Equities and Carry Trade Topped

The respite from deflationary forces has led to a 43% rally in the S&P 500 and a 24% (2700 pips) rally in the EURJPY. Elliott wave structure and other technical considerations suggest that the rally in risk (such as carry trade and equities) is over.

[B]S&P 500[/B]

Elliott teaches us that moves in the direction of the larger trend are in 5 waves and moves against the trend (corrections) are in 3 waves. Additionally, corrections tend to end near the former 4th wave. A picture perfect 5 wave decline ended in March and the subsequent rally has carried the S&P 500 back to the area of two former 4th waves (and the 200 day SMA). A closer look reveals additional bearish evidence.

[B]
S&P 500[/B]

The exact same 5 wave pattern is visible on the S&P hourly chart. The form of the decline (5 waves) indicates that the larger degree trend has turned back down. Considering the juncture at which the trend turned (former 4th wave and 200 day SMA), the probability that 956 was the 2009 top is high. Short term resistance is 928 (former 4th wave) and 936 (61.8% retracement). The immediate bearish stance would be invalidated on a rally above 956. 1025 would be the next probable turning point.

[B]
EURJPY[/B]

As a currency trader, you can play risk trends through Japanese Yen crosses (as well as the US dollar). The EURJPY is one such cross and exhibits a clear wave structure from its 2008 top at 170. The 170-113.59 decline is in 5 waves, indicating that the larger trend is down. The corrective rally stopped and reversed at the former 4th wave, making it probable that 139.17 was the top. The subwaves of the decline from 139.17 are not as clear as the S&P, which leaves open the possibility of one more high. In any event, a new high would only delay resumption of the larger trend - which is down. 135.50 is short term resistance.

Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday, GBP on Thursday, AUD on Friday), and the DFX Trend Index every day after the NY close. He is also the author of Sentiment in the Forex Market.