Forex Investment and Currency Trading

In recent months there has been a significant degree of IAOL – “its all one trade” – in financial markets, with a high degree of correlation of risk-seeking and risk-aversion trades. In particular, movements in equity prices have provided a significant “guide” to performance in the foreign
exchange markets of growth oriented currencies versus risk-aversion currencies– with the AUD/JPY cross a key G10 example on that relationship.

It is in this context that recent signs of support for equity prices could take on significant importance for currency movements during the weeks ahead. First, the S&P 500 index appears to be testing – but so far holding – above very serious long-term support from trend-lines going back to April 1997 (current support at 807.63) and December 1987 (current support at 799.69), with the November 13 low (818.69) modestly above both lines of support. Moreover, on November 13 the S&P 500 completed a reversal day to the upside after reaching the absolute low (so far) in the entire correction. While such a reversal off an extreme level in a large price change is significant by itself, it takes on even more interest as the S&P 500 posted a bearish reversal day off it absolute peak on October 11, 2007, a reversal day that ushered in a 13-month decline of nearly 50%. There was also a bullish reversal day on October 28 that ushered in a near 20% rebound, although it was not a reversal off the low of the bear market. Accordingly, we watch with interest to see if the S&P 500 can hold above the 818.69 low of November 13 and support a gradual improvement in risk appetite. A close below support, currently at 818.69 would target a move down to the October 15, 2002 low of 768.83. However, if the low does hold it would target a test of the November 4 high at 1007.51, a rebound that would likely be quite supportive of risk-seeking currencies.

S&P500 Holds Above Long-Term Support And Posts Bullish Reversal Day