Currencies Update: EUR/JPY

Most of us don't trade currencies and they may seem boring, most traders have no idea how much if at all, the currency market influences the stock market and how much the currency market can tell us about the stock market.

Sunday night I said the opening action in most everything including currencies was pretty flat and as a result, I didn't expect any of the carry pairs which include AUD/JPY, USD. JPY and EUR/JPY, to influence the market. Yes, currencies, especially carry pairs like the 3 above can and do influence the market. 

Yesterday I made it 100% clear that it was my opinion that the EUR/JPY was used as an engine to power the market up to the point in which it hit significant technical levels setting off a short squeeze and letting retail do the rest of the work.

*For those not use to currency pairs or "currency crosses", which are not "carry trades, but can be carry trades", the first currency in the pair (in this instance EUR for the Euro) is the long, the second currency in the cross (in this case JPY, the Japanese Yen) is the short. So if I'm long the EUR/JPY, I expect the EURO to move higher and the Yen to move lower either on an absolute basis or a relative basis (meaning the EUR/JPY could advance even if both the Euro and Yen were advancing, so long as the Euro was seeing a stronger upside move-however this is very rare).  If the EUR/JPY moves down, this means that the Euro is underperforming the Yen, the Yen may be rallying while the Euro is declining, if I was long the EUR/JPY I would lose money if the pair declined.

I showed you this chart last night with the commentary below, but had talked about it long before during normal market hours.

"The EUR/JPY cross compared to ES would look like this..."

"This is a 1 min chart of the EUR/JPY in the candlesticks and ES (SPX futures) in purple, since 2 a.m. to 1 p.m. today they are nearly in lock-step, the pair was as I said earlier, essentially the market's sponsor or as I'd usually call it and called it last night, the market's engine. There were other influences though that were important and we touched on them early, HOWEVER, TO ENGAGE THOSE OTHER INFLUENCES, SOMETHING NEEDED TO SEND THE MARKET HIGHER AND THAT WAS THE EUR/JPY."

That's why this post is important, let me just show you a few more correlations starting with the EUR/JPY vs. ES (S&P-500 Futures) for today...

 This is the exact same chart as above, the EUR/JPY in the red and green candlesticks and the SPX futures (ES) in purple. This chart shows the 1 min action from 5 a.m. EDT to present, do you notice anything?

If you said that ES is still following the EUR/JPY nearly tick for tick, you'd be 100% correct.

So, while it is possible for another currency cross to sponsor the market's risk on (because the market itself doesn't have what it takes to move higher without help), we can get a lot of very useful information about what is likely to happen to the market if we know what is likely to happen to the currency cross that is moving the market.

To give you a broader perspective, this is the EUR/JPY in the candlesticks and ES in purple just like the 1 min chart from yesterday and the chart from today above, except this is a 5 min chart. 

Notice how the market follows the currency pair nearly perfectly?

Now lets look at the individual currency futures and how they relate to the market.

 Again, the currency is the candlesticks and Es (S&P Futures) are purple. 

This is a 5 min chart of the Japanese Yen (JPY) vs ES, note that they trade nearly the mirror opposite, that's because the JPY is the second symbol of the currency cross, the short.

This is the same 5 min chart, but this is the Euro (EUR) vs ES and notice how the market follows the Euro nearly tick for tick, just like the EUR/JPY pair because that's what we are looking at, the pair broken down in to individual currencies and showing how they relate to the market. 

So what do you think would happen if the Euro moved down on the chart above? Or what would happen if the Yen moved up on the above this one? If you said the market (assuming the correlation is still linked) would fall, THIS IS WHY THE SIGNALS IN THE CURRENCY (or FX) PAIR are important and VERY few traders know this or know how to get the underlying probabilities from the currencies.

Now lets look at the 3C chart of the EUR/JPY.

 It's difficult to get detailed signals from currency pairs, but I can often get an idea in the 1-5 min chart range, this 5 min chart of EUR/JPY shows a negative divergence that has gone to a new leading low for the week late this afternoon, I thought this was important enough to mention in this post today.

To go further in my analysis of the currency pair, I can look at the individual currency futures that make up the pair such as the Euro's 3C charts and the Yen's 3C charts, here's what I found...

Single Currency 3C Euro charts 

 This is the 5 min Euro and the 3C divergence is clearly negative, this does not bode well for stock market upside, it's not damning in and of itself, but it is a piece of the puzzle.

 The Euro 15 min chart is much more serious, if not for the market, then at least for the currency cross, this too is a new leading negative divergence hitting new 3C lows for the new week and even further back. *Almost all of this damage, which is on a very strong and important 15 min chart, was done TODAY ALONE!

 Euro 30 min shows a positive divergence forming last week, then late last week we saw none other than a .....

HEAD-FAKE! Remember how I'm always writing that we see a head fake move 80% of the time before a reversal and even more specifically, HOW THIS CONCEPT HOLDS TRUE IN ANY TIMEFRAME, ANY TYPE OF TRADING AND IN ANY MARKET? There's proof for you.

One way we know it's a head fake move beyond the strong positive divergence in 3C as the move is made to new lows, but also note the increased volume in the two yellow boxes, a head fake move is not effective unless it open up volume, causes traders to stop out or buy, it needs to create movement and volume to be effective. 

Beyond that, we have a very strong 30 min negative and once again, almost all of the damage was done today alone, this is rare to see on chart's as long as the 15 or 30 min, but just goes to show how much distribution is taking place.

The 60 min chart shows divergences as well as a lot of accumulation at the head fake move, however the negative is starting to show signs of making it to this timeframe. Honestly this is excessively long and we could get a reversal in the Euro and the FX pair based on the 5 min chart alone, but to make the case stronger, a rising Yen would confirm and make a stronger case for the FX pair to lose ground and likely take the market lower with it.


Single Currency 3C Yen charts 

 This intraday chart of the Ye shows what we want to see, a positive divegrence, but not only that, the divergence is found within a price formation that is base-like, sort of like an inverted H&S base, this makes the case stronger.

 The Yen 15 min charts show 2 positive divergences, the first sent the Yen up fairly substantially, the second is in place now (it could add to the divergence making it stronger), however for a 15 min chart, this is strong.

 We have a Yen 60 min chart showing a positive divergence as well. As the Yen makes new lows it is clearly being accumulated.

This daily chart of Yen accumulation is very strong and a long term view of the Yen, this is almost all of 2013. 

In fact I think the Yen is so important and its eventual rally to the upside as I believe the Bank of Japan created a QE monster that is too large and they have lost control of it, is such an important event, I wrote these two articles called Currency crisis.

I find them interesting because I make the case in these articles which were written around April 2013, that the Yen rallying will be seen at the same time the stock market take its hardest hit yet, so to see daily accumulation on the Yen chart is encouraging for our Primary Bearish trend.

Here are the two articles, you can always find them linked on the right side of the member's site.

Currency Crisis Part 1

Currency Crisis Part 2

In essence we have a shorter term indication via the weak Euro right now and strengthening Yen and the fact that it was the EU?R/JPY pair that acted as a short term engine for the market to lift it higher until it broke technical levels that caused a short squeeze. On a longer term or rather a big picture basis (as I have said many times recently, "I don't think we are close to the big picture, I think we are already in it"), the indications above are in line with what I expected and wrote months ago in April so I would expect to see Japan in huge trouble, the Yen soaring while the US stock markets and global markets see one of the worst bear markets anyone alive has ever seen.