The look on many markets from the August 2019 low, that are moving in sync with the current risk-on trade, currently have a distinct corrective look to them.
For example, let’s look at an overlay between TBT and USDJPY. Some readers may be aware that generally speaking, USDJPY tends to move higher when a risk-on environment is present in the markets and moves lower with there is a risk-off environment. As you can see both markets have been moving higher since August 2019.
However, the look of the wave structure is what we are really interested in. The advance has a corrective look to it, so it seems to be supporting the idea that the current rallies on risk-on assets are likely a corrective bounce since August 2019, against the backdrop of the prior declining trends, and not likely to be the start of a strong upward rally. If we had seen a strong upwards rally in 5 clear waves, then it would be a far more bullish clue. However, the overlapping waves and the 3 wave movements are characteristics of a corrective trend as opposed to an impulsive trend.
So the expectation is for a move lower on both USDJPY and TBT once the current rallies from August 2019 end. If we add in Gold which has been currently moving lower since early September 2019, we can see there is a decent inverse correlation between TBT, USDJPY, and Gold.
What that essentially means is as the risk-on trade has progressed higher over the last few months, traders/investors have sold Gold and US treasuries (yields higher) and purchased risk-on assets such as USDJPY and equities.
If I am correct about the current risk-on rallies from August 2019 being a corrective advance, then a reversal of that trade should then see a move back into Gold and US treasuries (yields lower), as well as a move away from equities, and money moves from one area of the market into the other.
Let’s add the SPX as a proxy for US equities and see if that offers any clues. You can also see US stocks have moved higher, which would make sense if USDJPY was moving higher, as those two markets tend to move well with each other. So if the current risk-on trade is close to reversing as I suspect, then there is a strong chance we see a move lower on US equities, as traders/investors once again move money away from risk-on assets and back into risk-off assets such as TLT, US treasuries, and Gold.
If you overlay the RUT with USDJPY, you can also see a distinct 3 wave move on the RUT from the August 2019 low. Now that may change, but presently the advances on many risk-on markets have a 3 wave look to them from August 2019. If the current advance remains in 3 waves as I have shown, then the current risk-on rally is potentially setting up for a move lower. A move below the October 2019 low would further support a more bearish tone to the markets.
If any weakness in markets such as USDJPY or the SPX remains above the October 2019 low, then it can support a bullish tone to the market and further upside thereafter.