I will be speaking at the London Money Show next Friday 7 November. My four-hour presentation is: “Trading Currencies in a QE World” and I will be outlining my tramline trading methods and then covering some currency crosses.
If you are in London then, I will be pleased to meet you!
Right on cue, the US dollar staged a massive upside breakout last week, as I have long foretold. I have not yet seen any MSM comment and ‘explanation’ for this, but I imagine they will pull something semi-rational out of the drawer. Or maybe they will resort to the usual ‘profit-taking’ theme when the move confounds them!
To me, the dollar fell to massive support on the charts and in my MW Trader email yesterday, I gave my technical analysis of the EUR/USD, where I outlined my reasons why this market would likely top out in the 1.38 area.
It closed yesterday at the day’s low at 1.3490.
Cable also was hit hard and so the dollar rally wasn’t just a sudden dislike of the worsening eurozone picture. Yes, deflation looks a cinch in Europe in 2014, unless the eurozone overlords ‘ask’ the statistical bureau to see if they can possibly ‘adjust’ their numbers, that is. Can anyone have any confidence in their impartiality? Ditto with China, of course.
And in China, the real estate bubble (or should that be dirigible?) expands even larger. How many empty cities do they need? It is getting more attention now that prices are eye-popping in certain cities. The shadow banking debt associated is an accident waiting to happen – and it will when social mood turns down.
The Shanghai stock market is still way down from its former highs as investors fear the bursting in a crash landing. Incidentally, reference to a China ‘crash landing’ has come off the radar recently as mood has improved in the past few months. But that won’t last.
In the high-flying US stock markets, we had a few down days last week – a highly unusual event. I am not sure whether we have seen the top tick, though.
But I am more confident that Treasuries have seen their highs and are headed lower. If so, then I expect the rising long-term rates to be noticed by stock investors eventually. There is so much debt sloshing around the world that even a 1% rise in 30-yr T-Bond yield (a 30% increase) would play havoc with the ability of some to even pay interest.
That goes for the huge pile of junk bonds that have recently been issued – in spades. Watch these.
With that kind of squeeze, stocks will enter a period of jaw-dropping declines. But we are not quite there yet.
It was significant that stocks and Treasuries (and gold) declined together last week, while the US dollar rose. This is precisely the scenario I forecast months ago. It is the result of a liquidity slow-down. And as interest rates rise, the pressure will be on to raise funds to stay current. And since most debt in the world is denominated in dollars, that is the currency which will be in greatest demand.
I read lots of pundits still calling for the collapse of the dollar because of QE. That is an old story. Don’t believe it.
With last week’s glimpse of a hint that the Fed may/will start tapering soon, we saw huge moves in Treasuries and the dollar. And when the amber light starts to turn red, the moves will be historic.
Here is the very long-term chart of the US Dollar:
The wedge has been building for ten years! That is one heck of a coiled spring (see the same coiled spring effect in the 1987 – 1997 period and the huge rally out of it). My first target is the upper line in the 85 area. I fully expect a break of that and when it does, it will zoom up like gangbusters. My medium-term target is in the 100 area (a Fibonacci 62% retrace). That could occur in less than two years.
If you cashed out of all liquid investments and held cash dollars (the folding variety), you should be looking very good in a few years. Why cash? Because many banks will not survive and I do not want you to be in one of these. Gold will not perform well medium-term.
Are US stocks overvalued?
There are several metrics that tell me the US stocks markets are living on borrowed time. This is one. It is the combined value of equity and bonds (less cash) of all US companies divided by revenues:
We are in (almost) uncharted territory. Only in the Dotcom bubble was this metric higher, and we all recall that P/E ratios were approaching the amazing 100 level in the S&P. Those were the days!
What I like about this chart is the clear A-B-C form to the current rally. A-B-C s always spell ‘counter-trend’ . Normal service will resume when the C wave tops out. Then watch out below.
Came under pressure last week and here are my new working tramlines in the hourly:
My upper line is terrific with all those touch points and a PPP. My centreline has only one tp but sports a PPP. The lower line takes in the spike 9 October low. Remember, these lines must be equi-distant to be valid.
Unless I see a centre tramline break early next week, I will expect to see a slight new high during the week – and an opportunity to aggressively position short.
I have shown this long term chart before, but with the rally to 1.6250 it hit my very long-term wedge line – and set up a terrific short:
Over the next few months, I expect a move to the lower line in the 1.50 area, and breaking that level would propel it to at least the 2009 low at 1.35.
That is a bold statement, I know. But this coiled spring of the six-year wedge contains the requisite energy. Wedges of this size must be respected – and used.
Has fallen to a precise Fibonacci 50% retrace:
I expect a good bounce from here, which could carry farther than many believe.
The move off the $1250 low appears to be the A and B of an A-B-C where the C wave would carry above the $1360 highs.
Sentiment is still ultra-bearish and an upside pop is certainly not out of the question.
Here is yet another wedge! And with all of these wedges I have shown, the moves out of them will be massive. You have been warned!
The lower wedge line was tested last week, and held. I fully expect the next move will be sharp.
Have a great weekend!