Dollar Reversal May Unwind The Presumptions Behind the September to Remember Rally

The Dollar has continued the break up since Friday. The reversal has been strong and has all the earmarks of a short squeeze. As I noted a few days ago, the net short position was quite large. This chart from Credit Suisse shows how deep the Dollar bearishness got:

The break up has formed a nice 1-2-3 pattern, which under ewave suggests it has more to run in wave 3 and beyond. It has also bifurcated out of the recent trading range, which under Fractal Finance means we have a trend change, unless it reverses quickly back down. The STU yesterday was written by Peter Kendall, who has a different style than Steve Hochberg who normally writes it, and as it has for several issues, it started with the Dollar. The bounce since Friday traced an initial five-wave pattern and corrected yesterday in three waves. The strong move today confirms the change of trend up. You can see the bifurcation above the recent trading range, and the turning up of key sentiment indicators, in this chart from EWTrends:

If this Dollar Reversal continues, the most immediate impact should be on commodities and gold. Oil and gold fell today. Treasury yields have reversed up in the last few days, despite the overhang of QE2.

The most interesting move today came from China, where the PBOC raised rates for the first time since 2007.  China continues to be concerned over inflation and other signs in internal overheating. Growth in Europe and Japan has been turning down, and China may follow. The global economic recovery may be topping.

Optimism still rules in stocks. Carl Futia sees a short-term consolidation before a continuation of the uptrend, targeting 1300 by April 2011. Goldman Sachs has provided their guidance, with targets of 1200 by YE and 1275 within a year:

What is noteworthy is Goldman sees continued earnings growth but fading PE, and hence less of a rise in the S&P even as earnings get back to 2007 levels. Carl's key chart also shows a triple top in the e-mini followed by a bifurcation below the recent trading range, which under Fractal Finance indicates a top, not a consolidation:

The case for bullishness rests largely in fundamentals: QE being good for stocks, and continued earnings growth. If the Dollar Reversal continues, score one for technical analysis, since the overhang of QE would not have caused fundamentalists to expect the bounce. So what about stocks?

One of the better technical indicators at a top is to watch the leaders fade against the trend. While Google popped well after their earnings, Apple, IBM and Amazon all showed weakness. Apple in particular may have been priced to perfection, and yet the reason for the drop after hours yesterday seems spurious: while revenues and earnings blew away expectations, iPad sales were lower. Being in the Silicon Valley community, it is clear that iPad missed due to supply not demand. Apple is selling every iPad they can build. Hardily the cause for pessimism. Perhaps Apple will be back on trend in a few days, but if it and the other tech leaders lag despite good fundamentals, it signals a reversal brewing.

Nowhere is this clearer than with bank stocks. They led the rise off March 2009, and were a huge percent of both earnings growth across the whole S&P and market volume. Facing all kinds of pressure due to foreclosuregate, including threats of buyers of their toxic junk wishing to put it back, financial stocks may be in for a tumble. And indeed, Shanky noted over the weekend (and I also received charts from readers via email) that the banking stocks were noticable laggards:

The bears are being cautious, but some are growling. PrincipalAnalysis thinks a big drop is next, and gives levels that would change his view: SP1177 and Dow 11068. The drop looks like a reverse of the Dollar break up, being a wave 1 down, a wave 2 correction,and now we appear to be in 3 down. The levels to watch are the wave 2 highs, which should not be broken if a big drop is right ahead:

Comments

[Wave Rust]

best bull bet is an abc 4th flat from the 13th high

but i'd probably sell a close below spx 1156-7

look at mid april '10; same signature; more up ahead to 1200 at least.

wave rust

[Sherman "Double Long"McCoy]

There you go again, looking for a dark cloud in a clear blue sky. Maybe you could look beyond data confirming your opinion and notice that the DXY is in an obvious wave 4 triangle, and is just entering wave e? Maybe you could look at a LT chart(going back to at least 1995) and ponder that the yen hasn't printed new all-time highs yet, so at least one currency out there should continue to prevent the dollar from bottoming?

Markets don't peak on the first central bank move, but it does shake out the weak longs, and encourage losing shorts to plunge in with what little remains of their trading capital for one last "hail Mary". Good luck!

[Account Deleted]

S&P 500 Futures before opening bell

[Michael]

Anyone purchase shares in MEE yesterday when I mentioned it?

It's now +$1.80 from when I posted.

:)

[Michael]

Nice rally back up for TRADERS in the commodity / weak dollar plays... BTU, CLF, WLT, and FCX this morning.

:)

[MHD]

Gee,all the insiders selling about 1.2 billion in the last 5 weeks and buying only about 1 million in stock are really looking like the dumb money. And the record short positions in stocks must be getting very nervous at the present time.
If yelnick's info on Wave 2 retrace are correct then this move up has only a 7% chance of being a wave 2. Not good odds!
Dollar about to reverse higher according to most ewavers. Not today!
Stock market about to turn down hard????? Back to the many alternate counts once again.
One of these days they will actually be right and there will be a change of trend.

[MHD]

90 minutes to retrace almost all of yesterdays move in the dollar. Another wrong count????

[Edwin]

SPY Golden Cross still in full force...

50 day MA =$111.80;
200 day MA =$111.38

Dipsters are rewarded again until it is broken.

[cjmorris]

"...gives levels that would change his view: SP1177 and Dow 11068."

