Regular readers will know I have been not so patiently waiting for this. It is a common observation that currency markets often extend trends far longer than you think possible. In Elliott wave terms, we see many extended fifth waves and these are often the longest wave in the pattern. This characteristic is unusual in most other markets. And this description fits the current dollar setup like a glove.
But why am I so fixated on finding the dollar low? For the simple reason that as the world’s reserve currency, its value is crucial to all other financial markets; period. If I can pinpoint the start of a major rally phase in the dollar, I can make more accurate forecasts for many other markets. That is my goal.
For one thing, recent bullish action in the US stock markets has been influenced by the declining dollar’s value as US shares become ‘cheaper’ for overseas buyers paying in euros, sterling and yen.
This currency effect shows up in the relative action in the Japanese Nikkei as the strong yen has put a lid on last week’s relief rally off the plunge lows. The Nikkei has barely made a Fibonacci 38% retrace, whereas the US Nasdaq has regained a huge Fibonacci 78% retrace.
So, if we now have a dollar turn what is the outlook for US shares? I’m sure you know where I am going with this.
What is my evidence we have the turn? Here is the recent action in the daily chart
The market had been trending down for over a year and was tracing out a textbook series of Elliott waves inside the trading channel contained by my tramlines. The red wave 3 was typical of a third wave in that it slightly overshot the lower line in a final burst of weakness that was a selling exhaustion.
And yesterday, it put in the final wave 5 of 5. Note that the purple wave 3 contained its own five wave pattern with the fifth wave extended.
That is key point number one. Key point number two is the absolutely huge momentum divergence at yesterday’s low. The scale of it is breathtaking – and will herald a complete shock for the dollar bears.
There are many ways to play this of course from shorting individual currencies. I believe the euro will be leading the pack down There are several reasons for this forecast.
Many traders were buildng the euro up in recent days ahead of the ‘strong’ EU growth data released last week. In a classic ‘buy the rumour, sell the news’ event, the euro sold off heavily yesterday. Is that as good as it will get for the EU? After all, the outcome of Brexit remains in severe doubt and as the horse trading goes down to the wire, tensions will surely ramp up.
But one event that could upset the euro apple cart is the 4 March Italian general elections where the anti-euro party is leading in the polls. If this situations remains, I expect the euro to remain under pressure in the two weeks to the elections.
Yesterday, the euro made a slight new high at the 1.2560 level, but that was enough to consider the count complete. And the sharp move down off the high was a stark warning to the bulls to expect more of the same.
There is another currency cross I am keeping a beady eye on – the yen which likewise has terrific potential
We have just completed a complex purple wave 4 down to the meeting of the Fibonacci 62% and chart support (red arrow at wave 1 high). We have a slight momentum divergence but it shows up a little better on the daily.
The final leg down off the red b wave high is clearly a five so it can turn at any time.
I expect to see major fireworks in the weeks ahead.
Cryptos are catching fire (again)
My feelings on this sector is basically this: bewilderment. I really don’t grasp how a slice of code can be worth thousands of dollars, but maybe they really are stores of value (much as sea shells were for Pacific Islanders, or even gold today). Many people believe it, so it must be so.
But my puzzlement may be a function of my generation – -I guess I really need to be under 22 to feel the fire.
But what I can do in its place is to read the charts – and they are looking very bullish indeed.
On Monday 12 February I sent VIP Traders Club members a Special Crypto Alert pointing out the bullish potential of Bitcoin, Ethereum and Litecoin. This was the chart of Litecoin I showed then
Despite the limited data available, I confidently applied my wave labels – and the excellent tramlines. The market was trading at the 160 area and was about to push up past the upper tramline in wave 3.
And this is the chart today
Very explosive move in typical third wave action for a move from 160 to 220 – a gain of almost 40%% in just five days. As they say, that beats the building society!
Bitcoin and Ether are making similar thrusting moves. There should be a lot more to come.
There is a lot of talk about some cryptos replacing gold as the primary global store of value – and that makes a lot of sense. But remember, this argument is most often proposed by the died-in-the-wool cryptomaniacs. But it would be more than a coincidence if cryptos continued to fulfill their bullish potential while gold and silver enter bear markets.
In fact, that is precisely what I believe is unfolding right now.
Gold and silver poised for losses
As the dollar starts to turn back up, the PMs will be under severe pressure
This is the weekly off the 2100 high at $1920 showing the major waves with labels. Wave 4 will be a complex three up and we are near the end of the C wave of 4. It has hit the major resistance at the Fibonacci 38% level and is bouncing off it.
Hedge funds remain overwhelmingly long, although they have reduced their long bets somewhat to last week.
Silver has lagged gold’s recent advance and has greater bearish potential
The next big move will be down.