The Dollar and the Line of No Return

Markets remain in a trading range.  The STU maintains several counts, and the Neely River has several tributaries to meander down.  So, they don't know.  In the big picture, they generally agree - they see us as having an A wave drop to 2002/3, then recently having ended the B wave up, and now being in either a C wave or a triangle to a lasting bottom sometime at or after 2012.  Is the B over, or will we see a higher high before the big C wave?  Or put differently, if this is a large 14 year triangle, will we see a D wave go to higher highs than last October?   Dow16K!  The Surge!  Or not.  How to choose?  Watch the Dollar.

The short term view of the STU is that we either are in a wave 2 up, or still in a fourth wave triangle.  These two views lead to very different markets over the next six months.  How to choose?  The Naz appears to have ended their fourth wave triangle as well as the wave 5 down, and are now in a wave 2 counter-trend.  The Naz may be a better predictor of the broader markets than various wave counts right now. The S&P shows a triangle like the Naz, but not yet over; the Dow is obscure, especially if you look at daily closes not intraday lows, but could be in a triangle as well.  The triangle view followed by a final wave 5 down would support a Surge later this year; whether it goes to a new high is unclear.  Neely drew a line in the sand at SP1475 which he does not expect to be crossed for the next 5 years. 

The Dollar also suggests a triangle for equities.  The recent Euro/Dollar ratio looks like a triangle, which will end with a spike up in the Euro to new highs, probably above $1.60, and the Dollar Index to all-time lows, probably below 70.  The ratcheting up and down of this triangle has caused the similar up/down/up across commodities such as oil over the past month.   It will end soon.

The Dollar Triangle reflects underlying rotation of vast sums out of Dollars by private investors and into Dollars by central banks. Currently the Fed has let interest rates drop so much that a huge distortion is raging around the world.  The interest rate on inflation-adjusted Treasury bills went negative (!!) (which people thought impossible) just 2 weeks ago.  The rate on one-month T-bills got to 12 basis points (0.12%), even below the lowest the Japanese ever got to, and the benchmark 90-day T-Bill got to 60 basis points (0.6%). The private sector is rapidly going away from the Dollar, and the surge in demand for other currencies is scaring central banks into 'sterilizing' the exchange by buying T-bills (in effect, first changing Dollars from private sellers into their local currency, and then buying their currency back from other sources to convert back into Dollars), keeping inflation out of their local market.  This is driving T-bills to very low rates and ratcheting the Dollar up and down. 

The new line of no return: at some point the central banks will stop trying to keep their currencies constant vs the Dollar, and the Dollar will collapse.  Or, the US will back the Dollar. and the rest of the world is left off the hook.  Until that is clear, we sit in a triangle.  Could go either way ...

Comments

[george]

yelnick,
if i interpret what you are saying and EWI and river theory are saying-
river is expecting this massive triangle of wave c we are in to to bottom then
go up significantly in the dow industrials during wave d but
wave d will not have exceeded wave a's high dow 14000 but approach it. yelnick thinks we are going to 16000 on the dow which is not river theory's
view. EWI sees the c wave dropping to 4000 or lower maybe.
so 2 of the 3 views river and yelnick would be long term dollar cost
averaging into the dow industrials for either your surge or river theory wave d's rise.
am i correct?

[Oz Waver]

Yelnick, could put my rather long post here please, the system stop it because it claimed it might be spam, when it clearly is isn't.

[yelnick]

Oz, email it too me and I will post as a guestblog

[yelnick]

George, EWI clearly sees an abc with the c dropping at least to Dow6K. Neely sees an abc or more likely a triangle abcde with c touching or slightly breaking lower than a, but d not exceeding sp1475 (~Dow14k). I see us in a 14 year triangle which is likely to break the recent wave b highs (an ascending triangle) and be followed by a fairly robust wave 5 into the 2020s. The Surge is either a continuation of b or the d wave. If it is a continuation of b it should start pretty soon, around May/June. The drop from Oct to May will be seen as a wave 4 of the b's last leg up.

[Rogue Poster]

I appreciate the longer term view but as a trader I am really more interested in what is going to happen next week. Now we have been range bound for over two months. I think we probably all agree this cannot go on much longer. There has to be a BIG break soon, either to the upside or downside. So who's read the STU and what are your views on that? Does anyone read Bob McHugh's newsletter? And does anyone follow Tony Cherniawski? I follow all three.

I have been crash minded for weeks now and I have been wrong wrong WRONG and lost a lot of money. So I am much more humble and much more willing to listen to the bull case. But what is the bull case? I haven't heard it articulated. From a technical prerspective the countertrend rally looks nearly complete and I see (I can hear you all groaning already) wave 3 of 3 of 3 about to start. From a fundamanetal POV the news is bad bad BAD. So what is the argument for a surge? Hit me.

[yelnick]

Rogue, good questions. For a trader, if this is a triangle, then it is possible to watch how it is developing and guestimate the end in level and time. I would focus on the Dollar/Euro. Neither Neely nor Prechter have solid timing or endpoints right now. This can meander into May or early June on both their counts and alternatives. The STU did say that the countertrend could be done but they think it is too short in time.

As to fundamentals, the news is bad in the US but consumer spending has only softened. Real estate hasn't bottomed and we are probably in a recession. Growth continues in Asia and global growth may keep the US economy in a muddle-through process rather than a collapse. also, we have that wasteful tax rebate coming up.

