DAVID FLOYD: Hey there, traders. David Floyd here with Aspen Trading Group on behalf of Real Vision Television and the technical trade series. It's June 19th, 2019, and it is the Federal Reserve decision day. So what I'm going to be reviewing today is a variety of asset classes and a couple of trade setups.
But I want to preface that obviously things could change depending on what happens during the Fed meeting. We're not expecting a cut at this point in time. But the market is looking ahead to a very high probability of a rate cut later in the year. But nonetheless, I think there are still some themes that are starting to develop, that independent of today's fed decision should continue to play out albeit with a little bit of volatility, post-Fed decision, that might alter the charts a little bit.
But the first thing I want to talk about is the S&P 500. Obviously we've been in a very trending market for the last basically decade and certainly for the last couple of months, continuing to move higher in a very grinding fashion. But what I think is beginning to happen overall is I think we're going to go into more of a two way non-directional market. And I think the S&Ps are going to become obviously very good for traders, maybe not so good for investors. But even trading a sideways market is certainly challenging.
But for the time being, I'm going to go with what the overall wave count suggests, which is to point to higher levels. But I'm very cognizant that we could go into a market where we just get sharp moves up, sharp moves down, and therefore, we're going to need to be nimble. One of the things that's allowing me to draw that conclusion is basically the steepening yield curves and the inversion of yield curves. From a quantitative standpoint, when those two situations develop, not only that not only are they suggesting a recession in the offing, which is not really what I want to drive out at this point, but it does point to periods, historically speaking, when you get more of a two way type market.
So for instance, let's look at the yield -- the steepening yield curve between the 2 and the 10 year note. And we've had a big spike up in early May, and then we've been retracing in more of a corrective manner. I don't have the Fibonaccis drawn on here but that looks like about a 61.8 percent retracement. Three waves off the high. If that continues to steepen, that lends itself to the argument that the S&Ps might be slightly bullish but likely more to see a lot of volatility going forward, which from a trader's perspective it would be very, very welcome news.
The other thing to keep in mind, too, and I've shown this chart a couple of times, and this is just more of a conversation and something to keep in the back of your mind. And this is the S&P 500 versus the spread between corporate junk bonds and government yields. And as you can see this is very clear inverse relationship as spreads begin to narrow between junk bonds and treasuries. That is obviously beneficial to the S&Ps and vise versa. Right now spreads are beginning to decline again. We're back under 400 basis points. That has been part of the driver of the recent rally we've seen in the S&P 500. So barring another turn back higher, it's likely to keep a little bit of an upside pressure on the S&P. This is something you want to keep an eye on a day to day basis.
But let's look at the actual price action in the S&Ps for right now, because that's where really where we're kind of basing my decisions. Based on the technicals right here I think we're probably going higher, probably towards 29.68. Now again, the Fed could throw us a monkey wrench later today and prices could move lower. In fact, it's entirely possible that maybe this minor or smaller degree wave five is complete up in here as opposed to being complete somewhere up here and then we begin to correct lower. But for the time being the trend is your friend. Looks as though we're going to be moving higher. Really simple here, I mean maybe wave four is completed here. Maybe this is a triangle of some sort that broke out yesterday. Either way the implication is the same.
The other part, or the other asset class that I'm looking at, are 10 year notes. And oddly enough I am looking for a possible move lower in 10 year notes and higher in rates. And I know that goes against everything that the Fed is supposed to be doing later this year. But again, bond market is rarely, rarely wrong. They're usually a pretty good barometer for what is likely to happen. And the reason I'm getting a little bit bearish on bonds, or let's say bullish on rates, is that it looks as though we've completed a five wave move to the downside here.
I would say if we can get back above 210, certainly if we get back above 217 on the yield, I'm going to want to be short treasury notes. In fact, I have a small position on short 10 year notes at this point, expecting that these yields to move higher. That will drive 10 year notes lower. In fact, I'll bring up the 10 year note right here. This is a six hour chart. I've got this labeled as perhaps a nearly completed wave five up here, and we've broken this trend line support, and it looks as though prices are going to begin moving lower. So I know that goes against kind of what is being discussed in the marketplace. But when everything is discussed ad nauseam, sometimes it pays to look the other way.
Where we're not getting as much clarity right now is in the dollar index. I'm not going to spend really hardly any time there. I do think the dollar index probably moves a little bit lower in the near term. I don't have a firm opinion beyond that. But the one set up I do see that I like quite a bit is the Australian dollar. And this is purely a play on the technicals and if the S&P are to remain supportive, I think the Aussie dollar moves higher from here. We've had a nice pullback off of yesterday's highs. We've just about hit about a 61.8 percent retracement. I think if we can get above this little resistance area here at 68.80 you'd want to be long. And then I think your minimum upside target is simply 100 percent or 161.8 percent projection of wave 1 from wave 2. And I'll walk you through that in just a moment here. And upside target of 69.10, call it up to 69.42, and currently trading at 68.70. Pretty good reward relative to risk.
