Macro risk analysis - Daily Form for June 8, 2011

Inter-market Technical Analysis using algorithmic pattern detection

WEDNESDAY JUNE 8, 2011       06:11:00 GMT

I am writing today’s column earlier than usual - Asian markets are still open and European markets will not be open for another couple of hours - as I have an all day commitment.

The main story from yesterday’s session was Bernanke’s widely reported speech on the economic outlook and monetary policy. It seems to have been the judgment of the pundits that the Fed chairman has ruled out the possibility of any near term supplement to the existing QE2 program which will conclude at the end of this month.

Reviewing the S&P 500 futures chart at present on the daily chart (see below) the index has now broken below and closed below a key trend line. There is a strong likelihood, in my estimation, that 1280 now needs to be robustly tested, and should that fail - and if prop trading desks and funds really want to send a "distress" signal to the Fed that without further monetization programs they cannot be relied upon to support equity prices - then we could see a rather sharp and abrupt move down the 1240 level in coming sessions.

There are still a lot of asset managers that will want to buy on the dips and there is likely to be some near term volatility as the bulls and bears struggle for control. As always the key to how this struggle will be resolved may well be found in the broader currents across other asset classes and specifically FX. As suggested yesterday my focus will be on looking for signs that the euro and the Australian dollar might be revealing evidence of intermediate term "peaking".

The configuration on the daily chart for the Russell 2000 is also suggesting that the very positive environment for equities which has prevailed since last August, when Ben Bernanke first articulated the QE2 program, now seems to be ebbing away.

Yesterday’s suggestion that instigating short positions on AUD/USD ~ 1.0740 turned out to be prescient.

As the hourly chart reveals the US session failed to reach above this level and during the last few hours of Asian trading we have dropped down almost 100 pips from the trigger level proposed.

In general the current dynamics are suggesting that traders are looking for rallies to get short and this would lend plausibility to my intermediate term target for the Aussie against the dollar the base of the daily Ichimoku cloud around 1.040.

Perhaps the most useful chart for detecting the overall level of risk appetite across multiple asset classes can be seen in the weekly chart for AUD/CHF.

The line drawn at 0.90 on the chart illustrates how critical the current position for this FX pair is, and with pending Aussie weakness and continued safe haven buying for the Swiss franc it would appear that there is increasing doubt that this level can be preserved.