Global equity markets are showing weakness. A possible change in trend is in progress. Over the past few decades 2 year moving average proved to be a good indicator for following long-term trends. Price is now below the long-term average and as long as it remains below this technical level probability of further correction in equity markets will increase. 407 level will remain as strong resistance.
It started with weakness in emerging market currencies (archive for emerging market currencies) then it spread to equity markets and now emerging market yields are under pressure. From commodity exporting economies to energy importers, almost all emerging markets experienced high volatility. Charts are telling us that the high volatility is here to stay and possibly spread to other investment areas. This update shows the technical damage on the 3 major emerging market economies; Brazil, South Africa and Turkey. By looking at these charts one would wonder how much more shocks can these markets absorb. It looks like the bond markets can experience some heat in the following months.
Sharp sell-off in Brazilian equities breaks down 2008 low levels. MSCI Brazil underperforms the MSCI Emerging Markets index.
U.S. Dollar vs. Brazilian Real is now close to 4 levels. Since the breakout above 2.62 levels, depreciation in Brazilian Real has taken a parabolic shape. Breakout above 4 levels will push the cross rate to uncharted territory.
10 year government bond yields completed 7 year-long base formation, suggesting a price target of 18 levels.
Source: www.tradingeconomics.com
MSCI South Africa is now testing strong support at 445 levels. Breakdown below this level can push the index towards 350 levels.
MSCI South Africa has outperformed the MSCI Emerging Markets index. This is positive on a relative basis.
U.S. Dollar vs. South African Rand is now challenging all-time high levels. Depreciation against the U.S. dollar resumes…
South Africa 10 year government bond yields are completing a massive 5 year-long base formation. Breakout above 8.9 levels can result in a similar move that we have seen on the Brazilian government bond yields.
Source: www.tradingeconomics.com
MSCI Turkey breaks down decade-long trend line support. Also the index breached the 5 year-long support at 400 levels.
If we take the relative performance of MSCI Turkey vs. MSCI Emerging Markets we can conclude that the index have been flat since 2004!
After completing its decade-long consolidation which took the form of a continuation head and shoulder U.S. Dollar/Turkish Lira broke out above 1.8 levels and since then the sharp depreciation pushed the Lira to historical high levels. Added to the emerging market weakness, political uncertainty and security issues put further pressure on Turkish economy and its financial markets.
Turkish short-term yields are completing a massive 6 year-long base formation. Breakout above 11.8 levels can push the yields to 19 levels in the following months.
Source: www.tradingeconomics.com
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.
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
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.
European indices are at critical levels. Breakout higher could result in a multi-year uptrend. Failure to clear those strong long-term resistance levels could signal the end of last 5 year’s uptrend. Whatever the outcome, the implications will be long-term.
STOXX EUROPE 50 index cleared the 15 year-long trend resistance in late 2014. EURO STOXX 50 and EURO STOXX 600 are challenging their long-term trend lines. Fresh breakouts on these two indices could add momentum to the uptrend.
Unless gold prices recover above 1,130 levels in the following weeks, probability of a sell-off towards 1,000 levels will increase. In mid-July gold price broke below the support range between 1,130-1,150. Since then the rebound has been weak and price failed to recover even above 1,110 levels. Lower boundaries are considered to be negative extremes and upper boundaries; positive extremes in terms of sentiment. If price is breaking below the lower boundary, that signals extreme weakness for the analyzed instrument. Downtrend remains intact for gold. Strong resistance stands at 1,130 levels.
Weakness in emerging market equities can be seen across the board. From commodity exporting South American countries indices to China’s trading partners in emerging Asia, all show downtrends.
Head and shoulder top is a bearish chart pattern and usually forms after prolonged uptrends. It acts as a reversal chart pattern and successful completion could result in a multi-month downtrend. Malaysia’s KLSE Composite Index formed a 2 year-long head and shoulder top. Support remains at 1,670 levels. Decisive break (on a weekly closing basis) below 1,670 will complete the head and shoulder top and result in a downtrend towards 1,400-1,450 area.
Commodity exporting countries currencies are weak against the U.S. dollar. Especially energy and metal exporters are showing significant weakness. One of those is the Canadian dollar. USD/CAD cross rate is now testing a strong resistance at 1.3040 levels. Breakout above 1.3040 levels can result in a runaway price movement to historical high levels. Though RSI, a momentum indicator, is not confirming the latest rally (more info on negative divergence on RSI). While in the short/medium-term the uptrend looks over extended, long-term traders/investors should keep a close eye on the critical resistance at 1.3040. Breakout above 1.3040 level can complete a massive multi-year base formation with a long-term price target of 1.60.
