Fallout From The Crash: Euro

On this Creditanstalt Day, the battle over the Euro has been joined! The Euro was getting crushed in after-hours trading last night, pushed down towards $1.26. The shorts are wolfpacking it. This morning central banks rushed in to intervene, and the Euro bounced off $1.261 to run above $1.27, but has fallen off again. It remains well below the "we're saved!" peak of this weekend, at $1.31. If the ECB cannot withstand this assault, the Euro-TARP bailout is doomed.

The intervention caused a 20-pt reversal flip in the S&P futures, which had been falling towards 1140.

Curiously, the biggest expected losers, the French and German banks with excessive exposure to the PIIGS, might be able to make some it back by being wolves themselves - hedging in Forex markets by shorting the Euro. This is a partial win-win in a lose-lose situation:

• If the Euro breaks, they win on Forex
• If the ECB protects, they win on the bailout

What the wolves see is simple logic: the PIIGS are insolvent. Their income cannot cover their current debt. Piling more debt on top only prolongs the problem. The Euro-TARP tries to lower borrowing rates, but if the assault on the Euro drives rates up, the ECB is left with QE to self-finance the debt, which it wants to avoid. Hence something will break. 

Right now the spreads are widening for LIBOR vs. overnight index swaps (OIS), as they did in 2007, when they ran from 13 bp to 73 bp, and then "the rout was on." Last week the spread jumped from 9 to 18 bp, and since the Euro-TARP was announced, have widened to 20 bp. Bondsquawk also notes that 2-yr rate swaps have also widened. The TED spread (Treasuries vs Eurodollars, now called LIBOR) for 3-monthers is back to levels of 3Q09.

John Taylor (Stanford Prof and originator of the Taylor Rule for Fed interest rates) writes today in the FT that what may ultimately break is confidence in the ECB, and with it confidence in central banks. 

Comments

[Marry]

Added to my short position, there is a big bad wave 3 cash scenario

can't wait

[MHD]

Yelnick... what's your take on the inflation-deflation debate? It seems we are going to find out real soon who is right, Keynes, or the Austrians. Robert P's main argument on printing money to no end to cure deflation, is it would spike interest rates sky high, which would be deflationary, hence you can't do it to defeat deflation. 20% interest rates should cause credit to collapse. In addition, you destroy the value of the currency, so maybe 100 dollar bills could be sold right next to Charmin tissue paper. I keep reading arguments for both sides and both seem to have valid arguments to support their outcomes. Is it too complex for anybody to forecast the eventual outcome? One thing is for sure....it's coming to a head!
Do you see hyperinflation or deflation of the EWI kind?

[MHD]

And could the Feds just print money to keep interest rates where they are, in addition to printing trillions for everybody that will need bailouts in the near future (i.e. California, 38 other states, pension funds, bailout of recent bailouts, etc. etc....)?

[Chico]

For all of his quantification of wave theory, Neely's mathematical depth doesn't seem to go very far. Or, it does and he's just keeping it simple for "the masses". I'm more inclined to think it's the former than the latter.

I agree. From Neely's past comments, it's apparent he's not very sophisticated when it comes to math or programming, and he doesn't use a rigorous, objective, statistical approach to support his theories and beliefs.

Everyone knows that markets go through periods where it's easier to make money than during other times. This is true regardless of the methodology being used. It NeoWave only makes money during strongly trending markets, what advantage does it offer over say, a simple trend-following system based on moving averages, especially when you consider that the latter would have made money during the huge rally from the March 2009 low, while Neely repeatedly sold against the larger trend?

[Hank Wernicki]

Fractal Free Week Coming Soon !

Today's Bottom Tick Fractal Trade :

http://www.elliottfractals.com/TRADE_5_12_10.jpg

[MHD]

Maybe Ludwig should change his words to the following.....there is no way to avoid the final collapse of a bubble created by credit.....unless your country is run by Obama, Ben, and Tim. Then everything is OK.

[DG]

It NeoWave only makes money during strongly trending markets, what advantage does it offer over say, a simple trend-following system based on moving averages, especially when you consider that the latter would have made money during the huge rally from the March 2009 low, while Neely repeatedly sold against the larger trend?

Yes, this is one of the most crucial analyses that can be done.

Taking the most strongly trending market over the period from August 2006, when my data starts, I found that from September 2008 to March 2009, when the market went down about 630 SPX points (I'm working from memory here), Neely's trade recommendations on the Weekly time frame were worth 851 SPX/ES points, net.