I have long believed that the Chinese will keep their economy humming through the Olympics. I note that some consumer product companies are seeing 25% rise in costs out of China recently, a faster rise than the currency rise of the RM would indicate; it may suggest forward pricing by Chinese companies with the expectation of the RMB link to the Dollar being let go after the Olympics.

Hence it makes sense to me that we muddle through into the Fal, and probably continue on optimism with the new President into his or her first 100 days.

[Dow Theorist]

Check out IYT, the Dow Transportation ETF

Its very close to making new record high while the media is telling us we are near a depression.

Dow Theory looking bullish here for at least the Intermediate term.

[Dow Theorist]

In order to shift the Dow Theory to bullish, the Dow Industrials need to close above its February closing high. That number is Dow 12,743.19.

[deacon]

fresh eliades, his 78-80 week low agrees with the election year chart, that being we are likely to create a new low of year before 2Q ends:
(http://www.traders-talk.com/mb2/index.php?showforum=45)
...wondering why crude oil(now 109.25) can stay so high despite clear economic slowing worldwide, and the answer might be war in the middle east..all the other commodities look to crude for direction, thinking it is measuring inflation, however if it truly is war that is incorrect...the QQQQ high of move was a precise touch of 89MA last friday, SPX 89MA is at 1384.7...i'm expecting the usual weakness from weird wollie weds. to close the week, to set up the usual option-ex week strength...cooper says 'SPX 5 waves off low finishes at 1400'

[Upstart]

Rogue Poster,

Check out what Carl Futia has been saying on his blog for months. Also look at posts by Clif Droke on gold-eagle, and the more recent ones on there by Richard Russell. I find them very helpful.

Regards,
"Upstart"

[Ham Actor]

We are still not seeing the up side thrust.

I'm counting the last month as a complex flat wave two in the US. Some markets are irregular (Nasdaq). Some markets are flat running corrections (UK, AUS, NZ) Very bearish intermediate term - short term we just wait signs of the high with a break down of 12k in the Dow. I don't mind if Carl Futia gets his S&P 1420-1450, relatively speaking it's only a stones throw.

[Eventhorizon]

Talk about lines in the sand:

Thursday's low: 12,528
Friday's Low: 12,528
Tuesday's low: 12,526

Will it hold, or did the third strike weaken it enough to open the trap door?

[Sean]

Clif Droke is a stupid clown.

He make his little fame just by posting on the bearish site of www.financialsense.com, so a stand out lonely bull for the last 2 years.

His analysis is amateur, period!

He got the market right just by being a bull. Any idiot bullish Jo6pack can be a Clif Droke in the last 2 years, and clif droke still calling for market bull right to the end of Oct 2007.

Go read Clif's articles on FinancialSense.com, and tell me what analysis (besides taking some bearish news paper headline and make a bull contrary out of it, without any historical judgement of his bullish reason. Some polls survery on smart investor, so the results could be good to follow. Some polls survery on idiot investors, so the results could be contrary, while some polls are just statistical meaningless) he has provided besides the usual sentiment reading?? No Fundamentals discussion, No Technical Analysis, and No Historical Context for comparison.

Take this clown off this site. This is a TA or fundamental discussion site with a historical context.

[TObject]

Tading calendar for April
http://www.cxoadvisory.com/calendar/April/

[Upstart]

Timing "patterns" suggest the next leg up may begin Thurs. 4/10 (+ or - 1 day).

[EN]

Hey Guys:

Buying old lows and selling old highs works for me. If today's low holds tomorrow and we can rise above today's high, then a short-term bottom my be in. I project one more leg up to about SPX 1410-1415. That would make 5 waves up off the bottom for a C wave of a flat or a first wave of a new bull market. Would not matter either way if you are short-term.

If I am wrong, only will lose a little. If right, will gain a lot.

If this is a great multiyear bear just starting, then why is sentiment the most bearish it has been since October 2002? Just a thought.

[I. Sosceles]

EN: "If this is a great multiyear bear just starting, then why is sentiment the most bearish it has been since October 2002?"

Labels distort perception.
How does STAGFLATION manifest itself?
The powers to be are NOT letting interest rates rise, thus, poSTponING, as well as, at the same time guaranteeing a WRECKoning later on.

[Bear-B-Que coming?]

Nasdaq Short Interest is also at ALL TIME HISTORIC RECORD HIGHS

Does high short interest typically occur at beginning of major bear markets? or at beginning of short squeezes.

[Rogue Poster]

For me the amount of short interest is less important than who owns that short interest. If it's "dumb money", i.e., retail investors, the we're likely in for a Bear-B-Que. However if it's "smart money," i.e., commercials, then it's likely to be a Bull-B-Que. One thing we know is that smart money ALWAYS rigs the game so that THEY win. If it's to be Bull-B-Que, then they will use media outlets to convince the dumb money to buy into the double bottom theory and buy stocks, at which point they will drop the bottom out of the market and take everyone's money. So before deciding if this is a set up rally or not, it's imperative that one know WHO owns the majority that short interest.

[Eventhorizon]

I am curious about the whole "record short interest" thing.

Since someone has to take the other side of any trade, a record short interest also implies a record long interest. So I don't understand how this tells you anything one way or the other.

Now, if you argue that shorts are more likely to panic than longs, maybe there is a point - but I have taken a look at potential short squeeze stocks such as Zixit (sp?) a couple years ago where 80% of the float was short. The bulls starved to death waiting for the short squeeze that never came.