The Australian dollar (FXA) continues to provide fascinating, and profitable, examples of its strong relationship with the S&P 500 (SPY). On July 8th, I described in "How Divergences Between The Australian Dollar And The S&P 500 Can Signal Trades" how the S&P 500 made a new intra-day low late in the day while the Australian dollar failed to do so against the U.S. dollar. This bullish divergence was a signal to at least close out bearish short-term positions. On July 23rd, another big sell-off day, the Australian dollar provided a handy indicator for a bounce in the S&P 500.
Soon after the open of trading and a 1.7% loss for the S&P 500, I tweeted the following:
Australian dollar still lagging poor technicals on $SPY. Has not yet broken its uptrend from June low on $AUDUSD. Watching for confirmation.
The S&P 500 had broken its uptrend from the June lows, and I was waiting for the Australian dollar to do the same. I was expecting the S&P 500 to continue dropping to its 50-day moving average (DMA). Instead, the S&P 500 began to turn upward, and I immediately assumed that marked the low of the day. The index went on to recover almost half of its losses on the day. The Australian dollar provided another bullish divergence that signaled the end of short-term bearish trades. (I chronicled some of these trades in my semi-regular technical review called the "T2108 Update").
In the daily charts below, I show the S&P 500 and the AUD/USD currency pair. Note that the Australian dollar not only stopped short of breaking its uptrend line from the June lows, but it also held support from the 2010/2011 closing level.(click to enlarge)
The S&P 500 bounces after approaching its 50DMA. Uptrend from June lows holds.(click to enlarge)
The Australian dollar sells-off with the S&P 500 but refuses to break its uptrend from the June lows
So far, I have noted important divergences on days when the S&P 500 sells off. I have not yet identified useful correlations on up days.
It is impossible to determine when these handy relationships and correlations may fail. However, it makes a lot of sense to leverage them as much as possible while they do last. At some point, I do expect the Australian dollar to sell-off sharply once the current attraction of the carry trade finally wears off. I am not predicting just yet what that event will mean for the S&P 500. Note well that the Australian dollar's 2012 sell-off began a full month before the S&P 500 put in its high for the year (see "Correlations Are Broken But Australian Dollar Still Leads The S&P 500" for more detail).
Be careful out there!
Additional disclosure: I am net short the Australian dollar.