There were also trades in there, which, if Neely were more rigorous about understanding what trades are higher-probability trades in NeoWave (I think he has some idea that there are certain scenarios in which his methods are less useful, but he still goes ahead with the trade anyway. For me, that's something I wouldn't do. If a specific set-up only has a 10% chance of working, I just won't bother), he would not have recommended. If you were to strip out those losses (which wouldn't really be "after the fact" data-mining because those set-ups and their probabilities for failure would be known at the time they occurred), NeoWave vs. "short and hold" is even more in favor of NeoWave.

So, you'd have to have a moving-average based system "sensitive" enough to jump in and out of the trending markets such that you added as much over and above what you could have gotten by selling short on the top tick and covering on the bottom. That's how I benchmark it, anyway.

Secondly, regarding Neely's trades over the past year, I put that down to his bias toward the assumption that wave-(B) would end soon after it started. However, there were many situations where going long based on the "Rule of Localized Progress Label Changes" and the "expansion of patterns" would have been completely justifiable and risk could have been controlled in the same way it was during his short trades. He kept making the assumption that wave-(B) would end and so didn't bother going long. That was a discretionary choice which cut against the grain of his own rules. I always say that it's important to separate NeoWave, the method, from Neely, the person. The rules of NeoWave are unbiased in the sense that they can lead you to take a long trade or a short trade regardless of your personal opinion of what the market SHOULD do. Neely the person was unable to stick to those rules and, as a result, passed up many valid long set-ups.

[Wave Rust]

The same market that sent us the Flash Crash in the stock market is setting up nearly exactly the same way again.

Tomorrow may not be a time to be long stocks. I won't be.

wave rust

[Hockthefarm]

Yelnick:

A key facet of the Greek problem was that they didn't have a currency of their own to depreciate.

Well Shilling was on today expecting parity for the EURO/USD. That is quite a depreciation.

That should be great for Germany's economy and France as well, don't you think?

[Hockthefarm]

MHD:

In case you missed it:

http://www.safehaven.com/article/16755/hyperinflation-or-hyperdeflation

Hock

[Mamma Boom Boom]

The R/R, of being long stocks, has now shifted to dead neutral.

[MHD]

Up 140 at 3:20 on 4.5 billion shares????? Euro going down like a rock , but the US markets only cared last night!

[Hockthefarm]

Maybe this is the final word:

(Reuters) - The United States posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month, the Treasury Department said on Wednesday.

Greece

It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.

Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.

The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April.

Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

But for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

Receipts in April -- mostly from income taxes -- were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.

Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.
///
And Obama said last year that "deficits kept him awake at night". Maybe it is time he moved on to "I'm holding my nose"!

Hock

[Shanky]

Your posts this week have been on FIRE! One after another great quality stuff. Thanks for sharing the knowledge Yelnick.

[Chico]

The rules of NeoWave are unbiased in the sense that they can lead you to take a long trade or a short trade regardless of your personal opinion of what the market SHOULD do. Neely the person was unable to stick to those rules and, as a result, passed up many valid long set-ups.

That may be so. As much as Neely tries to claim that his spin on EW takes much of the subjectivity out of EW analysis, it doesn't do so entirely. It allows for less possibilities than conventional EW, which is good, but you still rarely will get two analysts to agree on a count, much less ten. I'm wondering, were any NeoWave analysts long during most of the rally? Did anyone using NeoWave exclusively forecast a major rally last Mar or April (and stick to it)? I haven't heard of any. If Neely allowed his personal biases to interfere with objective analysis, surely there must be someone out there who didn't cave in to his biases and called it correctly. I'm not talking about someone who scalped a few points here and there on long positions. Did anyone catch a MAJOR portion of this bull market?

[DG]

"It allows for less possibilities than conventional EW, which is good, but you still rarely will get two analysts to agree on a count, much less ten."

Fair enough, but even so, it is possible that 7 of the 10 who disagree do so because they don't know the rules well enough and the remaining 3 actually have some basis for their counts and it's simply a matter of the market needing to reveal more information. This is especially the case during Corrective patterns. For example, if you have a wave-B correcting a wave-A and it has retraced ~38.2% of wave-A in about 50% of wave-A's time, is it the wave-B of a Triangle or is it just the first portion of the wave-B of what will eventually turn out to be a Flat? One could look to other rules for context, e.g. does a Flat or a Triangle make more sense in that position due to the Rule of Alternation?, but even that sometimes won't provide a clear answer. Who is right in that circumstance, the person looking for a Flat or the one looking for a Triangle?

