It must be great to be at the annual shindig at Davos every winter, mixing with the bigwigs of global finance and politics and receiving all their pearls of wisdom. Or not. Since I am rarely invited, I have the luxury of noting the prevailing mood as it relates to the markets – far from the madding crowd. That way, I can sense approaching market turns with a little more clarity. My general rule is this: When a prominent person expresses a widespread view on a market that reaches the MSM headlines, I start to look for at least a tradable pause in the trend (or sometimes a major turn). And this year did not disappoint.
When a senior US official expressed delight the dollar was falling (under the erroneous assumption that a low dollar always aids US exports), my contrarian antennae started to twitch a little more vigorously.
It was noteworthy that his comments had arrived after a significant bear trend has been in force for many months – with the downtrend accelerating in recent weeks. You rarely, if ever, see MSM headlines at the start of a bear trend reporting similar comments! For a well-known pundit to express the obvious (that the dollar is falling), the trend must be firmly established and in effect for weeks and months.
With the dollar now at such a low level, will we see MSM headlines that some pundit proclaiming the dollar is a massive buy? Of course not. And thereby lies one clue that we are indeed near a low!
Remember, markets exist to punish the majority.
But I have other clues to suggest we are very close to a turn up from the charts. Here is the fascinating long term monthly
The bull trend really got started in 2011 and it traced out a clear five up to the 120 high last year. Note the huge momentum divergence at the wave 5 high – a sure precursor to a massive slide, which has materialised.
But today at the 88 area, the market has hit both the Fibonacci 50% and also chart support – the latter arising from the major highs of 2009 and 2010. Yes, that is a very long time ago in trading terms but remember, markets have long memories and often chart points have significance many years later.
So now, with the market testing major support at 88, the potential arises that a decent rally phase can develop – with Mt Mnuchin’s delighted comments providing a major contrary signal!
Of course, the trend may continue and the next stop then would be the Fib 62% support (and also chart support) at the 85 area. I would guess that if it does plumb those depths, the resulting reversal will be very sharp indeed – and provide us with a major profit opportunity as the heavily short hedge funds are squeezed till the pips squeak!
What does the daily chart tell us, if anything?
In fact, quite a lot. This is the wave down off the wave 5 high and right away, I have a beautiful tramline pair with multiple accurate touch points on the upper line. Also, I can count the Elliott waves as an A-B-C with an extended C wave where I have a five down with the fifth wave not quite complete. We should be finishing up wave 3 of 5 of C.
Near-term, I expect a wave 4 bounce of some size and then the final wave 5 of 5 (to reach the lower tramline perhaps in the 85 – 86 area? That would be poetic, since my lower target (on weekly chart) is in this very same area. Hmm.
Any other clues? Well, Daily Sentiment Index (DSI) has fallen to 8% bulls to an area where previous turns have been made, and latest COT shows hedge funds are 2.5 – to – 1 bullish the euro (and have been adding to their long bets). There may still be room for more manic bearishness, so I am not ruling this out at all.
But with bullish sentiment at record extremes in many markets from US stocks to gold to crude oil, the speculative juices are boiling over – with Bitcoin being the paragon of manic speculative frenzy. Crucially, BTC has already come off the boil by over 50% – and I believe is leading the way down for the other markets that will follow in due course.
In one way, I find the dollar weakness against the euro astonishing, since there is a wide and growing interest rate spread. The US Fed is dumping bonds onto the market and putting upward pressure on yields, while the ECB are still pumping out those euros as they continue to extend QE . One day, the dollar bears will have to take note and get a rude awakening.
The Yen is the strongest against the dollar
The word is that traders smell a BOJ rate increase pretty soon – and are piling into the yen in anticipation. Here is the weekly chart
In fact, the yen has been trading in a range of roughly 108 – 114 for almost a year and I have made several attempts at finding a breakout, but to no avail. Now the market is dropping into the lower part of the range and my best guess is the market will drop to my target in the 106 – 107 area before staging a huge rally phase that will at least test the blue trendline in the 112 area.
But first, I believe we shall see a near-term bounce and then the drop
This is my preferred Elliott wave count and we should be starting small purple wave 4 up soon before moving lower towards my 106 target area in a few weeks to complete the downward count. That is the way I plan to play it.. Of course, if the market continues lower next week, all it means is that the third wave has not completed yet. But odds favour a bounce soon.
The Dow steamroller picks up even more steam!
Last week, the Dow added another 2% into new all-time highs – and has punched above the short-term trendline resistance I have been monitoring
The upper trendline was a reliable line of resistance – it is now support. But we must always watch out for a pull-back when we can label the push an overshoot – and to signal the trend has changed. But until that develops, the trend remains up and we must stay with it. The momentum divergence may be important, especially if we get a pull-back. So watch this space.