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Bearish, volatile and oversold

Volatility increased in spades overnight. Once again, the JPY was the key beneficiary in the currency market.

Volatility
Source: Bloomberg

I looked at short NZD/JPY trades on Wednesday, with a view to sell rallies from ¥84.70 (the spot price at the time of writing). I felt placing a stop ¥86.15 would be prudent. Judging by price action, this seemed to be the right call.

On the daily chart, we seem to be seeing a period of consolidation after the strong run lower from ¥88.93. However, the intra-day range in this consolidation is sizeable. Which way will the pair break?

Looking at the various oscillators, we can see oversold conditions on the daily chart, but there are no signs of divergence or crossovers that scream of a pending reversal. Resistance is at ¥85.85 (the 29 May pivot low) and ¥86.07 (the 38.2% retracement of the recent sell-off). The fact the market is respecting these levels seems important. It looks as though the balance of probability suggests the risks are on the downside.

The weekly chart highlights the bearish outlook, with this week’s candle showing a clear rejection of the May lows.

We will need to see volatility remain high for NZD/JPY to break lower, and I will therefore continue to focus on the volatility index and also the US 500 cash (S&P 500). The weekly chart of the US 500 cash seems key. A close below 1950 would see the index close below the November 2012 uptrend, which could bring out better technical selling.

I also continue to focus on my long Wall Street Cash (Dow Jones) / short Russell 2000 trade and, while the trade lost some traction yesterday, the overnight move has clearly helped. Since looking at the trade, the Wall Street Cash has outperformed by 0.8 percentage points, which suggests a profit of $2298 thus far.

US 500
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