Dollar Days - October 23, 2011

UPDATE:  2:00 PM

Melt up continuing in what feels like an Apple or Gold-like throw-over...  Watching a rising wedge, crab pattern (just got to the 1.618 extension) and oodles of negative divergence developing on the 5-min chart.

Here we are, in late October, in the general vicinity of our December target.  Talk about too far, too fast.  The next move should be a quick dump to 1197 or so.  But, given the market's rumor-driven euphoria, who can say when/if rational behavior will resume?

UPDATE:  October 24, 12:00 PM

Big news rumors this morning -- reports that the EFSF might be increased to 1 trillion euros and/or China and Brazil might step in and buy euro bonds and/or the IMF will jump in and start supporting the euro... blah, blah, blah.

The only real news is that Markit Economics PMI (purchasing manager index) fell to the lowest level and is falling at the fastest rate since July 2009.  The PMI has been a very good predictor of GDP growth.  Manufacturing output, orders, backlogs, employment, confidence -- all bad and getting worse.

In other words, don't expect the Eurozone to work itself out of its mess through economic growth.   What will be necessary, says Moody's, is a lot of pain.  In an article headlined "Euro Credit Pressures Yet to Peak:"

The rating agency therefore expects that severe market pressures will likely persist for the foreseeable future, with the potential for higher long-term financing costs and an elevated risk of constrained access to funding.

That's a fancy way of saying "credit freeze."  In the meantime, Morgan Stanley (in a blatant case of book talking) recommended clients go long the Euro this morning, with a near term target of 1.4060 before falling back to 1.30 by year's end.  The bump was enough to complete a bearish Bat pattern, the third embedded bearish harmonic pattern over the past couple of weeks. 

EUR likely maxed out just past the .886 Fib at 1.3946; look for a reversal here in EUR/USD and SPX, which is showing marked negative divergence.

ORIGINAL POST:

One way or the other, the Brussels befuddlement will drive markets this week.  If you're a glass-half-full type, the long-awaited solution to Eurozone problems is imminent, and the market is due for a rip-roaring surge that'll take us to new highs.  If you're more glass-half-empty, this summit will be like all the rest, ending in a promise to resolve things "soon" that will be followed by... more promises.

I guess I'm more a "there is no glass" kind of guy.  It baffles me how many times the investing public has bought the "this time for sure" malarkey.   One thing for sure, there is no solution to the problem that doesn't involve substantial write-downs for banks and other institutional investors....unless, of course, the ECB takes a page from Helicopter Ben's book and simply starts printing (literally or figuratively.)  Neither is good for the Euro.

The harmonic patterns in the markets are confirming said diagnosis.  Take a look, for instance at the dollar index (DX.)  It reached significantly oversold status on Friday solely on rumors that things had been settled.  But, in so doing, it has traced out nestled bullish harmonic patterns.

The Butterfly pattern (in yellow) completed at the 1.272 extension, while the smaller (purple) Crab pattern completed at the 1.618 extension.   If you have no idea what this means, don't worry.  Just know that the dollar, which recently suffered in relationship to a rebounding Euro, is about to snap back in a big way -- probably to the 78.61 range.

For laypeople who think this is irrelevant because they don't invest in currencies, think again.  The Dollar/Euro relationship has been a very powerful indicator of stock market performance for many weeks, now.  Bottom line, a surging dollar/falling Euro has been very bearish for stocks.

Look for DX to remain in the channel we've drawn, with Friday's dip written off as an aberration.   Next up, the .618 Fibonacci level at 78.989 from Jun 2010, which might represent some resistance.  It's also the .382 from the more recent October highs.

The EUR/USD, on the other hand, is poised to plunge.  Last week's attempt to break out of its bearish plunge will fail.   It's completed a bearish Bat pattern (in purple) at the .886 Fib and a bearish Butterfly (in yellow) at the 1.272 that should see it hit 1.35 within the next few days.  My medium-term target is 1.15 between now and mid-March 2012.