All I did right there from an explanation standpoint, from an Elliott Wave and Fibonacci perspective, is this. I use the drawing tools here in MotiveWave to measure the length of wave 1, and then project that distance from the bottom of wave 2. 100% that length comes in at 69.09. wave 3s will typically, not all the time, Typically go about 161.8% the length of wave 1. So what I would rather do is simply say, here's my target zone, and then kind of look to book my profits into that zone, depending on how price action is unfolding. If you're a longer term trader, obviously this is only wave 3 and we would have a modest pullback and then one more move higher in wave 5. So that could easily take us up 69.60, all the way up to 70, perhaps a little bit higher.
So I think the Aussie dollar's a really solid play in here over the next several days, maybe a week or two. I want to be long that as well. I could make the same argument on the euro. But the technicals are not quite as convincing as they are here on the Australian dollar. But the euro certainly would move higher if the dollar moves lower. That's a given.
The gold market. I'm going to be using GLD, which is the ETF for gold. I'm going to bring up, let's say a four hour chart. Again, pretty basic here. Nothing real magical. We have -- looks as though we've got the beginnings of a larger degree wave 3 unfolding here. We've got wave 1 up, wave 2. We've unfolded in 5 waves in Wave 3. And then we're either going to move one more leg lower in wave 4 let's say down to around the 125 level. Or we might just chop sideways in some sort of a triangle, or some sort of other corrective format before prices move higher. So, bottom line I'm bullish gold, especially above 128. But I think if you manage your trade correctly and position size it properly, I'd be a buyer in this area. And then if we do unfold in an ABC correction, I'd be a buyer on a break lower, as well.
Stops would have to be right here, which is at the wave 1 high, 122.93. So that gives you about 4 points of downside. But your upside risk, let's actually factor that in. Let's say we move down one more leg in wave 4. Then wave 5, there it is. Come on over here. Wave 5 is likely to go, again using that same premise, measuring waves 1 through 3 and then projecting them from the bottom of wave 4, you're going to come up -- Whoops. That's not going to work. You're going to come up with the target of about $130. So about $3 of upside, $4 a downside. I don't think you're going to have to do quite that much, because you'd be a buyer down here at the 125 five level, probably stops around 123, give or take. And so, maybe the overall risk reward is balanced at about 1 to 1. But I think this is the early stages, potentially, of a hot move higher in gold. So I think there's a trade here as I've just outlined. But I also think there might be, maybe for the first time in a long time, a structural move to the upside in gold.
And then I'm going to leave you with one last play here. And this is a trade that we actually went short this morning in our service. And this is Carvana, CVNA. Again, a very basic technical setup. Sometimes the best trades come from a very simple technical setup. There are some solid fundamental arguments against this company. Maybe it's overvalued. Maybe it's poorly run. Whatever it may be, I'm purely looking at this from a technical standpoint. So what we've had is, we've had a correction lower off the highs in wave A, and then a three wave correction in wave B, which, as you can see here, it ended exactly at a 61.8% retracement. We went short this morning at about $64, and we're currently trading at 62.77. Again, using some simple Fibonacci and Elliott Wave projections, I measured the length of A, projected that from the top of wave B, and came up with the downside target zone of anywhere from $48.40 all the way down to 35.50.
I think this is a good trade regardless of what the market does. I think this one can trade independent of the market. And as long as the S&Ps don't go into a raging bull phase which, I think is highly unlikely, I think the downside is far more likely in Carvana than any further upside.
Where would I put stops? Ideally you'd put stops above this wave B high of right around 69.25. For those that are a little bit more aggressive and want to give it room, because it is a volatile stock, maybe you use this all-time high up here at 76.90, give or take. I think, though, if you get above $69, the bear case is probably null for the time being.
So again, lots to work with. There's a lot of macro developments in terms of the larger asset classes. S&P is likely to be moving sideways with perhaps an modest upside bias. I'm looking for 10 year notes to trade lower, which means yields higher. Looking for gold to trade higher. Looking for the Aussie dollar to move higher. And looking for Cavanna to move lower. So plenty to work with regardless of what the Fed does today. These are some overall themes. The Fed decision will likely just be a speed bump that might make -- where you may need to make some adjustments to your charts. But overall I don't think it's going to derail any of the themes that I've outlined here.
This has been David Floyd with Aspen Trading Group on behalf of Real Vision Television. I'll be back with another video in a couple of weeks. Until then, good trading, and we'll talk to you soon.