False breakouts are the story of the week

At the end of last week a handful of charts were looking grim, pointing to the potential for an ugly turn in risk trades, prompted by a surprisingly dovish message from Fed Chair Jerome Powell.

This week though, there have been some stark turnarounds, potentially invalidating the moves.

I want to highlight three.

1) AUD/USD

AUDUSD daily

I’ve written about this pair extensively in the past few days. On Friday, this looked poised for an ugly breakdown as it fell through 0.7000 and two major lows with little support below. It closed at 0.6990 on Friday but has rebounded to 0.7131.

To me, this is the most-relevant chart because this week the RBA was dovish and Lowe followed that up today with many hints that he has no plans to hike this year.

But if something can’t breakdown with the technicals aligned and bad news from the central bank governor, how is it going to break down? I’m cognizant that a turn in the risk trade could suck it right back down so I want to see it survive a negative day in stocks but at the moment, this is looking like a false break.

2) Nikkei 225

Nikkei technical analysis

You can take your pick with the major equity indexes. The Nasdaq, Russell 2000 and many others looked broken late last week but the Japanese invented technical analysis so lets look at the Nikkei 225. There was a clear close at 14-month low with scant support. It’s since staged an impressive recovery and is up another 1.6% today.

3) EUR/USD

EURUSD

I don’t know if this is as much of a risk trade indicator as it is a global inflation indicator. The hot CPI numbers from Germany this week and rising bund yields have tipped the market towards a more-hawkish ECB. We’ll find out on Thursday if that’s the case. If so, it will be a similar setup to the RBA.

In any case, this looked like a major breakdown after a long consolidation but here we are now comfortably back in the range. I dare not predict what will happen here but I’m inclined to bet that these really are false breakouts because I think the global economy is in good shape. If that’s the case, these moves could have plenty of space to run. False breakout reversals can be some of the most-powerful moves in markets.

Technical Analysis

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