The dollar is looking toppy
I have received a gratifying number of discerning traders taking up the Free Trial Offer to my VIP TRADERS CLUB that officially closed on Friday. The good news is that I am extending the deadline to next Friday 27 January to allow late-comers the chance to see how a professional trader makes profits in these very tricky financial markets. And I make it easy for almost anyone to follow my moves.
As you know, I only advise reading the MSM financial pages – as well as seekingalpha.com – for entertainment purposes and for terrific contrarian trades that go directly against the mainstream. When I read one such article, it puts me on high alert to go the opposite way to that espoused by the author.
Why does this policy work so often for me? Most who come to the wonderful world of trading the markets do so from trading/investing in company shares. There, you learn all about P/E ratios, the exchange rates, interesting background stories, dividend yields, and so on. You read the thick books on the subject of investing. You may even learn a little about technical analysis, but bear in mind the old adage that a little knowledge can be a dangerous thing.
Many conventional analysts can tell a wonderful story of how Company A’s shares will perform in the future – all based on data from the past, of course. You may be sucked in if the story is attractive enough – and especially if the author is a well-known figure.
I have to tell you that such ‘analysis’ puts the cart directly before the horse. Any reported success derived from such analysis is purely accidental – and always in hindsight, of course. And that is simply because such methods will only allow for a continuation of the existing trends when everyone is on board. The only method of analysis I know that consistently works in practice to detect trend changes before they happen is the Elliott wave model. That is why I incorporate the basic EW ideas as one of the three pillars of my Tramline Method.
Yet I use MSM articles as a barometer of sentiment of conventional analysts who represent the vast majority. When the bullish/bearish chorus gets loud enough, my contrarian juices start flowing.
Today, I have yet another magnificent example of this at work. Here is a well-known investment director at one of the largest fund managers in the world explaining away why the US dollar will continue rising in value (maybe he hasn’t noticed that it has been in a nine-year bull market?):
Janet Yellen made clear last week that she has abandoned her dovish tendencies. Her job is to keep as many US workers as possible in jobs and to cap inflation. On the first, she clearly thinks it’s mission accomplished. On the second, she is worried there’s more work to do.
No surprise, then, that she should have predicted that between now and 2019 the Fed will raise interest rates a “few times a year”. The dollar looks set to keep rising.
So that’s pretty clear – an influential money manager believes the dollar will continue its bullish trend. He believes that rising interest rates are always bullish the dollar, no matter what occurs to the myriad of other influential variables in the meantime. He has picked one dodgy theory (which actually fails to agree with the facts) to rationalise his already bullish dollar stance.
And that is the thought process behind the majority. They cling to a simple and plausible story. The problem is that it is simply not true that rising rates is always bullish the dollar – sometimes in history they have moved more or less together and sometimes they did not. A simple check of the historical charts would reveal that.
For instance, from Oct 1974 to Dec 1976, the Fed funds rate fell hard and stocks rallied. Then Dec 1976 to Feb 1978, the Fed funds were increased sharply while stocks fell hard. Why do not more people look at the historical record before writing garbage? If I was a conspiritorial person, I might think that it is deliberate to suck as many minnows into their net as they can.
And his outlook for the pound?
On this side of the pond, the outlook for the pound is no better than it was in the early-Eighties. Last week’s moment of clarity from Theresa May gave the pound a short-term fillip but the difficult negotiations ahead, a reduction in real consumer purchasing power and a gaping current account deficit argue against a meaningful rally from today’s level.
The dollar made its last major low in 2008 – nine years ago for goodness sake. That is enough time for just about everyone to have the ‘strong dollar’ story imprinted in their brains. It is a result of herding that humans (and a few other species) are prone to.
As someone who has been around the markets for a while, I can tell you that markets do not follow the news – it is precisely the reverse. They are driven by changes in social mood (sentiment) and that is an unconscious drive by humans that is not influenced by anything external, such as data, news, fundamentals, or the opinions of gurus/pundits.
That means to be a successful trader/investor, you need to ignore the guff that is written, or at least treat it as a measure of sentiment that you can use to trade against the wrong-way bets.
Here is my reading of the dollar starting with the weekly chart
I have a long and strong wave 3 up to the 2015 high, a nice A-B-C down to wave 4 and we have been in the final fifth wave up since mid-2016. The very strong rally in the last half year has convinced most that the rally will continue.
Let’s look at the daily:
Because the rally does not make a clear Elliott wave pattern, I have an alternate count. We are still in a fifth wave up but instead of the ending diagonal, I have a wave 4 decline currently which should lead to a new high in wave 5 before resuming the bear trend.
Today, I would place these two alternates about equal in probability.
But I would be happy either way! That is because I issued a short signal to VIP Club members a few days ago and the market has declined from our entry (we have since then lowered PS to break even). If the market decides to rally back in a wave 5, we will take no loss. And if it decides to obey the ending diagonal scenario – great, since we are short.
So, using tactics like this, we can get the odds of success very much on our side. How would you like to be in trades where you will never take a loss? So would I!
Incidentally, trading against our money manager, we are long GBP/USD from the 1.20 area.