Note the recent 50 SMA cross below the 200, a so-called death cross implying EUR has officially entered a bear market.  The 50/200 weekly chart clearly shows the recent attempt to turn bullish again has failed.

More later.

2011 v 2008: Day 121

 It's probably safe to say the 2011 v 2007/8 analog is back in sync.  While there were numerous reasons to expect a lower low than the 1074 we got, in the end we got something truncated -- whatever count you want to put on it.

I'm disappointed (and poorer), but am happy if things are back to a higher degree of predictability.  Here's where the counts are as of today.

Assuming we get through the day without a sudden plunge, it appears as though one is coming as early as Monday (conveniently, right after OPEX.)   If I'm right, it'll take us down to the 1140-1150 area and establish the lower ray of a rising wedge that peaks in December.

Here's a closeup of the equivalent 2008 action, just for grins.  I'm working on the 2011 upside target.   My current thinking is around 1260, but I have more work to do before committing to that. 

In the meantime, a very tradeable 60 point dip and likely 100 point rally into December.  Plenty here to help me get over the lost 40 points.

If I'm wrong, and we get the lower low I've been expecting, then it's coming either really early or really late.  No question that this rally has been faster and stronger than most expected.  I heard that EWI is suggesting that the corrective wave is actually over - recommending leveraged short positions for the imminent wave 3 of 3.

Let's discuss moving averages for a moment.  People are divided over whether to use simple versus exponential.  The EMA gives more weighting to recent price moves than older ones, so it reflects recent volatility more effectively.  On the other hand, that volatility sometimes generates false signals that wouldn't have been made under the smoother SMA methodology. 

Which should you use?  It's kind of like the exponential vs arithmetic charting argument.  You should use both, if for no other reason than to be aware of what others might be watching (and acting upon.)  I bring it up today because SPX passed beyond the EMA 200 today (thick red line.)

The thick purple line is the SMA 200, and is still a good 36 points away.   While both are some distance from their 50-day moving averages (and, thus, still in death cross mode) the EMA makes a really good case for a reversal right here.

BTW, 200 sessions ago was around Jan 7, 2011 -- at which time the SPX closed at 1271 on its way to 1344 about 30 sessions later.  So, the MA should retain a slight negative slope as long as we're replacing 1280-1344 days with anything less than that.  In other words, it's coming to where we are as much as we're heading towards it.

Last, a note on currencies and moving averages.  DX just saw the SMA 50 cross above the 200, confirming a bullish market for the dollar.  Likewise, AUD and EUR both just saw a bearish cross on the 50/200 and their prices smack up against the 200.

While it's possible we could see a continued stock rally in face of a rising dollar, that's not how it's been playing out lately.  It lends credence to the idea of a sharp pullback in stocks and rise in the dollar, followed by a period of chop that will carry DX back across the channel, possibly expanding it if completing wave 2 takes much longer.

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A word about comments on this blog.  All I ask is that you provide an underlying rationale for your thoughts.  A statement such as "now we're heading back to 1350" does very little to enlighten anyone.  Provide some context, so that others can decide for themselves whether your reasoning is sound.

I don't even mind if your comment isn't about technical analysis.  We can all learn from each other.   Although, if you get bullish every time the hummingbirds outside your window have sex, I suggest you start your own blog (and seek professional help.)

Also, for the first time ever, I deleted a troll's discourteous comment today.  I have no issue with those who disagree with me.  Obviously, I won't always be right.  But, we've had a great run, going back to my first post on May 2 (wondering if we were near the top -- who would've thunk?)

I've given back some profits over the past couple of weeks, but am still up very substantially ytd.  Anyone who shorted heavily on July 26 [see: All Aboard] after seeing this chart has probably done all right, too. 

I'm often early, and have a definite bearish bias.  But, I try to always have a sound reason for my forecasts.  I always tell the truth as I see it, and don't charge a dime for my thoughts.  Having said that, this is not investment advice.  Anyone who shadows my trading does so at their own considerable risk.