More Investment Thoughts for Yasi

Yasi went long in May after I set out an investment roadmap despite my cautioning her (since much of the runup had already occurred). If she has stayed long, she is in pretty good position. Yet, the wave count I put out last Friday seems to be on: we are in the final wave 5 up, and should top soon. So, should she lighten up? My thoughts follow, but readers, please add yours in the comments.

One view of this wave is from Tony Caldero, and it puts a limit on the final run up at Sp1112 for reasons set forth in my Friday post. The wave action today pretty well confirms that little wave 4 is over and 5 is on. The S&P closed its gap from last year today, so could be done; but the wave structure begs for a run up to at least Sp1107, where A=C of the second zigzag since the July bottom, as explained last Sunday.

Another view is from Walter Murphy, that we are still in a wave 3 up. What Tony calls the end of 3 he thinks is the end of the third wave inside of 3. A reasonable position given that otherwise wave 1 is pretty long compared to 3; within the rules but rare. If so we should see a pop to Sp1107, a fade (in the real wave 4), and then a final runup towards Sp1121, the 50% retrace (Dow10334).

My proposed count from Friday would have ended wave 1 lower than Tony, created a longer wave 3 (which could still be on) and hence allowed a higher end to wave 5 than Sp1112.

Let's pull up without getting so hung up on minor count differences. As a general rule of interpretation, as corrections meander on in ever more complex structures, it is better not to play Ptolemy and construct epicycles of ever increasing complexity; instead simplify (or compact in Neely's terminology) the count. In doing so the whole move off Mar9 looks like a large ABC, and we would be in the final waves of C. The attached chart (courtesy the STU) shows the simplified count, with now 7 waves up - an ABC-X-ABC compacted without being hung up on where to draw the X. By doing so we see the wave can continue to subdivide up and we should not try to project the top by looking at the minor wave structures.

What gives further support for more subdivision higher are the other major indexes. The STU tonight noted that the Dow is is near the "4th of the prior 3rd" level, a very common maximum retrace level for a wave 2. The S&P has gone a little past that, but the Dow needs to get to 10122. In addition, the Nasdaq has its gap to close from last year at 2183, just a smidge higher; and then 2252 is the 61.8% retrace. Given how AAPL blew away earnings, and the Naz futures after hours, the Naz should jump tomorrow, closing the gap and heading to 61.8%. Both indexes point higher.

The other consideration is the USD, which is continuing down. It is likely to spike down at the end of its fall, typical of its formation, an ending diagonal. It hasn't yet, so Dollar down, Dow up. That spike may touch the long-time target of EWI of DX74.50.

For those of you wondering what might spike to Dollar down then turn into a surprising reversal, read How The Fed Bailed Out The World from Zerohedge. The Fed has provided liquidity for central banks globally to the tune of $6.5T, and it now sits as a huge liability that needs to be covered by them. But how? Consider this conclusion:

As the DXY continues tumbling ever lower to fresh 2009 lows, the trade de jour is once again the dollar funding one, although unlike before when the Yen was the carry currency of choice, this time it is the dollar itself, positioning banks for the double whammy of not just a dollar funding shock, but one coupled with a potential massive and historic short squeeze. If and when an exogenous event occurs, not even $6.5 trillion in Fed swap lines will be sufficient to bail out the world economy.

Such a short squeeze would send the USD skyrocketing upwards. Where would they find the Dollars to cover the short? From the Fed? How funny would that be! You owe the Fed $6.5T and need to cover, so you borrow another $6.5T! What happens next time, when it is $13T? Or the time after that??

This is one of the conundrums Bernanke has to handle to exit gracefully from his bailout last year.

Instead of another bailout, what would happen is a recovery of the USD from vastly oversold levels. If you look closely at US equities, their rise has been on decreasing volume. It seems to be largely a manifestation of hedging against the USD. (Yes, for overseas investors, buying US equities hedges a falling Dollar.) Hence any spike in the Dollar would crush the stock market.

Now there is no indication that these events are about to occur. Absent them, Yasi should probably let it run. Even a drop right now should not spook her, as it merely may be a minor wave pullback within the upwards trend.

The key is to watch is the lower trendline in the chart above - the so-called 0-B line (or in this case 0-X). A break below would indicate a major degree trend change and the likely end of the whole Obama Hope Rally. Absent a crash, she has latitude to lighten up if it occurs, and should be in the money. Right now that line runs around Sp1041. Since it is rising a few points a day, watch for a break of Sp1050 by the end of this week, or 1060 by the end of next week. 

One last thing, Yasi. This site does not hand out investment advice, but comments on the opinions of those who do. So take any thoughts in this at your own risk. Happy trading!

Comments

[Jing]

Just like anything you undertake in life, you may want to consider the risk and reward. If the reward is little and risk is high, then you probably don't want to do it.

Same with trading or investing.

[Mamma Boom Boom]

---SWOOSH---

Don't be surprised if it's starting.

[Michael]

I shorted the COAL sector this morning on BTU's blow-out numbers . . . I think we could see a typical SELL on the NEWS scenario here, especially due to the fact that these stocks (along with most energy names) have seen nearly 11 straight up days in a row.

Got to TRADE it a bit though.
Should see HUGE volatility.
:)

[Jing]

USD wave pattern looks complete

It looks like the USDEUR completed a small diagonal triangle down last night. If so, USD has completed all outstanding waves at multiple degrees in this downtrend.

Seemingly confirming this, as I am typing this, USDEUR completed a small five-wave up and then started a correction down.

Incidentally, Canadian dollar dropped 2% this morning from a blowoff top.

It is probably still premature to declare USD downtrend over. But this is something worth watching, especially as lot of folks are tracking the US stocks top.