I disagree with Neely's short-term counts very often, actually, and I invite others to provide alternative counts on the Neely subscriber blog I have. My experience in the year I've had the blog is that there are always a handful of short-term counts which "make sense". The differences between them are often quite small, though. At one point in MEW, Neely says that a wave count which breaks more than one major rule is probably invalid. What he doesn't mention is that almost every valid wave count breaks one major rule!

" I'm wondering, were any NeoWave analysts long during most of the rally? Did anyone using NeoWave exclusively forecast a major rally last Mar or April (and stick to it)? I haven't heard of any."

I can't say that I have heard of any. The irony is that Neely went long on March 9, 2009 and caught nearly the first 100 points of the rally. He then went short in early April, which was definitely in accordance with his rules, as was going short after the decline from the June 11,2009 high. Where he completely dropped the ball was in not going long again once the high of March 26, 2009 was surpassed, because the Rule of Localized Progress Label changes was triggered right there. Same thing when the June 11, 2009 high was surpassed. And the August 7, 2009 high, the August 28, 2009 high, the September 23, 2009 high, the October 21, 2009 high and the January 19, 2010 high. He claims that he wouldn't have been able to manage risk as well doing so, but that doesn't ring true to me. It was his bias that wave-(B) would end after "one more high" each time that kept him from going long. NOTHING in the NeoWave rules prevented him from taking long trades at those junctures. And, since we now know in retrospect that the lows from which the runs to those new highs began were never breached, even setting the initial stops at those lows would not have led to losing trades, and would have been the most logical place to set them, according to NeoWave's structural analysis rules.

From there, depending on how he managed stops, he SHOULD have caught most of the rally. But, at the same time, the short trades he recommended were also all in accordance with his NeoWave rules, so he would have given a good deal back in losing short trades, too. There is some question over whether each trade met the Neely River rules, but I don't know because I haven't taken that course. Still, without doing all the backtesting myself, it would seem that, net-net, he would have done better taking all those long trades to mitigate the losses on the short trades. For me, that's where subscribers should be ticked off. Not everyone is going to dig into the minutia of NeoWave to figure these things out and, at the very least, at each of those new highs I mentioned, Neely should have been willing to say "Look, there is a long trade set-up here that I personally think won't work, but here are the parameters for it, in accordance with the NeoWave rules". Then, each person could decide if the trade was worth it.

I have also recommended to Neely that once he identifies a situation where the market is going to be difficult to forecast, he should take the next trade in the direction of the trend and then simply move stops up "one step slower" than he otherwise would, once the stop hit breakeven, i.e. if the market goes in the direction of the trade enough to move a stop twice, only move it once. That way, random noise, which is much more likely during the "unpredictable" periods, won't stop you out.

There are a few different ways to optimize NeoWave to reduce the impact of more "unpredictable" market conditions. It just requires a little creativity.

[yelnick]

Shanky, high praise, thanks! Not sure I can live up to that ...

[yelnick]

Hock, I think the wolves push the Euro down, and if it breaks, it will bottom. Why? It means the sovereign debt will begin defaulting, and that is deflationary.

[yelnick]

MHD, M2 and other monetary measures are plummeting! I may need to elevate this. Money velocity is down, and now money supply is dropping. The Fed has stopped its QE and is unlikely to restart. Deflation is ahead

[betterdays]

Yelnick ..You have the most intelligent analysis on economics in the USA
Forget about bashing neely or who else.. market drops on big volume ,rallies on lighter volume ..getting setup for more downside after OE Friday

[trendlines]

reposting from earlier thread:

Hi Yelnick, I have abandoned the triangle count since the break below 2700 for SSEC. Looking instead for a zig-zag correction, with one more high to come(short-term & long-term bearish, still bullish for the medium-term). I've posted the possible support levels here, and the reasons:

http://trendlines618.blogspot.com/2010/05/shanghai-composite-zig-zag-correction.html

[Account Deleted]

Yelnick,Shanky is right.Infact I would even go to the extent of blaming u for making me addicted to your blog.Really a enjoyable addiction I must admit.

I learnt a lot of NEOWAVE on your blog.Its perhaps the best place to enhance ones knowledge of Elliot Wave.Really thanx to you and some really knowledgeable boarders like DG,Vipul,Wave Rust.