Another Bearish Omen With AUS/USD?

05/23/12 02:48:25 PM

by Matt Blackman

Markets have been giving mixed signals, but there have been some signs that a correction may be in the offing. Here is another.

Security: SPX, SPY, AUS/USD
Position: Sell

Since peaking in April, US stock markets have struggled. Major indexes have been flashing some bearish chart patterns, as the head & shoulders on the Standard & Poor's 500 shows in Figure 1. But perhaps even more bearish from an intermarket standpoint is the Australian dollar/US dollar (AUD/USD) currency pair. While the SPX continued to rally well into April, the AUS/USD peaked in late February and has been trending lower ever since.

FIGURE 1: SPX VS. AUD/USD, DAILY. Comparing the Australian dollar/US dollar pair and the S&P 500.

Graphic provided by: FreeStockCharts.com.

Why is this important? Take a look at the relationship between the aussie and SPX going back to March 2009 (Figure 2). The aussie bottomed in late October 2008 (point 1), well ahead of the S&P 500 in March 2009. It has also led the SPX higher in the rallies and in warning of weakness along the way since then. So what does the strong negative AUD/USD divergence mean?

FIGURE 2: AUD/USD, WEEKLY. Comparing the S&P 500 and AUD/USD relationship since March 2009.

Graphic provided by: FreeStockCharts.com.

Australia has provided an accurate mirror for growth in Asia, especially China, and AUD weakness indicates dropping resource demand from that region. As Figure 3 shows, all emerging markets are showing signs of weakness, as the iShares MSCI Emerging Market exchange traded fund shows.

FIGURE 3: EEM VS. SPX, DAILY. Bearish divergence of the iShares MSCI Emerging Market Index ETF with the S&P 500.

Graphic provided by: FreeStockCharts.com.

Emerging markets have been a major driver of the global economic recovery. Is it possible that US stocks will continue to rally in the face of slowing emerging markets and cloudy global economic outlook? It would seem unlikely, but so is the fact that US stocks have continued to rally in the face of slowing economies in Europe and emerging markets.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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Another Bearish Omen With AUS/USD?

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