Today Was a Big Yuan

The market yawned despite gushy headlines like Bloomberg's "Yuan Strengthens the Most in 20 Months." Mish wryly notes that since China held the peg since July 2008, duh! Bloomberg later redid the headline to "Since 2005", but the move was only 0.37%, which machts nichts compared to, say, the Euro, which fell peak to trough over 1% today. The conventional wisdom on the Street seems to be (from Art Cashin):

• Treasuries should drop as China can buy fewer (higher Yuan buys more)
• USD drops, AUD and NZD rise
• Commodities higher as China can buy more
• Stocks will be mixed

The first point, long-term bearish on Treasuries, was picked up by many morning pundits, but curiously not David Rosenberg who instead thinks it is good for Treasuries, and signals a time to load up. After all, China has been unloading Treasuries recently anyway, and a higher Yuan will have its biggest impact in lowering the US trade deficit which lessens pressure to borrow from abroad. The STU agrees, as Treasuries appear to be ending a B-wave triangle and starting a C wave to drive yields down, with the 30-year targeting a drop below 4%. 

The second point, to go back into commodity currencies, depends on the third point. The AUD and NZD should pop for a bit, but if this is not bullish for commodities, they drop back. Indeed, since China needs to continue to tighten to stave off various bubbles, this move can be seen as simply another lever to tighten. That is bullish for the USD and bearish for the commodity trio of CAD/AUD/NZD. 

The third point, that commodities go higher, presumes China continues to increase growth, whereas it appears this move is partly intended to quash internal inflation. CPI inflation at 3.1% is above China's target, and PPI is well above, up 7% over the past year, largely due to rising commodity prices. Hence it might be time to unload commodities, especially after they popped a bit today. Here is a video analysis from MPTrader of how commodities have not responded as expected:

The final point that stocks will be mixed, is curiously unenlightening from Art. Nic Lenior had a much more insightful reaction: Houston, We Have A Problem! Here are excerpts:

The rebound which we managed to anticipate from 1,040/1,045 in the S&P future was purely technical. ... The market caught most bears trapped as it broke above the 200-dma, but the volume and price action did not really confirm a major acceleration. ... As such we were hoping to sell the rebound should it reach 1,150 in S&P futures. Unfortunately I don't think we will have that pleasure. 

Nic adds that a lot of traders have been waiting for the Sp1150 level to go short again. When a lot are on one side of a trade, Mother Market will fool. On the technical indicators, the STU notes that we hit Sp1130, the 50% retrace, and did so in a thrust (the gap up at the open) out of a fourth-wave triangle. We have been in an ABC flat correction, which means the final C wave will break as a "5", and could be considered complete after the fifth-wave thrust. They note how breadth closed negative on every index they track. If volume picks up to the downside, the top may indeed be in.

My take: we are in what I call the Big Tease, a name chosen to fool the maximum market participants before the end. Take a look at this nifty chart, recommended by a reader in a comment to the prior post. The Dow hit the 50 DMA and fell back. So far it has done two head fakes:

• it double bottomed around Dow9800 (Sp1041), creating a bear trap a couple of weeks ago
• It now has backed off the 50 DMA after the bullish enthusiasm had increased, creating a bull trap and springing it

So why not drop a bit more, getting the bears short, and then thrust up in a final spike to Sp1150? A final bear trap. This wave 4 triangle and wave 5 thrust can be considered the end of the third wave of C, not all of C, requiring a larger fourth wave followed by the final thrust up. 

Watch two things:

1. does volume increase to the downside?
2. do we hold above Dow10320/Sp1105, the low of the prior fourth wave triangle?

Comments

[Steven_737]

nice analysis Duncan;

+++++++

http://steven737.typepad.com/blog/2010/06/es-spx-analysis-06212010-.html

http://steven737.typepad.com/blog/2010/06/nq-ndx-analysis-06212010-.html

cheers :)

[trendlines]

Hi Yelnick, nice post title!

