The Dow Jones Industrials is moving in a similar pattern seen this past summer in May-July 2011. This could lead to a selloff in risk and opportunities to buy the US Dollar. (How to Read Risk “ON” and Risk “OFF”)
In late July 2011, the stock market began to sell off in response to a couple of noteworthy events that are re-emerging again today.
- US Debt Ceiling talks were stalling and going nowhere fast
- The Italian 10 year bond was moving above 6.0%...a high at that time
As a result of the above fundamental events, the chart pattern of the Dow Jones Industrials that is tracing out again today.Although the result of the pattern may not be the same, this does create a set up for a stock sell off and flight towards buying US Dollars.
US Debt Ceiling Debate (July 2011 compared to November 2011)
The US Debt ceiling debate was taking center stage. Many debt watchers were surprised to see a deal carry into August, but this debate was temporarily resolved in the first week of August. I say temporarily, because it is only a matter of time before this issue needs to be readdressed. After the temporary resolution is agreed upon, S&P downgraded the US debt rating on August 5, 2011. As a result of the debt ceiling debate, a congressional “super committee” was created to bring a longer term deficit reduction plan for the United States. It was an effort to let the world know we are serious about finding long term solutions.
Now it is time to step up to the plate with actions. The deadline for the super committee’s decision is next Wednesday November 23, 2011. In reading news over the weekend, it seems this deal will happen like the debt ceiling deal in August…it will likely happen at the 11th hour at the last minute. This may create uncertainty in the market that the United States is able to tackle and solve tough problems regarding its debt.
Italian 10 Year Yields (July 2011 compared to November 2011)
Another parallel of today’s market relative to July is the Italian 10 year yield. The yield on the Italian 10 year bond reached a high near 6.03% in July 18, 2011. As the debt talks stalled, fear crept into the market and the Italian yields began to push even higher reaching a swing high of 6.23% on August 4, 2011. The European Central Bank then began the highly criticized purchasing of those bonds on the secondary market which drove the Italian 10 year bond yield lower throughout the course of August. However, the foundation of fear created the iceberg below the surface and traders flocked towards the US Dollar.
Fast forward to the current market, last week, the Italian 10 year bond reached a high of 7.48% before ECB bond purchases began to drive the yields lower. Yields are still at an elevated level (near 6.5%) for the world’s 3rd largest debt market in the world. Higher Italian yields means higher borrowing costs which means there is a potential the credit crisis of Europe spreading creating a risk “OFF” environment and a potentially stronger Greenback.
Dow Jones Industrials (July 2011 compared to November 2011)
When looking at the charts, the price patterns are similar from July 2011 to today.
Above is a daily chart of the US30 which is a CFD that tracks the Dow Jones Industrials. In July 2011, there was a double top (gold box) where the right side of the top briefly pierced the left side of the pattern. The whole double top pattern formed below the May 2 highs creating a partial retracement of the May 2 sell off. Therefore, we have a lower high and weakness in the market. As a result of the pattern, the market sold off 19% to the October 2011 low.
Over the past 2 weeks, the US30 has been tracking a similar pattern on a 4 hour time framed chart. Earlier this morning, the right side of the double top (blue box) was created as it barely pierced the left high of the double top pattern. This double top pattern is below the October 27, 2011 high created a partial upward retracement of the sell off experienced the first week of November.
This gives us a good opportunity at a good risk to reward ratio as we can place a stop loss to sell risk above this morning’s highs.
If we wish to place a currency trade based on a risk “OFF” environment, then we can sell the EURUSD, AUDUSD or buy the USDCAD, USDCHF. ( How a Stock Market Move Translates to Currency Trades )
Additional Resources
How to Read Risk ‘OFF’ or Risk ‘ON’ Sentiment
How a Stock Move Translates to Currency Trades (Text)
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education
Follow me on Twitter at @JWagnerFXTrader.
