FUND NEWS: Houston, we have a bank account.  With any luck, we’ll also have our brokerage account open today.  I’m taking the morning off to wrap up the remaining paperwork.  With any luck, we’ll have documents posted later today.  Watch this space and your inbox for an update.

*  *  *  *  *

The dollar tagged the secondary .886 (79.436) we mapped out last Friday [see: The Dollar’s New Digs]…

…as the EURUSD topped its Feb 1 highs on the way to a reversal at 1.3832…

…and, the USDJPY continued tracing out a pennant that is bursting at the seams.

It all plays well with our forecast.  The tell would be the sharp interim reversal by ES (today or tomorrow) at 1750-1755 that we mapped out yesterday.  The equivalent range for SPX: 1752-1760.

There’s no requirement that this reversal take place, but it fits our medium range forecast much better.  We often look to the USDJPY for confirmation, but today it’s the EURUSD that’s the most helpful.

continued for members… (more…)

The dollar is reacting to the .886 and 1.618 Fibs we discussed at length Friday.

While a significant rebound could be in store, the USDJPY suggests a limited move.   Note the continued coiling of the pair — never able to break out but never breaking down.  The apex of the resulting pennant pattern is fast approaching.

To anyone watching the Charlie Evans interview on CNBC this morning, it would seem pretty obvious which way the dollar is going.  The Fed will continue to play the dangerous game of pumping inflation and asset prices at the expense of the dollar and the country’s long-term fiscal viability.

In the economy, there never has been such thing as a free lunch.  Can rapidly expanding debt can coexist with abnormally low interest rates forever?  As we’re recently witnessed, there’s no reason to believe our elected officials can balance the budget anytime soon.

So, the Fed will go on monetizing the deficit, buying whatever amount of debt is necessary to keep rates low, praying for a deus ex machina resolution.  The poor and retirees will continued to get squeezed; the bankers will cheer; and, the markets will continue to rally.  It will work indefinitely — until it doesn’t.

Speaking of markets, let’s take a fresh look at key levels on the way to our next targets for the major indices.

The ES continues to bump along the top of the proposed red channel.  At some point, it should revert to the midline — currently around 1718 (versus 1738 trading level.)  That’s the trouble with steep channels — they’re steep on the way down, too.

But, the next key level for ES is the white 1.618 extension at 1754.59.  So, I expect we’ll tag that before any serious deflating occurs.  Timing is tricky, but a good possibility is the intersection of the white channel midline and the Fib later tonight.

continued for members… (more…)

The dollar finally reached our 79.60 target [see: Sep 20 Update] overnight and should see a bit of a technical bounce here at a large scale .886 (white) and medium scale 1.618 (purple.)

But, as we’ve discussed the past few days, there is plenty more downside after the bounce.  For starters, an alternate .886 at 79.436 based on 78.725 as Point X is a possibility (light blue.)

Based on fact that SPX just broke out of a rising wedge, I’d say it’s a very good possibility (watch for a potential channel top at 1741.)

And, then there’s the rising red channel (dating back to May 2011), which broke down on Sep 18. It’s seen its share of equity highs and lows (SPX values in yellow below.)

But, it’s managed to stay on an upswing ever since — until the Fed announced no tapering last month. Now, with no tapering and no budgetary discipline, the market is correctly wondering what — if anything — might provide a floor.

While a declining dollar can be positive for US exporters, we’re a net importer.  Anyone who buys food, clothing, electronics, gas, automobiles feels the pinch right away.  But, it also shows up in raw materials, affecting almost all capital and consumer goods one way or another.

The chart below shows how a declining dollar typically leads to an increase in CPI.  When the dollar broke down in 2002 (the red trend line), it touched off a six year increase in CPI.

Inflation plunged in 2006 when it appeared the dollar had found its bottom (the yellow channel.)  But, when that channel broke down, CPI soared from 1.3% to 5.6% until 2008, when DX finally did bottom.

Inflation plunged in 2008 as the global economic meltdown took hold and buyers disappeared from the scene, eventually sinking into negative growth (deflation) for much of 2009.

Central bankers came to the rescue.  The first round of quantitative easing in 2009 did, in fact, bring inflation back from the dead.  CPI spiked from -2.1% in Aug 2009 to +2.7% in December 2009.  Gold soared 33% from 900 to 1200 in the same period (already up from 681 in Oct 08.)  The S&P 500, which had bottomed in Mar 09 at 666, managed its own 33% rise from 869-1150.

By early 2010, the dollar was on the rise again – accompanied by a slump in annual inflation to only 1%.   When the dollar peaked in June 2010, inflation leveled off.  It spiked in November, however, when QE2 was announced.  The dollar held on valiantly, but the purple channel broke down in Mar 2011 and CPI ran up to nearly 4% again.

