Has the dollar finally turned?

MY BOTTOM LINE:

• GOLD/SILVER – Bearish
• STOCKS – Bearish
• US DOLLAR – Bearish
• T-BONDS – Bearish

Regular readers know that I have been tracking the dollar’s highly convoluted path up to my projected high for some time – and I believe it is now in place.  That is because I believe the next big move will be a multi-week/month bear phase of some size. Keep in mind that the dollar’s value is the linchpin most financial markets are geared to. A major change in the trend of the dollar will quickly translate into major trend changes elsewhere.

A curiosity in recent weeks has been the little-noted synchronous moves in the dollar and gold.  The much-quoted market ‘rule’ that gold and the dollar move in opposite directions has been totally trashed.  Here they are since June

The dollar gained 4% while gold gained 20% in the same period!

So gold priced in euros gained around 25% while priced in sterling, it was even greater.  That wasn’t supposed to happen, and any trader shorting gold as the dollar advanced was caught badly off-guard.

So why did they advance in synch? In an unusual summer period, traders became very bullish on both at the same time.  The dollar, because it was paying a 2% yield versus minus 0.4% on the euro (that makes up a big chunk of the dollar index) and they expected euro rates to go even lower as the EZ economy was tanking while the US was holding up relatively well.

And bullish on gold because interest rates were low to negative – and gold always is favoured in this scenario as carry charges are low to non-existent (as the conventional theory has it)

The bullish fervour on the dollar was so intense, the DSI bullish reading reached over 90% – at the region where previous tops have been put in.  Even sterling, which makes up only a small part of the dollar index, was heavily sold by specs.  Here is a very important chart showing the COT data on cable:

chart courtesy www.elliottwave.com

It shows the extreme bearish positions of hedge funds (large specs) and the extreme bullish positions of the ‘smart money’ commercials. This is a very lop-sided scenario and since hedge funds almost always are holding maximum wrong-way positions at major market turns, that is why I advised VIP Traders Club members to go long GBP/USD last week near the 1.20 level.

Evidently, the very clever PhD analysts employed by hedge funds had been focusing on the Brexit shenanigans in the Westminster bear pit. But as government defeat was just snatched from victory, hedgies are being forced to cover – a development I had foreseen based on the wave patterns.  Here is the chart I sent members to back up my bull case on my Wednesday Flash Alert:

I have a lovely wedge/falling diagonal and a potentially complete five down to Tuesday’s spike low on a huge momentum divergence.  That looked very much like a selling climax to me to the 1.0960 low.

So was that low greeted by calls to buy ultra-cheap sterling in the MSM?  Of course not!  Pundits were expecting sterling to decline even further, especially against the euro.  Even after a lengthy decline?  Yes – and that is because it is far safer to do so that to stick your neck out, career-wise. This is what I wrote to members on Wednesday:

Many traders believe it is very risky to go against the trend – there are constant warnings from the pundits against it.  They warn against trying to ‘catch a falling knife’ – and for most, that is good advice.  But when you have a serious and established trading method that can help identify major trend changes with high probability and accurate timing, that is a far different matter.  In this case, the risk of loss is quite small – far smaller than trying to jump on an established trend which may be nearing an end when you have gathered enough confidence to enter a trade!

The most nervous trades are usually the best.  Cable has gained 4 cents since the Tuesday low in an explosive surge.  We are long in the VIP TRADERS CLUB.

Gold/silver have likewise turned, as forecast

So with bullish sentiment in the PMs also at record highs – silver DSI  bulls reached a record 95% last week – will they do the unthinkable and decline in synch with the dollar, just as they linked together on the way up?  That would really get the conventional analysts’ knickers in a twist!  They would have to re-write their textbooks again (but they won’t!).

In fact, it is a scenario I have long been anticipating.  And when silver reached my main target at the 19.50 zone on Wednesday, it validated my view on Fresnillo, the FTSE 100 silver mining stalwart.

Here is the video on Fresnillo I made for COTW last Monday, as silver was in the final stages of its meteoric advance.  And that was the opportunity to take profits on the shares we had bought at 636 to exit at 750.  

And here is my Elliott wave picture in gold

A hard break here would confirm – BUT I have a small problem.  My ‘ideal’ target is the $1600 region where massive resistance lurks and we are over $50 away from it as I write.  Hmm.

So for now, I am playing short trades very near term and a rally above the $1555 high would set me on higher alert for the $1600 target.  But odds still favour a downtrend.

And bolstering my bear case is the latest World Gold Council report that gold ETFs have amassed a near record amount of the metal at 2,700 tons – just shy of the 2012 record when gold traded around its $1920 ATH. Most analysts see this data point as extremely bullish.  I disagree – it is extremely bearish.

The fact is most analysts possess a ruler and many of these are able to draw a straight line using it. They believe trends will continue so long as no obvious outside factor impinges, such as a sudden US decree to ban gold trading (for example).

But just a casual glance at any price chart reveals not a straight line, but major trend changes wih highs and lows.  So what is causing a top when everything looks so bullish? That is a question conventional analysts fail to even ask, let alone seriously investigate. But they are looking in the wrong direction.

It is plain that markets do not operate from an analysis of fundamentals and data points.  In fact, they are driven my swings in internal market sentiment.  When sentiment becomes extreme, that is when turns are made.  Market highs are always and everywhere made as bullish sentiment becomes extreme. 

Has Barclays put in a major bottom?

I have been bearish on UK banks for many months and PRO SHARES members have ridden the bear trends in Lloyds and Barclays for a long time.  But recently, I noted the let-up in selling pressure and advised members to take major profits in both shares.  But is it time to explore the long side now with both shares pretty much bombed out?

One factor for the negative sentiment in banks has been the squeeze on earnings from the relentless trend towards weaker margins with short term rates at or near the long term rates. In the UK, at least we have positive, albeit tiny, rates.  Pity the poor EU banks with the ECB policy rate deep into the negative as it costs banks money to deposit funds there!  And there is talk it may get worse next week when the ECB reports.

But what if long term rates have bottomed – totally against consensus – and are poised to move up?  That should juice the share prices of banks.  So is the current support for them flagging up this scenario?  Here is the long term weekly showing my splendid Barclays Wedge

And at today’s 138p print, it about matches the three-year-old low from 2016  and interestingly,  the move below the lower wedge line sets up the possibility we have an ‘overshoot’ provided it can move back above it in the 150 area pretty soon.  Here is a close-up of recent action on the daily

and the latest decline has a five wave structure (that may or may not be complete). But if long rates were to improve, I can easily see a push up past the 150 level and back inside the wedge to confirm the overshoot as a selling climax.  Hmm.

Of course, any advance past the upper wedge line around 170 would really set the cats among the pigeons!