Equity markets are at it again today with the S&P finishing 7% lower on session. Crude oil is following equities in lockstep closing at the lowest level since October 23, almost one year ago. Bond markets, however, are not confirming this new equity market low as bond prices, especially at the long end of the curve, have begun to push lower showing some hope that credit markets can soon normalize. The 30-year bond is facing vulnerable trendline support at 116 1/2, as is the 10-year note at 113 1/2.

I have shown this 920 level in the S&P as a potential support zone on several occasions, as well as the $86 support level in crude oil. I find it rather interesting that both were tested this afternoon. I picked up some upside S&P and crude oil exposure today for a possible snapback short covering rally on Friday. Should the S&P hold the 905-920 support level, a 4th wave move towards 1050 is well within reason, at which time we roll back over in wave 5-of-3 before we enter a long, nasty drawn-out consolidation in the blue wave 4. Once equities enter this wave 4 consolidation, I believe the focus will shift away from the equity market and back towards the dollar.



The US Dollar Index is facing significant daily resistance at 81.75, and more immediate resistance for tonight at 81.75. A break above there, however brings a likely test of 84.25, which equates to EUR/USD at my final target of 1.3320. I believe this will become our reality for the following reason. Notice USD/JPY has been the currency proxy for the S&P during this downside bloodbath. But USD/JPY has continuously held the .786 retracement of the March to August move at 99.00 in recent sessions, yet the equity markets have sailed (or should I say sunk) through their equivalent lows. This could be an indication that USD/JPY selling has not been a result of lower equities, but of higher bond markets and their corresponding lower yields. We might have seen the lows in USD/JPY.

So If the US treasury markets are coming under profit-taking pressure along with continued weakness in equity markets, USD/JPY will not have as much downside selling interest and we are required to look elsewhere for a risk-aversion currency trade. And our risk-aversion trade going forward looks to be short euros.

EUR/JPY and EUR/USD are currently working off the excesses of a pair of 4th wave patterns that should complete in the next few sessions. EUR/JPY just this afternoon put in a d-wave low of 135.40, and is expected to make one more feeble bounce in wave-e to complete the larger 4th wave triangle. From there, trendline support between 136.00-136.50 should be broken before moving to our wave 5 target of 130.70.

EUR/USD is struggling through a 4th-wave choppy consolidation of its own. A break below 1.3625 +/- 20 pts should open the door to a wave 5 push into the 1.3320 daily target. For tonight, I am watching this EUR/USD support level before moving ahead.



Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

Disclaimer
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.