Look to EUR/AUD and EUR/NZD for Stock Market Direction
Joe Perry April 15, 2020 10:35 PM
If you are looking to see why stock indices have turned, look to the EUR/AUD and EUR/NZD.
After putting in a low on March 23rd, the S&P 500 has been moving aggressively higher, only pausing at the 38.2% Fibonacci retracement level from the February 20th highs to the March 23rd lows. It broke out of a pennant formation on the move higher which targeted near 2900/2925, near horizontal resistance and the 61.8% Fibonacci retracement level of the previously mentioned timeframe. Today, price halted at minor horizontal resistance and moved lower to test yesterday’s daily low and put in an ominous, dark candlestick.
Source: Tradingview, CME, FOREX.com
So, the question to ask now is: Why did stocks stop moving higher HERE? Was it the minor horizontal resistance? Was it the expectations of weaker data (the move started overnight)? Was it more bad coronavirus news? Sometimes we don’t know, and that’s ok. But we should always be looking for clues as to why, so that when we see it again, we may already have an answer!
Let’s look at EUR/AUD. The currency pair is highly negatively correlated with the S&P 500. That is, when the EUR/AUD moves in one direction, the S&P 500 moves in the opposite direction. The current correlation coefficient is -0.92. With this context in mind, the price movement of the pair has formed a descending wedge and has broken higher today. The target of a descending wedge is a 100% retracement of the wedge, which is near 1.8000. Therefore, because of strong correlation, if EUR/AUD is breaking higher, the S&P 500 should be moving lower.
Source: Tradingview, FOREX.com
Now let’s similarly look at EUR/NZD. Similarly, EUR/NZD is also highly negatively correlation with the S&P 500. As with EUR/AUD, the correlation coefficient is also -0.92. In addition, the price movement of the EUR/NZD has also formed a descending wedge, with a target of 1.8475 at the 100% retracement of the falling wedge. One of the few differences between the price action of EUR/AUD and EUR/NZD is that EUR/NZD fell less than EUR/AUD from the March 19th highs, and therefore, broke out of its descending wedge yesterday instead of today!
Source: Tradingview, FOREX.com
Today, the S&P 500 closed -2.35%, EUR/AUD closed +1.33% and EUR/NZD closed +1.22%. If you are looking for a reason that stock indices have turned, you can always look at the EUR/AUD and EUR/NZD to see what they are doing.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.