Should Indians play soccer?
Here's analysis of the Bombay SENSEX, along with the above question.

http://trendlines618.blogspot.com/2010/06/sensex-soccer-socionomics.html

[yelnick]

trendlines, there is a world of sport beyond cricket you know.

[KRG]

I think that China will take its own time in Yuan adjustment. The timing of their announcement seems to be much to do with Dollar's renewed strength. They are now better off in a basket (so that Yuan can still be relatively cheap)while the dollar is threatening to go up.. Smart chaps.. too bad they don't play cricket or chess. That is where India can beat them (not counting the occasional Badminton threats)...

[JJ]

KRG I agree although I wouldn't use "smart chaps" to describe them.

The Chinese simply make the Ferengi look like kindergardeners.

They are the ne pas ultra Earth offers in the way of materialistic, exclusionistic, uncaring of others and distrustful of outsiders.

As with everything, there are a small percentage of great individuals that manage to rise above this but, as a culture, it's unfortunately pretty consistent.

Until these weaknesses get resolved in a big way, China will advance only so much no matter how much they progress economically. It has stopped them at least once before in the late 1800s when they were also the 2nd largest economy in the world.

People may admire all of China's acomplishments and may gaze at these acomplishments in wonder but only because their government's spin doctors make ours look like Sunday school teachers.

You think the faux pas' are limited to stealing U.S. Military Secrets, corporate espionage, unfair business practices and human rights violations?

Well, those are simply the things they don't mind you knowing about. You ain't seen nothing yet.

Wait till they slip up and you accidentally get a whiff of what they're really like. You won't like what you see. Earth possibly has a tough future ahead if we continue to fall asleep at the wheel.

How do I know? My grandmother was Chinese and she told me a thing or two...

[Account Deleted]

Hai Yelnick

Thanks for sharing my chart in this forum.

US Markets view before opening bell
http://niftychartsandpatterns.blogspot.com/2010/06/us-markets-view-before-opening-bell.html

[Steven_737]

hello Duncan;

"So why not drop a bit more, getting the bears short, and then thrust up in a final spike to Sp1150? A final bear trap. This wave 4 triangle and wave 5 thrust can be considered the end of the third wave of C, not all of C, requiring a larger fourth wave followed by the final thrust up. "

Following this assessment of yours, how are you positioned?
1)Long - what percentage? - which instruments? (stocks, options, futures?)
OR
2)No positions on, waiting for the end of wave (2)
OR
3) Day-trading ?

cheers.:)

[Steven_737]

JJ

"Wait till they slip up and you accidentally get a whiff of what they're really like. You won't like what you see."

Do you care to expand on this though?

cheers :)

[Account Deleted]

Bearish engulfing in apple Inc
http://niftychartsandpatterns.blogspot.com/2010/06/apple-bearish-engulfing-and-channel.html

[yelnick]

Long bonds
On the side on stocks

[Wondering]

Where's Roger? He's been conspicuously absent after posting 20 charts a day for weeks.

[da bear]

the wave iv or wave d or whatever happened yesterday got pretty low. A final pop up would take the Dow to around 10,900 or so. And that should be it for the wave 2 rally.

I think that wave 'c' or 'iii' up ended at 19,594 on the DOW. I thought that DOW 10,666 would be a good target. I got close... Wave v could float higher into either a double top on the DOW or a right shoulder on the S&P 500.

da bear

[jz]

JJ, although you have Chinese blood in yourself, you certainly don't quite understand Chinese history and culture. The basic idea of Chinese culture can be summarized in one sentence, "If I don't want it myself, I don't do it to others". Basically, the whole Chinese history can be understood if you really understand this sentence. In Ming Dynasty, China has the power to conquer the whole east Asia, but they didn't. Instead, The first Emperor of Ming made a list of countries that they would never invade, including Japan, Korea, Vietnam blabla... The Chinese government nowadays is pretty much the same. All they really want is to make some money and improve Chinese living standard.

