CBOE Volatility index moves into a new territory of high volatility. Usually high volatility periods suggest corrections in equity markets. In the past several decades breakouts above 20 levels on the VIX was followed by major equity market corrections.
Chart shows CBOE Volatility Index with weekly closing prices. Last week of August the VIX closed at 26.05 levels which was clearly above strong resistance at 22. Last few weeks surge in volatility cleared two important technical levels. Both the 7 year-long downward sloping trend line and the horizontal resistance at 22 levels were broken on the upside, suggesting a change in trend.
Unless we see a sharp reversal below 22 levels, following weeks/months will lead to higher volatility levels and further weakness in global equity markets.
*Chart shows updated current price as of 1/9/2015 EST 12:30 PM
U.S. dollar strength is here to stay. Greenback had a strong recovery last week. Strong dollar will continue to put pressure on commodities, commodity currencies and also emerging markets. In other words, weak emerging markets, commodities and strong U.S. Dollar trend is likely to continue in the following months.
After its breakout from a decade-long consolidation in the last quarter of 2014, U.S. Dollar index rallied from 85 to 100 levels. Since March 2015, price has been pulling back to the strong support at 92 levels. Last week, the dollar index tested the strong support and rebounded sharply. Latest consolidation is more like a counter trend move in the context of a short/medium-term correction. Uptrend in the U.S. Dollar remains intact and once the choppy sideways consolidation is over we can expect the continuation of the uptrend.
MAJOR U.S. DOLLAR CROSS RATES
U.S DOLLAR VS. SINGAPORE DOLLAR
U.S. DOLLAR VS. SWEDISH KRONA
U.S. DOLLAR VS. NORWEGIAN KRONE
U.S. DOLLAR VS. CANADIAN DOLLAR
U.S. DOLLAR VS. JAPANESE YEN
BRITISH POUND VS. U.S. DOLLAR
NEW ZEALAND DOLLAR VS. U.S. DOLLAR
AUSTRALIAN DOLLAR VS. U.S. DOLLAR
Couple of reasons why I think emerging markets sell-off is likely to continue in the coming months. I’ve updated this chart and discussed EM equity and currency weakness over the past year. Earlier updates here
- Volatility which is calculated by the Bollinger Band Width is just turning upwards from an extreme low level. There is still room for volatility to expand.
- Long monthly price bar has clearly broken below the lower Bollinger band.
- 4 year-long sideways consolidation has recently broken on the downside.
Latest outlook on the MSCI ALL COUNTRIES WORLD INDEX suggest there is a change in trend. We need to watch out for further volatility and possibly deeper corrections.
China devalued its currency. This opened the door for further depreciation for the Chinese Yuan and also for currency wars between the Asian economies. Over the past two years emerging market currencies have performed poorly against the U.S. dollar. Weakness was mainly driven by commodity exporters. Now, strong U.S. dollar, weak emerging market currencies trend is spreading to Asia.
U.S. Dollar/Indian Rupee is preparing for a strong breakout from its 3 month-long consolidation range (rectangle chart pattern). On a larger scale, USD/INR formed a head and shoulder pattern. Both chart developments suggest weakness for Indian Rupee if the cross-rate clears 64.4 levels in the following days.
Another weakening Asian currency is the Philippines Peso. Over the past two years, USD/PHP has been resilient though, following the breakout from its symmetrical triangle Peso has also started depreciating against the U.S. dollar.
I’m not a big fan of diagonal support/resistances. I like horizontal and clearly defined support/resistance levels on price charts. Especially horizontal support and resistance levels on the weekly and monthly scale charts. However, current price action and the outlook on the U.S. indices is worth mentioning. Most of the major Dow Jones indices are rebounding from trend channel supports.
Trend channel support is more reliable for the Dow Jones Utilities index as the lower boundary of the trend channel was tested several times over the past 5 years.
Dow Jones Transportation index is trying to rebound from trend channel support.
Dow Jones Composite index which is a combination of Industrials, Transportation and Utilities is also finding support at the lower boundary of its trend channel.