Investors were shocked by the roller coaster ride in the financial markets last week. In particular, stock markets tumbled sharply on worry over global slowdown. After massive selloff, equities stabilized before the end of the week and recovered. DJIA once dived to as low as 15855.12 during the week, which was -8.6% down from the record high of 17350.64 made less than a month ago. DJIA then recovered to close at 16380.41. FTSE also dived to as low as 6072.62, -12.1% down from record high of 6904.86 made in early September, then closed at 6310.29. DAX reached as low as 8354.97, -10.1% down from September's high of 9291.20, then closed at 8850.27. Treasury yields were also sharply hit as US 10 Year yield dropped to as low as 1.868 before closing at 2.199. Yield on German bunds tumbled to record low of 0.716%. But, Eurozone peripheral bonds were sold off with Greek 10-Year year yield jumped 147 basis points this week.
Taking a look at DJIA, it's now clearly in a medium term correction. A medium term top was formed at 17350.63 on bearish divergence condition in weekly MACD after it failed to reach the upper channel line. 55 weeks EMA was clearly broken too. We'd expect further downside in the index to channel support (now at around 15000 level). However, strong support should be seen at 38.2% retracement of 10404.49 to 17350.64 at 14697.21 and bring rebound. Judging from the structure of the up trend from 2009 low of 6469.96, price actions from 17350.64 would likely develop into a sideway consolidation pattern as the fourth wave. And eventually, we'd still see a new high above 17350.64 next year.
In the currency markets, dollar was broadly lower as traders pushed back speculation of timing of Fed's first hike. But dollar's weakness was overshadowed by Canadian dollar which was pressured by the selloff in Crude Oil. Yenand Swiss franc were strong as expected in such risk aversion environment. However, Aussie and Kiwi were also among the strongest currencies last week as supported by expectation of additional stimulus from China later in the year. Among European majors, Sterling was clearly the weakest one.
However, there are some important technical points to note. Firstly, the broad based weakness in dollar is seen as corrective. We've pointed out last week that Dollar index made a short term top at 86.74 and the pull back could go deeper. 55 days EMA at 84.01 might be breached. But we'd expect strong support from 38.2% retracement of 78.90 to 86.74 at 83.74 and bring rise resumption. The long term up trend from 72.69 is expected to extend to 88.70/89.62 resistance zone later. Based on this assessment, we'd likely much volatility in the greenback with downside bias in near term.
Secondly, while Aussie and Kiwi both registered broad based gain last week, that shouldn't be taken as sign of strength. Indeed, AUD/USD was just staying in sideway consolidation between 0.8642 and 0.8897. NZD/USD's recovery from 0.7707 short term bottom is also clearly corrective. While further rise cannot be ruled out, we'd expect limited upside potential. Meanwhile, a break of 0.7805 minor support would likely send the pair through 0.7707 low.
Thirdly, it should be noted that some importantly level were taken out in yen crosses last week. EUR/JPY broke 135.50 key level while GBP/JPY also broke 169.34. AUD/JPY broke 93.92 in the prior week already and managed to sustain below this level last week. Based on the outlook in stocks, we'd stay bearish in yen crosses in general.
As for trading strategies, our EUR/USD short was stopped out last week. GBP/USD short stayed, but as dollar looks likely to extend the correction further, we'll close out GBP/USD first. While AUD/JPY short did register gain, the performance was very disappointing. It's rather frustrating to see yen crosses diving sharply elsewhere but ours moved with snail speed. Nonetheless, we'll stay short in AUD/JPY as firstly, the consolidation in AUD/USD might end soon, and secondly, yen stays broadly bullish So to conclude, we'll only stay short in AUD/JPY this week and we'll discuss other opportunities next week.