Risk Aversion: What today’s sell-off in equities tells us.
The sell-off in the Dow Jones Industrial Average today was a confirmation that the downtrend exhausted at a level that traders were watching for dynamic resistance: the 20 period simple moving average (SMA) close.
The volatility that has kept traders and investors guessing about what the risk appetite of the market is has been one that still has an overarching negative bias to it since the daily chart of the Dow is in a downtrend. The recent rallies had continued to exhaust below 11,500 and below the 20 period SMA close, until today. Today move and subsequent rejection at the 20 period showed not only are rallies still being sold into but that the psychologically relevant 20 period is holding as well and this pushed the near-term ceiling down to 11,332.
Also consider that despite recent rallies in equities, the U.S. Dollar Index has not lost its footing below 74.00 in any significant way and therefore the range on the daily chart in intact. This means that buying support is still waiting between the 73.51 and 74.00 levels.
What does this mean to the USD/CAD and other comm-dolls? The support in the greenback should – along with risk aversion – drive the AUD/USD and NZD/USD lower and the USD/CAD higher. The stronger dollar would weaken commodity prices, and crude oil could test the 80.00 level again.
Taking a look at the intraday time frames for these three pairs, especially the consolidation on the respective 240-minute charts, it is clear that the market is waiting …
and we’ll all have to wait and see what Ben Bernanke says from Jackson Hole tomorrow.