Dollar May Have Topped For the Moment

Be prepared for a moment when technical analysis (TA) trumps fundamental analysis (FA): fundamentals say the Euro should weaken and the Dollar strengthen, but technicals say instead the opposite is due. 

Big expose in the WSJ on how currency swaps and other off-balance-sheet tricks in Euroland allowed Greece cheat on the EMU (Euro) rules. (Swaps allow countries to accept liabilities for currency fluctuations that do not show up as current liabilities.) Of course Goldman Sachs structured these vehicles. That is what they are paid to do. Get mad at Greek leaders, not clever bankers. 

Assuming a Greek rescue goes through, according to fundamentalists it will force the Euro to remain weak and allow the Dollar to strengthen:

Greece, along with Spain, Portugal and Italy, all need to increase taxes to reduce the deficit, and higher taxes in a recession reduces economic growth. Consequently the central banks will have to keep the liquidity high and the rates low. This means the US, with an anticipated quicker recovery, will be in a position to raise rates quicker than the eurozone bankers, goes the argument. 

In contrast both Neely and today's STU think the USD has completed a wave pattern and may have topped for the moment. If so, the Euro is about to have the strongest bounce in a while. 

Later this week we will have an onslaught of Bernanke presumably to explain away the rate hike. He also may have to address weak Treasury auctions - another one today, where 30 year TIPS went out poorly. The yield came out 6 bp higher. Also markets are digesting the rolling over of ECRI's leading indicators, as well as China's. These are signs that the Fed may have to slow down its exit from QE, meaning it has to keep rates low.

 

 
In the race to the bottom of currencies, the turtle currency rises relative to the hare. While FA tsks tsks about the Euro, TA is signaling that regardless of exogenous forces, a USD drop is due. Later pundits can concoct the explanation that the US has to race a little faster over the next month to maintain Treasury auctions and deal with rate expectations even as the Euro hare struggles to figure out how to bail out the PIIGS without causing the internal politics of Germany & France to rebel against supporting their wastrel brethern in Club Med. Whew! Complex sentence. At least TA explanations are concise. 

Comments

[Sanjay]

Yelnick I lost a bunch with last month puts thinking we would tank down. Where are you thinking we are going this month? I'm noticing that AIG (JUNK) is flying and
When you see junk taking off its a sign that traders and feeling more comfortable with the market and the $$$ is flowing back in would you agree?

Its a great signal

[Roger D.]

Just to be contrarian,I see a modest pullback and then off to the races.

Roger

http://www.screencast.com/users/fast996/folders/Default/media/2267073d-95df-43fa-978c-02be9e0ead2f

[yelnick]

Roger, your count looks a bit better that the STU's, which has a long 1, short 3 and very short 5, plus a smallish 4 vs the sharp 2.

[yelnick]

Sanjay, I think we are still at the moment of maximum chaos, the moment which could go either way. Wave count is completely ambiguous as my weekend postings should have made clear.

[Bird]

DG, Taz, Duncan,

I've thrown out some timing benchmarks lately and want to comment on Duncan's triple top post from earlier today.

First, I went short DIA last Friday afternoon, based on this timing approach, and thus far Friday's top survived today's triple topping, if that is what it is. So I have skin in the game and would love to see the market tank from here.

My worry is that the IWM and the SPX don't have the same clean pattern that I see in the Dow. Since these indexes largely move together, one shouldn't expect that everything will always fit neatly on all 3 at once. But here only the Dow has locked in.

BKX didn't turn at my second time "lock out" target which came due today, but has again come just shy of a price level. I would discount this, but the move down from Jan 21 to Feb 5 also must "lock in" to the new high and in this case it clearly satisfies the rule. So I call this a possible, tradable only after a move down takes hold.

As DG and Taz will recall, I started with a rather ambitious attempt at a forecast of BKX, aiming to find the end of the current uptrend but with the expectation that it would not be a new high and that the next move down would be to new lows. While I do not rule out new lows, I re-examined the measuring swing (the downswing ending Dec. 18) and see a rationale for the Feb 5 low satisfying the rule. So, before we're through with the first half, I'm dropping the second half of my call.

The upshot is that ideally everything would neatly tie out. The current "triple top" gives some evidence that the market is ready to move the other way, but it is just not perfect. So even tho I am leaning short over the short term, I am underconfident about it.

It is probably a little bird-brained to be espousing predictions based on a theory that nobody knows anything about. So I will at least say a little something about it. Simply put, every swing in every (properly scaled) market is a circle that is relevant to future price action in price, time or perimeter. The circle is a vibration that expands and contracts based on the fibonacci ratio. This is a missing link between Gann and Elliot. Gann squared price and time (it was really a circle all the time--the square is just the vertical and horizontal dimensions of the circle). Elliot brought the fibonacci ratio. Both are part of one movement.

I knew as much as I've said back in the 1980s and have been trying to make sense of it ever since. While I think I've just said a lot, there is more that I haven't said. I am actively studying, testing and trading what I've learned, and so will continue to refine. Most theories end in the dustbin. Maybe this one will too. But whether or not I succeed in bringing this to fruition, I cannot look at the markets as anything but an extraordinary dance of the highest geometry. True perfect order.

