Is the dollar turning down against all expectations?
This is so much like MSM ping-pong. First there was the yuan scare as the MSM latched onto this story pretty late in the game (as usual). Then we had the Turkey shoot (see last week’s post) where the MSM turned its attention just about as the USD/TRY cross was at its highs
And right on cue as my Headline Indicator predicts, the market topped out near 7.2 and then promptly plunged down to the Fibonacci 50% support and is currently in a strong bounce. Ideally, I would like to see a three down to the Fibonacci 62%, but that may not happen, although the waves would look better if the market spent more time developing wave 4 before moving up in wave 5.
By using my Tramline methods, TRY traders could have set the 5.8 level as their most likely downside target following the top on 12 August. They had several days to plan it. Regular readers know I use the Fibonacci levels extensively in my work.
So with the current respite in the Lira, the MSM’s attention is swinging swiftly back to the yuan with yesterday’s Telegraph headline; Trade conflict could trigger currency war where the emphasis is very much on the prospect of the yuan resuming its slide after sanctions are applied next month.
The reason my Headline Indicator is such a very useful and pretty reliable tool is that disaster sells (or in modern parlance, disaster is good clickbait). You will get a heck of a lot more clicks (and fame/fortune) if you have a ‘bad news’ story. How much attention would a headline such as this get? “Nothing bad happened today”
Sentiment remains bearish the yuan. Many believe the Chinese authorities are manipulating its value downwards in true mercantilist style to help compensate for the imminent tariff imposition. But I have grave doubts how much governments and central banks alike can strongly influence exchange rates, except possibly by raising or lowering short term interest rates against market expectations.
So my reaction is this: Is it possible my Headline Indicator signals the opposite market action in the yuan, as it so often does? Can the yuan actually defy the experts and move higher? Here is my reading of the chart
I have a decent rising wedge/ending diagonal that would be confirmed by a sharp move lower. Also, I have a complete five up count on a momentum divergence. The market is currently testing the lower wedge line support.
If next week the news carries stories over the weekend of a trade war rapprochement, you can bet the market will suffer major declines – and the US dollar with it.
At present, the yuan is on a knife edge. But next week should settle the matter.
Gold/silver near lows
Sometimes – but not always – the gold/silver prices move inversely to the dollar, and that has certainly been the case in recent weeks. Some analysts stick tot he conventional wisdom that when gold/silver prices dip, it is ‘because of’ the strong dollar’. That is patently false and lazy thinking. Regular readers know what drives all markets – and that is sentiment. But who wants to read MSM stories on technical analysis? They want stories that confirm their own mis-conceptions on how markets work!
When gold moves up from 1175.00 to 1175.10 in a second, it is because the buyer and the seller agree it should move up (otherwise, there would be no trade!). There is a slight increase in bullish sentiment with both buyer and seller. The seller, of course, wants as high a price as he/she can get. The buyer wants the opposite. But in that instant, they agree it should be higher. The buyer”s mood has become accepting of a higher price. That is what moves markets.
I have been preparing my VIP Traders Club members for a major turn up in both markets for some time. Bullish sentiment is at rock bottom and short squeezes are in prospect. But as ever, timing is of the essence. You certainly don’t want to be catching a falling knife by buying too early.
On the other hand, in a rapid spiky down/up move as we often get in the metals, you don’t want to be too late and have to chase the market up only to be caught in a sharp retrace.
One of the factors that strongly suggest a major turn is at hand is the gold/silver ratio. Here is a multi-year chart
The ratio has climbed to the 80 area where there are three previous peaks. As it happens, these peaks occurred at major lows in 2004, 2008 and 2016. It seems that every time the ratio hits the 80- area, that puts in a major low and then the ratio starts to decline where the silver price moves up faster that gold.
Another big factor is yet another use of my Headline Indicator. In today’s Telegraph, I see Why is gold – the ultimate safe haven asset – spiralling down in value? Note the emotive word spiralling. Whenever such strong words appear in a headline, the odds are good the trend has come to an end, or will do so soon.
But here, the timing appears perfect with the lows on Thursday (the above article was probably written Thurs/Fri). A bear is never so bearish than at the lows – and to back that up, here is the latest COT data as of Tuesday when the metals weer in the middle of their latest plunge
Hedge funds (non-commercials), who are mainly trend followers, again massively added to their short bets (by over 20%, while the commercials did the opposite. For the first time in 16 years, the money managers are now net short an extreme level of futures and options.. This is an extreme bearish stance – and ripe for a massive short squeeze. Silver is in a similar position. The clever traders in the hedge funds believe prices will continue falling – and their belief is at its strongest.
In fact, they have seen selling a falling knife! And that is just as dangerous as buying one (at the wrong time)
Not only that, but the latest DSI bullish reading shows only 6% for gold and 7% for silver – both extremes. The metals have surely reached peak bearishness.
And here is a very interesting long term chart on silver
I have a superb blue trendline with two lovely PPPs (see my text for a host of examples). Since 2016, that line has becomes major support and there have been three accurate hits on it with the market shooting rapidly away from it every time. Last week, it made another hit and is currently bouncing up away. Will history repeat?
As forecast, the dollar is on the turn
In my post of August 4, I stated that the ‘strong’dollar is about to turn and forecast the euro would be making a low soon. In that time, it has declined to a major target and is making signs it really wants to rally. Here is the euro
The worrisome phase for trading was the wedge in June/July where whipsaws were common. I have always maintained that fourth waves are the trickiest to figure out – and this one surely was. Only in hindsight did the wedge outline become clear, although I had penciled this pattern in at the time.
In any case, when the market resumed its downtrend on 10 August, the pattern was clear and that enabled me to draw in good wedge lines – and crucially, draw in my pink parallel tramline that gave me a highly accurate target just under 1.14 (recall my original target was sub-1.15). I knew that thrusts out of wedges in the wave 4 position are almost always followed by a complete reversal.
My target was hit on Wednesday and is now in bounce mode. And right on cue, I see from COT that hedge funds massively increased their short bets as of Tuesday. And DSI bullish readings on the dollar reached the 96% extreme at the same time. They are extremely convinced the dollar will continue its rise. I am not.
The dollar bulls point to the current Fed tightening with interest rates on the rise leading to a shortage of dollars to roll over massive dollar loans around the world. EM currencies are being killed as debt defaults loom with the prospect of a wholesale global deflation (as I have been predicting). Then there is the trade wars with China ‘pushing down’ their currency against the dollar.
But what if the Fed decides to slow down its announced rate of Fed Funds increases and keep them stable for a while? They must be worried stiff about a rout in the EMs and it would be a simple matter to put a halt to planned (and widely assumed) increases.
In that case, the markets would react aggressively to liquidate over-weight dollar positions – with the euro (and other major currencies) climbing rapidly. Hmm.
Together with their currencies, EM stocks are also in free-fall
The 50-day MA is proving to be massive resistance (dark line). This, while the US indexes are near all-time highs. This wasn’t supposed to happen as the story was the emerging markets would grow at a rate of knots because of the availability of cheap money (dollars). Ha – some growth!
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