Since our bounce, we have seen EUR/USD move inversely to the Index futures (opposite) and the USD/JPY Carry Cross has moved with the Index futures, in fact the USD/JPY bounce has been supportive of the market bounce, which is partially interesting as a support mechanism or lever like High Yield corp. Credit, but it's also interesting from the Carry trade unwind. In the past I've posted about the Carry trade, how it is used to finance bond and equity purchases (bonds outperformed equities in 2014) and as such, with the leverage typically used in carry trades of 100:1 or even 300:1, any bounce in a carry cross offers an excellent opportunity to exit the trade at either less of a loss or a better exit with a gain. In either case, there seems to be very strong data pointing to a carry trade unwind which can be seen here on the daily chart of the $USD, notice its 3C divergence as well as the carry ON stage last year in which bonds outperformed stocks until they topped out being one of the first hints the carry trade was being unwound as well as the end of the primary uptrend in the $USD.
Daily chart of $USDX with a carry trade ON during 2014 which sent the $USD higher and the assets that are financed with carry profits, typically the first is Bonds. Remember bonds outperformed stocks through 2014 then suddenly went risk off as if the carry trade was being unwound. At 100:1 or 300:1 leverage, it doesn't take a very big mover against the trade to cause massive losses like Long Term Capital Management saw before imploding.
At "B" the $USDX tops around mid-March on this daily chart with a very strong daily 3C negative divergence, then it went on to make a series of lower highs and lower lows. Sound familiar? The SPX did the same thing.
As for Treasuries...
As mentioned, they way outperformed equities last year, this is because of the carry trade. The 30 year Treasury or TLT put in a gain of +23.85% last year. You may recall we had several long positions until something started to change in 3C and we no longer had confirmation. By contrast the SPX put in a gain of almost half that through 2014 of only +12.39% compared to nearly 24%.
Remember when a carry trade is on, a low yielding currency such as the Yen is borrowed and essentially sold just like a normal short in which you are borrowing an asset, selling it immediately and then hoping to gain off its decline before covering and returning the asset that was borrowed. With the carry trade, one of the most common assets to purchase with carry profits are bonds in higher yielding countries such as the US, thus the 2014 carry funded move in treasuries nearly doubling the performance in equities. However equities are also bought and as a carry trade is unwound, profits are taken in the assets that were funded with carry proceeds before unwinding the trade which would in this case, essentially be selling the $USD and repurchasing the Yen and returning it from where it was borrowed, so the topping in Treasuries was a sign that the carry trade was being unwound as was the sale of $USDs to close the carry cross as you see in the chart above this one.
However remember all of those months/years on which the market followed the USD/JPY nearly tick for Tick as the carry processes were being invested in equities.
The $USD's daily primary trend chart is indicative of the carry trade being unwound,
but for the purposes of the most recent bounce we were forecasting for last week, the USD/JPY carry was supporting it.
This is the USD/JPY compared to ES/SPX E-mini futures.
This is the USD/JPY carry cross in candlesticks compared to ES/SPX futures (purple line) on a 30 min chart so you can see the lack of any carry correlated/supported bounce before the bounce we forecast for last week in which case the two assets move almost perfectly together,
A closer look at USD/JPY vs ES (purple) on a 10 min chart since the start of the bounce / base also shows the high degree of correlation.
Thus any change or divergence between USD/JPY and ES would be a bearish development for the bounce.
I look at the FX pairs with 3C, but they only give decent signals in the shorter timeframes, for example...
USD/JPY 10 min shows a positive divergence at the lows where the market bounce started and negative divergences in to the most recent highs, but not very detailed which is one of the challenging parts of FX crosses.
The USD/JPY 3 min is also showing a more specific timing 3 min negative divergence.
However as you see, these are broad signals, not a lot of detail so I look at the individual FX futures' 3C charts and put together a composite.
