Price & Time: Stock Market Correction Looming?

DailyFX   |  February 15 2013 1:03 EST

What will it mean for currencies?

This publication attempts to further explore the concept that mass movements of human psychology, as represented by the financial markets, are subject to the mathematical laws of nature and through the use of various geometric, arithmetic, statistical and cyclical techniques a better understanding of markets and their corresponding movements can be obtained.

Foreign Exchange Price & Time at a Glance:

USD/JPY:

Charts Created using Marketscope – Prepared by Kristian Kerr

-USD/JPY continues to consolidate just under the 38% Fibonacci retracement of the 2007 to 2011 decline

- While the dollar holds above the second square root progression from last week’s high in the 92.00 area focus has to remain higher

- A close over the long-term retracement near 94.20 now needed to prompt further push higher towards a Fibonacci extension just above the 95 handle

- Some caution warranted over the next few days as our cyclical analysis suggests the pair is nearing a turn window

- Weakness under 92.00 especially on a closing basis needed to shift attention lower and open the way for a more severe decline

Strategy: While over 92.00 we have to favor the long side, but should the pair fall under this level in the next few days we would strongly contemplate a stop and reverse.

AUD/USD:

Charts Created using Marketscope – Prepared by Kristian Kerr

- AUD/USD found demand early in the week near the 1.0230 38% Fibonacci retracement of the late 2012 advance, but broader decline remains in force

- Friday’s failure by a convergence of the 38% retracement and 1x1 angle of the year-to-date range in the 1.0370 area keeps focus lower

- Weakness under the longer-term Fibonacci retracement now needed to trigger the next extension lower

- However, cycles indicate the next few days are significant and the potential for a turn of some signficance is high

- Close over the 1.0370 retracement needed to shift bias higher and signal a more important move is underway

Strategy: While under 1.0370 we like being short the Aussie, but keep stops tight. The next few days are key from a cyclical perspective and a reversal in trend is looking possible.

EUR/GBP:

Charts Created using Marketscope – Prepared by Kristian Kerr

- EUR/GBP has found resistance over the past days at the 78.6% Fibonacci retracement of the early February decline

- Weakness from there has been mild and contained by a longer-term retracement in the .8575 area related to the 2011 to 2012 decline

- Near-term focus is higher, but strength over the cyclically significant year-to-date high near .8715 is really required to undermine this cycle and set up a more important advance

- While below .8715 risk remains that negative cyclical forces could re-assert for a deeper correction

- A minor Gann fan convergence near .8560 is now key support with a clear break of this level being the first sign that a bigger correction is indeed occurring

Strategy: Small long positions begrudgingly favored while over .8560, but if this level quickly gives way we will be looking to go the other way.

Focus Chart of the Day: S&P 500

Charts Created using Marketscope – Prepared by Kristian Kerr

We have written a lot of notes over the past few days about the possible importance from a time perspective of the coming week in the currency markets. When we near such turn windows we often look for corroborative evidence from instruments outside of FX as capital flow movements related to stocks and bonds are a major driver of movements in currency. In this analysis we noticed a very intriguing development in the US stock market that suggests it too is entering into a critical turn window over the next few days. We reached this conclusion because a pure Pi cycle equals 3,141 days. This frequency has materialized often in the stock market. For instance, the rise in the S&P 500 from the crash low in October 1987 to the March high 2000 took place over 3,141 trading days. One half a Pi cycle equals 1,570.5 days. This coming weekend will be precisely 4,711 calendar days (or 1.5 Pi cycles) from the March 24, 2000 “secular high” in the S&P 500. While a turn in stocks is far from guaranteed around such a frequency, its possibility does increase in our estimation - especially with the indices so extended and accompanying sentiment so ebullient.

--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com

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