Dow now starting wave 3 down
Do you get the feeling the world is falling apart? The riot du jour is in the Ukraine as the battle rages between those wanting the comfort blanket of close ties with Russia, and those seeing membership of the EU as their salvation. It’s really a case of them being between the devil and the deep blue sea. Damned if they do and damned if they don’t. It’s Hobson’s choice.
Emerging markets (of which Russia, amazingly, is one) are falling apart as the engine of their growth, demand for their commodities, is weakening. This morning, Markit reports a continued fall in Chinese manufacturing PPI to well below 50, indicating contraction. That won’t help commodity demand much.
On the other side, the Eurozone is also falling apart as it sinks deeper into deflation. Yet the euro has continued strong, as have the US stock markets in total defiance of reality.
And yesterday, along comes the Fed giving no hint that they are considering putting a stop to tapering. In my Weekly Wrap, I mentioned the low probability they would alter it. And so it has come to pass.
Market action yesterday ramps up the odds that the relief rally in US stocks has run its course and the next move is sharp down. Look out below!
DOW
I have a clear EW count now:
I already have the five down off the all-time high (see previous posts) which set the large wave 1 in place. The rally off wave 1 is my wave 2 up. Now the thing about second up waves is that they are usually accompanied by wild and extravagant bullishness based upon a false idea. And that idea was that the Fed would bail out the market by amending its tapering operations. Now that idea has been knocked on its head, we can get back to reality.
That is why the US dollar has been hit, but now it will resume its rightful place as a safe haven – and will rally to the 100 area, at least. Have you noticed the many opinions emerging recentlyclaiming the dollar will lose its sole reserve status in favour of a tripartite arrangement of dollar, euro and renminbi? Fat chance, with the eurozone and China declining forces. That’s how bearish dollar sentiment has become.
I am building short Dow positions, looking for a move of at least 1,000 points.
GOLD
In yesterday’s MoneyWeek email, I wrote that the market would at least pause here at the Fibonacci 23% retrace – and so it has:
But look at the retrace – a clear A-B-C complete with a pos mom div. Nice.
I remain long, looking for a move to the $1400 area.
EURO
Has rallied to a nice Fibonacci 66% retrace and is now back in its rightful downtrend:
The rally also has a good A-B-C feel to it, and that should be that for the rally (note the large neg mom div). Bullish sentiment is off the scale (the dollar remains well-hated), so the move should be very swift, especially now that the flight out of EM intensifies.