For example when looking at the $USD/JPY which has been supportive or supporting the bounce from last week, I'll look at the $USDX and Yen Futures.
$USDX 60 min chart with a larger positive divergence in white on a strong timeframe as a base for a bounce in the $USD, however to the far right we have a leading negative divergence suggesting distribution which would fit with a carry trade (USD based) being unwound in to better prices/bounce. This is a broad, strong underlying trend, but doesn't give us the detailed information that I prefer to see in addition with regard to timing.
The $USDX 30 min chart is showing clear confirmation of the negative divergence on the 60 min chart and is in a very ugly leading negative divergence thus the bounce that I initially called a "Risk Off" bounce before it even started as we had signs of it coming, meaning smart money would be selling/shorting in to it as all of our Leading Indicators have shown, gets additional credibility on this 30 min leading negative divergence in to higher $USD prices as the USD/JPY pair supports the market.
This $USDX 15 min chart is more specific with more details showing the actual base/bounce area with a positive divergence just like many of the market averages and distribution in to higher prices just like the Index futures and those of the major market averages.
As for timing, I have said it again and again, it's the 5 min Futures chart that is most critical to me for timing of positions as I want my positions to be in line with the divergence on the 5 min timeframe which is negative on the $USDX 5 min chart.
If the Yen confirmed, this would mean the support from the $USD/JPY for the market is about to give way, the carry trade is about to lose value and become a liability causing panic selling.
As for the Yen, since it is the $USD/JPY that means a long position in $USD/JPY is expecting $USD to rise and JPY/Yrn to decline, like a $USD long and JPY short, so I look at Yen futures for confirmation.
This is a 30 min chart of Yen futures that has seen price decline as would be expected with USD/JPY up, but showing a strong 30 min positive divergence recently confirming the $USDX negative divergence recently.
The Yen 15 min chart has a clear positive divergence as you can see without any notation on the chart.
The same is true for the more "timing" oriented 7 min chart of the Yen futures.
However it is the 5 min chart that is the prerequisite.
Yen 5 min futures leading positive as the $U?SD 5 min is leading negative. All of these charts (and there are many I didn't include), point to the USD/JPY moving lower, thus the support for the market(see the USD/JPY vs ES), is failing as well and has implications for the broader market.
As for the EUR/USD, which would be the EUR long and $USD short, it has had an inverse relationship with Index futures over the course of this bounce.
Unlike USD/JPY, the EUR/USD has had an inverse relationship with Es (purple)/SPX futures as you can see on this 30 min chart above. So a change of trend in this pair, while not as important to me as USD/JPY, would also be telling.
EUR/USD 10 min showing a negative divergence in the pair as the ES bounce began but more recently a positive divergence in the FX pair.
The 5 min EUR/USD is also positive after trending down during last week's bounce. However once again the pairs don't give as detailed divergence signals as the individual currencies.
You already saw the $USD divergences and the timing 5 min negative $USD, so it's only for the EURO futures to confirm what we see above.
Euro futures 60 min from negative to price moving in the direction of the divergence down, meaning EUR/USD down with a current large, underlying positive divergence trend at the right.
The Euro 15 min shows in line at the green arrows with the price trend lower until recently with a strong leading positive divergence.
10 min Euro futures also showing a clear leading positive divergence and...
The 7 min Euro positive as well, more in line with a timing timeframe.
And a positive Euro 5 min chart.
Thus we have confirmation in both USD/JPY and EUR/USD, the USD/JPY moving up with Index futures and supporting them through the bounce, the EUR/USD moving down during the bounce, but all 3 individual currencies have divergence confirming their pairs for a reversal which should of course lead to a trend reversal in Index futures as well. These have been there as I have mentioned them last week, it's the 5 min timing divergence that are interesting considering Friday's Week Ahead post saw some early price strength in the market today, but transitioning to the pivot and roll over in the market to lower prices. The FX pairs/carry trades seem to confirm out expectations with excellent timing indications.
