Brexit has set off a shot that will be heard around the world
The violent reaction of markets to the Brexit Leave win this morning says it all. Make no mistake, this is a shot that will be heard around the world. The old order is dying and Brexit is the first of a series of shocks that will be felt in markets as well as politics for years to come.
We are truly in a major transition period – and with deflation in control and a race to the bottom in currencies, the outlook is for renewed weakness in stocks. The decline should be historic.
In the markets, the bears are now well and truly in control. And the most notable feature is the record-breaking GBP/USD plunge of over 10% overnight to below the long-term support level at 1.38 – 1.40
and that is being breached as I write. No doubt the plunge from yesterday’s 1.50 to the low so far of 1.32 was exacerbated by the huge build-up of long bets (reference the COT table I showed last time) that were unwound as the vote results came in. Interestingly the City of London, where many hedge funds are based, were heavy Remain-ders (!) and evidently were betting the whole country would fall into line. They kinda lost that bet. Tip for City traders: London is a separate country.
With a record-breaking eighteen cent collapse overnight, I expect huge rapid swings both up and down and for most of us, trading in and out will be extremely hazardous. But I believe the writing is on the wall – my long-held forecast that the US dollar will be the last currency standing is being played out.
And now my wave labels are being confirmed:
We have just completed a fifteen-month wave 4 consolidation and is now in wave 3 of the final fifth wave up. My first target is the 100 region, which I set months ago. Breaking above that will set my targets up to the 120 area.
If this occurs, I expect GBP/USD to at least approach parity. Does anyone remember the last time that occurred? It was 1985 during yet another Sterling Crisis:
I remember it well. As cable tumbled and approached the magic $1 print, everyone was calling for targets well below it – after all, the fundamentals were so negative. Of course, it never did hit parity – it recovered from the low of $1.01 and then soared to the $2 area a few years later! That was one of my first lessons in questioning the ‘experts’ and the power of contrary thinking when sentiment was extreme.
And over in the stock market, FTSE has plunged by 10% overnight and is now trading below my lower tramline
And with the rally failure last week, the entire rally off the 2009 low is a clear A-B-C counter-trend move which confirms the main trend is now down. The head fake in May had me fooled as it broke the tramline and I believed then the downtrend was in force.
But that is what markets do best – they fool you and have you question your analysis. But it needed a rally above the 6500 level to convince me the rally was alive. That did not happen and now we are faced with an abyss.
My next target is the wave B low at the 4800 area.
We have been holding gold (and silver) for several months and overnight, it has jumped by $100 at one time to a new high for the recovery
We are probably in the final wave C up and my best target is the Fib 50% level around $1400. But it is possible it can trade higher – much higher – if the financial crisis really gets into its stride.
I am curious to see what the central banks will do now. BoE has ‘promised’ to support sterling, but as ever, they will be fighting a losing battle. I want to see what the Fed will do in light of the 10% overnight plunge in the Dow. They do buy equities, although details are hard to come by.
But there is little doubt that the state of complacency recently shown by stock investors is suddenly a thing of the past and VIX Fear Index will surely resume its rapid rise.