Now that was the quickest bear market in history ;)

[Roger D.]

Is it time to go short? Maybe at todays close. A reversal is due,we might stay up here for a few hours. My target in the DJR has been met.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/cd34c8e5-6665-4bf1-9a61-2fe5260cc9bb

[MHD]

From the high of 1560ish to the low of 667 in the S&P 500, a 61.8% retrace is approx 1219 which is the high this year. The only hope for the bears is 1219 holds, because in the big picture a retrace beyond 62% means the long term bulls are right.

[MHD]

I'm looking into my crystal ball and behold...I see Robert P. EWT Dec issue. In it, Bob concedes that this was not wave 2 with wave 3 down to come. Instead it was wave 3 up, and deflation is not to be, and all is well with the world as Ben has fixed everything much to Bob's amazement.
I won't tell Bob that the crystal ball shows a market crash a week after his new bullish forecast.
The crystal ball also shows Bob pulling the last hair from his scalp!
Nor was he able to publish his new bullish book called "Conquer What Crash".

[yelnick]

MHD, that would be a bigger surprise than this market! FOFL!

I am curious how the STU explains things. From a Fractal Finance POV, the ES did a triple top but not the S&P, so the cash index seems to have been destined to try one more time. If it punctures the 1181 level and stays above, it seems hard to stay bearish.

[Edwin]

If Mr. Market's job is to max.pain and damage to both bulls and bears alike, we should have a mother of all crash very soon.

I started to sell in spite of the golden cross.

[MHD]

Yes it seems Ben is doing what Alan did to Bob's forecasts in 2003. Does a wave 2 double top ever?
Also, what is your view of 1576-667*61.8%= 1229. It maxed at 1219, so this might be a last effort to reach 1229 or a double top.
The market seems to be convinced that the line of greater fools will get longer, as Ben blows the bubbles.

[Roger D.]

A possible broadening pattern and very compact,which is the most bearish, in the dow 60 minute. Also a small EDT might be forming now. Way too much bullishness for the trouble in the banking sector. As the past week has been distribution in many market leaders.

Roger D.

[Roger D.]

The Euro should thrust up out of a small 4th wave triangle to complete it's wave 2 up and that should mark the end of this last thrust up in the market.

Roger D.

[Roger D.]

The Dow, reversal near?

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/a5708cab-a875-49a4-a9ff-70f979442c3f

[JT]

Equity Top Pickers and Dollar Bottom Pickers getting crushed again... Wash, Rinse, Repeat...

[EZ]

S&P completed a backtest of the trendline broken in yesterday's decline. Heading lower again.

[MHD]

I give Roger D. credit for never giving up :)

[Dsquare]

Yeah, the dollar pooped the bed today. Still think the bottom has been made but going up correctively.

[yelnick]

MHD, I wonder if we should be more focused on ewave in Constant-Dollar terms. I believe it works better over long hauls, which is why I do not buy Prechter's doom & gloom scenario; we are in a wave 4 with 5 to go under the Constant-Dollar Dow. Maybe when gold is running and the Dollar is swinging so fast (relative to currencies in general), we need to adjust the count. The nominal Dow is what normal folk watch, but the Dollar-Adjusted Dow is what foreign investors watch, and they are a huge factor these days as they use US equities to hedge currency risk.

In any event the rationale for a triple-top in Fractal Finance is that waves normally end with waves 3/5/2 hitting either near the same level or with a H&S spike in the middle. Usually the wave 4 is a triangle - giving three peaks and a final "false break" thrust at the end; or a flat, with two peaks (end of 3 and B wave) and then the final wave 5 thurst for a triple top. Can a wave 2? Normally a 2 is a zigzag, so no; but we do see flat wave 2s, which look like a double top (A/C). A triple means after the flat the minor wave 2 of 3 came back a long ways. Rare

[Roger D.]

If we rally into the close, I will go short at market close.
Roger D

[Roger D.]

Short at market close.

Roger D.

[JT]

We didn't rally into the close, now did we... so why are you short???

[Sobranie]

I think he was going short for all cases of EOD.

[Cal]

It is highly unlikely that prechter is so wrong so often due to chance. He is the most reliable indicator of anything i've examined. He has been right in a modest way for short stretches but these are little blips in what is an astoundingly poor record.

[JT]

The Prechter's and Rosenberg's of the World do not trade the equity markets ... They have no clue what they are doing, because they DO NOT HAVE ANY SKIN IN THE GAME!!!

Anyone that has been short energy, commodity, or basic materials stocks over the last year knows that the DEFLATIONARY script that these guys have been touting is a quick road to filing Bankruptcy.

[Wave Rust]

let's not get bulled up until the price takes out the high and holds for a close.

it still looks like it may be an incomplete correction in an up market

going to watch for the morning spike and fail move that dives toward yesterday's low.

wave rust

[Wave Rust]

yel,

"I wonder if we should be more focused on ewave in Constant-Dollar terms."

try a simple bullish wave count. no x's. use a weekly. weekly is so obviously up from months and months ago.

constant dollar, then euro dollar, then in gold??? ,,,, where does one stop when trying to find a bear count that holds up for longer than 1-2 days?

rhetorically, i ask myself all the time, where's the dang mystery that i'm missing? that i don't see? where?

it's like everybody wants to climb the electrified bear fence, when they could just walk through the open bullish gate.

wave rust

maybe it's just too hard to recognize a generational low when they happen.