[Chabazite]

Cricket? Did you know that it was an Englishman who created baseball? I would however credit Americans with having created 'soccer' - its a term no one else recognises the world over.

[Steven_737]

"Long bonds"

Thanks Duncan;

I suppose you mean actual bonds as opposed to bond ETF or futures;

7~10 year maturity?

Another question;
back in spring 2009 you asked your blog readers for suggestions on which stocks to buy for riding wave P2.
I did not ask back then but now that this trade is over, would you disclose which stocks you bought and why?

Take care :)

[KRG]

jz: I am not an expert on Chinese history.. I have healthy respect for lot of things Chinese.. especially individual based sports, Tai Chi, Jackie Chan and so on..

but how do you explain the incursions into India...
why do they want to control Dalai Lama..
does the chinese society practice socialism...
how much of the development is distributive in nature.
what is the status of labour welfare..

"All they really want is to make some money and improve Chinese living standard"

I hope so but perhaps the broader opinion may not agree with this assessment

JJ: Good points.. In my view the limitations to China would come thru mother nature and mother market.The craze for commodities pile up could eventually turn against them as the craze for construction did for Dubai !

[trendlines]

LOL Yelnick! Precisely what i'm trying to suggest to the Indians :)

[JJ]

JZ wrote:

>>JJ, although you have Chinese blood in yourself, you certainly don't quite understand Chinese history and culture. The basic idea of Chinese culture can be summarized in one sentence, "If I don't want it myself, I don't do it to others

Posted by: jz | Tuesday, June 22, 2010 at 10:52 AM<<

That basic idea of Chinese culture has an equivalent in western culture as well —the Golden Rule "do unto others as you would have them do unto you".

Too often though, in both cultures, this gets bastardized into:

"do unto others before they do unto you".

Like I said, there are a small percentage of individuals possessing sufficient greatness and integrity who manage to rise above the deeply engrained faults so common in the Chinese culture.

I can only say that I hope YOU are right and I am wrong on this one. I can only pray your perception of the current and future governments is more acurate than mine. This is one time I want to be totally wrong without question.

The reason first Ming emperor made those decisions was because he was such an individual. Had he been more like Mao or Genghis Khan things would have turned out differently.

Let's hope for everyone's sake that the current and future leaders are more like first Ming Emperor, that would be best for everyone.

[jz]

Let me give you another example of what Mao did to North Korea. After the Korean war, Mao withdrew all Chinese troops in North Korea, in contrary to US, maintained army bases in south Korea, Japan, blabla, after the war has finished for half a century. Also, this example is not alone. Ming dynasty supported Korea against the invasion of Japan, after the war, the emperor, WanLi, withdrew all his troops from Korea. I am just wondering one thing, who is the threaten to world peace, the one who never stopped invasions and has so many oversea bases, or the one who has no any army bases oversea.

Genghis Khan never considers himself as Chinese. He can't speak Chinese either. If Genghis Khan is Chinese, what would those Russian say? Russia and China were both conquered by Mongolia at that time and Genghis Khan has never considered himself as a Chinese, although inner Mongolia is a part of China now. Also, his grandson, Kublai, Khan, once had a plan to kill the most populous 4 family names (Zhang, Wang, Li, Zhao) in China.

I am not a fan of Mao at all. Still, his foreign policy has a very high similarities of the Ming dynasty. And I have no reason to expect that current or future Chinese government will turn into a barbarian like government and kill their neighbors. Also, that doesn't mean I am a fan of the current Chinese government. They certainly have a lot of problems. Still, they are trying to improve. In the past 3 years, the death sentences in China reduced for about 50%. This is a big effort for them to show to the world that they are trying to become more humane.

[yelnick]

Steven_737, on which stock sin Mar2009 to buy, history says financials, specifically the five banks TBTF. This makes sense - the fallen leaders rise the most. I remember this in 2002 where the better Internet (dot-com) companies led the charge back up. Myself, I had been in and out of Google and similar, and expected them to bounce, which they did. Also, oil services and similar.