergence conditions of the daily MACD. SPX could have a take on the 55-day EMA this week. Trade sustained below followed by a breakout of 4367.73 support will align with DOW’s sell-off if that happens. In this case, we would likely see SPX retracement to a 38.2% retracement of 3233.94 to 4545.85 at 4044.70 before finding a bottom.
FTSE and DAX could also initiate a deep correction
Beyond the Atlantic, FTSE doesn’t look any better, as it already looks rejected by the 55-day EMA. In the background there is also a bearish divergence condition in the daily MACD. A deeper fall is in short term favor as long as the 55 day EMA is held, for 6813.02 support. The breakout there will suggest that it is at least a corrective rise to the set of 5525.52, and targets a 38.2% retracement of 5525.52 to 7224.46 to 6575.46.
DAX’s image is similar. If it couldn’t rebound above the 55-day EMA soon, a deeper drop would be in favor of at least 15048.58 support. Given the daily MACD bearish divergence conditions, the breakout of 15048.58 will extend the decline as a correction to the upside from 11450.08, at 38.2% retracement from 11450.08 to 16030.33 at 14280, 67.
Nikkei hit a new 30-year high, but HSI continued its downtrend
In the Pacific, however, the picture is very mixed. Nikkei extended its powerful rally in the short term and broke its highest level in 30 years at 30,714.52. The overbought situation could limit the upside for now, and a pullback cannot be ruled out. But the downside should be contained well above the 55-day EMA to set the stage for another rally. At that time, the break of 30,714.52 would likely be full of conviction.
This is a totally different story for the Hong Kong HSI as it extended the downtrend form 31183.35, after a prior 55-day EMA rejection. There is room for a brief rally to the upside, given Friday night’s buying. But the outlook will remain clearly bearish as long as the 55-day EMA is maintained. The next drop could be powerful if we see a deep correction in the US. Support 23124.25 will be the target.
The dollar index is on track to retest the resistance of 93.72, possibly still at the 94.46 fib level
As for the dollar index, we maintain that the short term uptrend has been defended with support at 91.78. There is an upside outlook on the expectation of a Fed cut as well as risk aversion. A further rise is now in favor of a further test of the resistance of 93.72. The breakout will extend the entire pattern from 89.20 to 38.2% retracement from 102.99 to 89.20 to 94.46 which is a major hurdle for the index to overcome.
Silver broke through 22.36 support ready to resume bearish trend
The strength of the dollar was confirmed by the sharp fall in gold and silver as well. Indeed, silver has already broken through the 22.36 support, and a steeper drop from 30.07 should be well placed to recover. The next target is a projection of 61.8% from 28.73 to 22.36 against 24.86 to 20.92. We would look for some initial support from there to provide a rebound.
But it’s also worth noting that the 55-week EMA rejection has a medium-term bearish implication. The entire 30.07 decline has the potential to fall to as low as 61.8% retracement from 11.67 to 30.07 to 18.69 before the close.
CHF / JPY in key support area as 122.74 drop resumed
If the markets (with the exception of Japan) turn into a deep risk mode, there is the prospect of another even stronger rally in the crosses. The yen has the potential to continue to outperform the Swiss franc as a safe haven currency. While the fall to 122.74 resumed last week, it now sits in a significant support area between a 38.2% retracement of 106.71 to 122.74 to 116.61 and the EMA of 55. weeks (now at 118.05). A sustained breakout will be a strong indication of a bearish reversal in the medium term. CHF / JPY could dip further to a 61.8% retracement of at least 112.83. But of course the tide would turn if the CHF / JPY could form a base in this area and rebound.
After some consolidations, the USD / CAD rebound from 1.2492 resumed breaking above 1.2760. The initial bias is back on the upside this week for a retest of the 1.2947 high first. Additionally, a larger rise from 1.2005 is still in progress with 1.2421 support intact. The breakout of 1.2947 will then target the Fibonacci level of 1.3022. On the downside, however, the breakout of minor support at 1.2635 will reduce the downward bias for structural support at 1.2421.
Overall, the drop to 1.4667 is considered the third step in the corrective setup from 1.4689 (2016 high). It should have ended after hitting 1.2061 (2017 low) and a 50% retracement of 0.9406 to 1.4689 to 1.2048. A sustained break of the 38.2% retracement from 1.4667 to 1.2005 at 1.3022 will pave the way for a 61.8% retracement at 1.3650 and above. Overall, the medium-term outlook remains neutral at worst with the 1.2048 / 61 support zone intact.
Longer term, we view the price actions from 1.4689 as a pattern of consolidation. Thus, the upward trend from 0.9506 (2007 low) should always resume at a later stage. This will remain the preferred case as long as the support at 1.2061 is held, which corresponds to a close to 50% retracement of 0.9406 to 1.4689 to 1.2048. However, the rejection by the 55-month EMA, followed by a firm break of 1.2061 support, will support that the USD / CAD has already started a long-term bearish trend.