A possible collapse of the Italian government would be bad for
risk in general and for the euro in particular any day of the week.
The messages of instability emanating from Washington, DC, would be
bad for risk in general most days as well. However, when you
combine these two issues, you get what we have this morning: a
general risk-averse attitude the is pressuring equities, crude oil,
and several key risk gauges in the currency markets to the
What matters to traders is not "what is" but rather "what will be."
So is there a lot more downside potential left on the charts for
risk assets? Or is there a potential floor nearby that could send
risk assets flying for a profitable Q4?
Let's go to the charts.
Treasury yields bouncing off of "minor" support; "major"
support still lower.
Treasury yields -- shown below by the yield on the 10-year US
Treasury Note (INDEXCBOE:TNX) -- are finding some short-term
support at 2.605%. That level represents the lower edge of the
upside gap that occurred in early August.
Given the recent break of the 23.6% Fibonacci retracement line last
week, the next "major" support for TNX comes in at the 38.2%
retracement line down at 2.467%. So, in my view, today's bounce off
of the "minor" support will not last for long. With the jobs report
due out Friday and plenty of data points coming out between now and
then, there would appear to be plenty of opportunity for the rest
of the move lower in rates to occur.
S&P futures testing one possible support at 1,665; next
level down at 1,656 may be
The S&P futures gapped lower Monday but have rebounded at the
opening of the US session as short-term traders followed the
trader's playbook predictably and covered shorts into the initial
sell-off. Those same traders are likely watching to see how much of
a bounce occurs and are probably picking their spots for re-entry
on the short side.
In terms of the technical levels to monitor, the futures tested one
possible support level at 1,667.88 this morning. That level was
generated by the 50% Fibonacci retracement line (orange line on the
chart) as shown on the chart below. However, if you take a look at
the blue Fibonacci extension lines, the real support level may be
down at around 1,655 - 1,656, which also corresponds with the 61.8%
Fibonacci retracement line (see dark red line). In either case,
this appears (at this point) to be a nice buying opportunity for
The AUD/JPY cross is bouncing off of one possible
One of the key risk gauges in the currency markets -- along with
the euro / yen (EUR/JPY) and the Aussie dollar / US dollar
(AUD/USD) -- is the Aussie dollar / Japanese yen (AUD/JPY) currency
cross. Today of all days, the AUD/JPY should be evaluated in lieu
of the others since it is not tainted by the US or Italian crises.
Right now, it looks like the AUD/JPY tested the key "correction
support" at 90.735 and is thus far holding up above that level. At
the very least, it was a natural place to expect the bulls to try
to make a stand. As long as that level holds firm as support --
especially on a closing basis -- the bulls will have something on
which they can hang their hats. Any close below that, though, will
mean real trouble for risk bulls. Monitor this one closely.
SUMMING IT ALL UP
If I had to place a bet this morning, it would be for one more
thrust lower in risk assets after this morning's bounce. I'm
thinking we test the "major" support in yields at 2.465% and the
1,656 level on the S&P futures before this correction is over.
Such a move lower may coincide with a retest of the "correction
support" for the AUD/JPY. All that being noted, breaks of the key
support levels in yields, stocks, or the AUD/JPY would be a clear
signal to protect capital ASAP.