It has been a wild last 24 hours with the Nikkei down 7%, USD/JPY trading through an almost 300 point range and the Aussie dollar breaching not only 97 cents but also briefly 96 cents yesterday.
In my experience over the last 25 years I’d note that volatility begets volatility so we could have a very interesting weekly close and equally with the setup in teh S&P 500 and the Aussie we might actually see some reversals of recent moves. The job of markets and price discovery and price action in markets is to find the path of least resistance. Until yesterday below 96 cents and not far off the low of last year in the 0.9570/80 region that path for the Australian dollar was down.
But you can only pull an elastic band so far before it snaps back and as I said in the MB Radio Podcast on the Aussie yesterday one of the reasons I trade currencies rather than stocks is this very up and down volatility.
In many ways now the Aussie chart is the reverse of the S&P 500 chart I noted yesterday which signaled a potential top and which I’ll talk about below. We have had a sharp fall, approximated an important support zone and bounced back strongly with the Aussie around the 0.9740 region this morning. 0.9840 is the key overhead resistance representing the lower trendline on the chart above which was supposed to be previous support on the way down but has already proved to be resistance since the fall. A break of that level would open a run toward 0.99. AUDJPY is also interesting and supportive of at least a consolidation in the AUDUSD as the low yesterday was exactly synchronous with the trend line going back to the start of the big AUDJPY rally last year.
Yesterday also saw the Nikkei get absolutely smashed falling more than 7% on what seems to have been a combination of the weaker Chinese HSBC PMI which moved into the contraction zone, some lingering worries about the Fed and the big yen move – although with regard to the latter it is a chicken and egg argument potentially, which caused which?
From where I sit it is hard to know but there is going to be a retracement of sorts today after the US markets recovered well from lows even if Europe struggled under the weight of the Fed statement and Japanese stock fall. The fact that USDJPY is 100 points off its low of 100.82 is also a positive for stocks on the day but as I noted above I strongly believe that volatility begets volatility so it appears that stocks globally and the Nikkei in particular are entering a interesting phase.
At the close in Europe the FTSE was 2.09% lower, the DAX was off 2.10%, the CAC fell a similar amount down 2.08% wil in Milan stocks dropped 3.06% and in Spain stocks were 1.40%. But US stocks recovered from early weakness as Jobless Claims fell 23,000 to 340,000 and the Kansas City Fed index popped to 5 against expectations of -5. Equally most of the PMI’s in Europe and certainly in the US were slightly better than expected.
So at the close the Dow was only down 0.08%, the Nasdaq down 0.12% and the S&P fell 0.26%.
Yesterday morning I wrote:
If I use my usual trading system I would now say that I expect a test of support at 1639 and if that level gives way a move back to 1616. If that level gives way then we are in for a deep retracement.
We saw that overnight even though we did have a recovery and the 1616-1639 zone now looks like very important support. My outlook based on the technicals is for a retracement into this zone again and if the lower bound breaks then 1590, 1570 and ultimately if the sell off eventuates or gets legs 1520 is massive support. On the topside a break of recent highs is needed to change the outlook.
On other markets, euro also had a big range and is back in the zone where it broke down from after Bernanke’s comments on tapering the other night. Short term euro looks like it might struggle a little with only a break of 1.2960 opening further upside.
On commodity markets crude was largely unchanged, gold rose 1.78%, silver was 0.16% higher but Dr copper fell 2.31%.
Data
Kiwi export and import data is out this morning and then German GDP for Q1 tonight along with the Ifo business survey. In the US Durable Goods are out.
Twitter: Greg McKenna