[David]

i think the dollar has more in it... euro looking extremely weak... have posted a count

http://www.tradeyourwayout.com/2010/02/eurusd-daily-elliott-wave-update.html

comments welcome :-)

[cc]

I think they will have to strengthen the dollar to prevent another commodity bubble in a recovering economy, unintended consequences. Hence, the move last week to raise the discount rate many to keep inflation at bay. I think the dollar is going to $83 to 84 NT. Equities are going down.

http://content.screencast.com/users/texana44/folders/Jing/media/36a9e70d-3d17-4fff-8e4b-29e2160a1915/2010-02-22_1819.png

http://stockcharts.com/h-sc/ui?s=$USD&p=D&yr=3&mn=0&dy=0&id=p24464992326

[Taz]

Thanks Bird.

Will try to absorb what you have written.

here in OZ I expect we will be up 1-2% over the next one two two days (on back of US strength). Then drop 3-4% over 6 days and then have one last attempt higher, for a lower high.

A lot of cycle guys have March as a nice bottom - Gann, Hurst and Armstrong methods. If the cycles analysis is correct and so too me we could have a nasty drop starting march.

[Le Chiffre]

Bird,

Sounds interesting. Are you using fib arcs or golden spiral in your approach?

Cheers,

[Anon]

Why would you ever waste time trying to define order to the market? As soon as you find the order, the market must metamorphize to a different form to do what it must do.

If you want to work on something, work on risk management skills. A monkey can make money throwing darts at the market if it uses a judicious risk management process.

[DG]

Why would you ever waste time trying to define order to the market? As soon as you find the order, the market must metamorphize to a different form to do what it must do.

If you want to work on something, work on risk management skills. A monkey can make money throwing darts at the market if it uses a judicious risk management process.

The two can go hand-in-hand. The price at which your ideal "order" begins to take shape is your entry price and the price at which your ideal "order" is violated, since there will undoubtedly be times when it appears your "order" is taking shape, but actually isn't, is your exit price. If it's possible to identify specific milestones between points A and B in your "order", you can implement stop movement as well.

Risk management should flow organically out of your entry strategies and the underlying premise of your trade. If it doesn't, the likelihood of stopping yourself out of a good trade or giving a bad trade too much room to run against you increases.

[DavidDT_TTW]

updated SPX charts D-Wave daily/weekly
http://screencast.com/t/ZjE0Y2MxMW

[Jay]

DavidDT,

Why are you depicting a potential 4th wave with a 5 wave subdivision?

[DG]

"My worry is that the IWM and the SPX don't have the same clean pattern that I see in the Dow."

IWM has definitely been strong, but I think the wave count is the same for it as the SPX, it's just that the standard relationships between the waves of this specific structure are more stretched in the IWM than in the SPX. Something similar happened after the November lows and up till the January highs. I don't follow the Dow.

[vimsin]

Stocks to fall and same for the dollar? Gold as well? They are not regular bedfellows-these 3. I think EWI will get either the call on the Dollar right or the call on stocks right; not both-good hedge on their part!

[Bird]

Le Chiffre, Fib arcs. But I've added a ratio that is currently not in the public domain. You need to know that to forecast the way I'm trying to do. But you don't need it to look at some charts and see that something really significant is going on with arcs (properly scaled).

You may have seen the post yelnick did of a time-price forecast I did of the Jan 19th top, first sent in early November. That did use a broad golden section spiral.

Anon, I am not a monkey, although my wife often proves that I am an idiot. I find trading 50-50 propositions extremely difficult because just when you get started you have a long string a hits against you. Darts require luck too.

I totally agree with DG that the two go hand in hand. Even with the most perfect expression of order, it is easy to screw yourself if you don't have money management. I know because I am an idiot.

Perfect order does not mean perfectly easy, or free of human error. While the essence of what I'm working with is simple visually, it is not always simple to apply. There are a surprising number of things to know. I like to throw the "KISS" rule on its head and say, "let's get really complicated". The circular dance of the markets is really complicated, but its based on a simple principles.

As I've posted before, I am a Grail seeker by nature. I think it is a mistake to read the legend, as many do, as implying that the Grail does not exist.

[Simpleton]

This morning's move down kind of has a wave 3 look to it on the hourly.

[DG]

"This morning's move down kind of has a wave 3 look to it on the hourly."

You just had to jinx it, right?

It's not a wave-3 anyway, though, but it will hopefully lead to a nice decline over the next few weeks.

[Simpleton]

I said kind of.

[DG]

Fair enough. There's just been a strong correlation between the "wave-3" crowd posting and the market reversing back up.

[Hockthefarm]

Every once in a while, you can still here the king's English spoken, and spoken beautifully.

What a great 2 minute speech. On message and very well delivered. A piece of art:

http://www.youtube.com/watch?v=94lW6Y4tBXs

Hock

[Jay]

Hock,

It just doesn't get better than that!

[Hank Wernicki]

Wednesday:

$NDX Gap Down on the Open

[Roger D.]

The Daily EDT in Micky D's

Now if Micky D's breaks down out of this very large pattern,you know things are going to be very bad.

http://www.screencast.com/users/fast996/folders/Default/media/5226ccc0-2cb2-444a-ae96-3389cd20b4a2