This will be a very short ( and late) WW – back to normal next week.
I have been banging the drum for the US dollar for many months – of course, mine was very much a minority opinion at the time – and it made new highs last week over 85. That print exceeded an important high of June 2013 and confirmed the large third wave up that I first pointed out in June this year.
I laid out my basic thinking then. It was that because we will be entering a period of asset price deflation where the massive loans that were needed to rocket asset prices into earth orbit will run out of fuel (liquidity), a run on debt will escalate into the biggest bust in history. Dollars, in which most debt is denominated, will be in great demand and an almighty scramble will ensue.
My Plunge-ometer, the Junk Bond Index, continues to ring alarm bells. This is updated chart:
The trading volumes are increasing when the market sells off – a classic bear market sign. Not only were junk bond yields racing up last week, but Treasury yields (the very safest bonds) actually fell, which produced a large spike in the spread. Markets monitor bond spreads as a proxy for risk appetite, which demonstrably came off the boil last week. The omen for equities is not good.
Is trading with much greater volatility since making the 19 September high. But despite the big sell-off mid-week, VIX has only managed to reach the 14-15 area, far below the mini-scare reading in early August when VIX reached 17. So the VIX is not yet signalling any kind of panic. To me, it seems the dip buyers (who have had things their own way for many months), will still be out in force and produce major rallies such as we saw in the last few hours of trading Friday:
But it appears we are making a series of one-twos down in a series of third waves. Friday’s rally carried to the Fibonacci 62% level and I expect the market to resume its decline early in the week.
I remain short from the 17,315 level. Huge declines lay ahead.
The weak rally off 9 September low was broken. Here are the tramlines I have been working with:
I established a short trade at the lower tramline break on Thursday, but will be looking hard at it when the market hits the pink zone. This is where my third tramline meets the Fibonacci 62% level and where solid support should emerge.
Trader sentiment towards the euro reached a new low of 3% bulls last week (DSI) which means that the decline is near an end. A vigorous counter-trend rally will ensue – and this will spill over into a strong rally in cable. That is why I will be quick to take a profit – and look for a long entry in EUR/USD and GBP/USD.
This has been a scorcher of a trade and here is updated weekly chart:
My major target is the 115 area. I remain long from the 107 area. This is an unusual trade for me – a position trade, not a swing trade. I expect this to be one of my whale trades of 2014.
As with the euro, sentiment is at an extreme – only 5% bulls last week (DSI), so a near term low is at hand:
On this 15-min chart I have a nice tramline quartet. The wave structure is telling me that if Friday’s low is a wave 2, then we shall see a major advance in a third wave next week.
I am long with a close stop.
Have a good weekend!