This time, it was a market crash that saved the dollar.  The dollar bottomed as SPX topped in May 2011, and gained dramatically between August and October as the market melted down.

It was enough to kick start another dollar rally that lasted until QE3 in Sep 2012 — which might have remained the peak had it not been for two factors that sent the index skitting higher:

• Abenomics — the Japanese, outdoing the Fed at QE
• the market scare in June 2013

Since then, it’s been all downhill for the dollar.  As mentioned back in January, if 78.725 doesn’t hold, look out below.  The next downside support isn’t until 77.48 and then 75.45.  If our equity forecast is accurate, we’ll find out very soon.

Amazingly, the deal got done.  Predictably, the deal buys us only a few months before we get to do it all over again.

From a market perspective, the crisis is averted (for now.) And, given the .50% hit to GDP, the Fed has even less reason to taper anytime soon.

Our upside forecast updated yesterday should be in pretty good shape going forward — though there will be plenty of bumps in the road.  First stop: the smaller IH&S target at ES 1722.50.

The white channel is too steep, so another backtest of the red midline (1704-1705) isn’t out of the question.  And, remember, ES did just complete a Bat Pattern at the purple .886.  So, a dip to the .707 or .618 is always a possibility.

The dollar isn’t exactly loving this turn of events.  It looks likely to reach our 79.6 target later today.  Whether or not it can reverse there at the white .886 is anyone’s guess.

A failure to reverse in that area opens up 78.913 by early November and 75.45 in the month or two following.  While I’ve had the falling white channel seen above as a placeholder for the past month or so, I suspect the top of the falling wedge will probably act as the top of a new falling channel I’ve labelled below in yellow.

Not to worry.  It will only affect those who buy electronics, cars, gasoline, clothes or food.  On second thought, maybe it’s best not to delay that week in Tuscany or luxury import you’ve had your eye on.

continued for members… (more…)

The dollar backtested the broken white channel midline again, but has failed so far to break back above.

Even with the overnight ramp job, E-minis are contained at this level…

But, the structure suggests a Bat Pattern rather than Gartley, so 1716.86 will remain on the table until ES dips back below the purple channel — currently 1680ish.  If it happens, look for a tag of the red “S” later today.

The cheerleaders have worked hard to establish another IH&S, this one targeting 1722.

And, given the support TPTB are lending, it certainly isn’t out of the question — even though the headlines hardly justify it.  Even though the US won’t really run out of money until the end of the month, when social security, welfare, military payroll, etc. checks go out, the deadline of the 17th will clearly pass without a deal by both houses of Congress.

It will likely take the dip we’re forecasting for them to get their act together and do the job for which they, at least, are still being paid.  In other words, yesterday’s forecast looks just as good to me the day after.  It’ll look even better if we can get the rally over with intra-day.

UPDATE:  11:05 AM

SPX just tagged its .886 on breaking news that the shoe shine guy at 6th and Constitution is confident that a deal will be struck.

ES should tag 1717 any moment.  Excellent time to short.

Needless to say, if the Senate deal can be sold to the House, there’s plenty of upside in the markets.  So, though you probably get tired of hearing me say it, always use stops.

My trading strategy doesn’t hinge on being right all the time (though, it’s always nice when we are.) It hinges on not hesitating to switch sides when it’s apparent that a particular forecast isn’t playing out.

In that light, I’ll review our upside scenario.

continued for members… (more…)

Another day of assurances that everything’s going beautifully, just a few loose ends to tie up, etc.  The talking heads are certain it’s a non-event.  I remain, shall we say…uncertain.

In the meantime, ES tagged the .786 retrace (in purple below) from the all-time high overnight and retreated to the neckline of a rather imposing looking IH&S.  In the past hour, prices have slipped below the neckline.  (SPX came within 0.98 of its .786.)

As discussed yesterday afternoon, the .786 is a great place to try a short [always use stops — especially in highly unpredictable situations!] Besides the channel and harmonic indicators, there is a potential analog in play.  Actually, two of them.

continued for members… (more…)

As we expected, there was no political breakthrough over the weekend.  There is plenty of talk about negotiations going better, but still no deal.  The markets are taking it in stride, with SPX down only 9 points at present.

The charts are a bit of a mess today, as Friday’s close threw a wrench into both the channels and harmonics.  ES clearly broke out of the two most likely falling channels, and closed just shy of the .707 retrace of the 1726-1640 drop.  It was the sort of move that either signals a new direction, or will be written off as a rule-breaker.

continued for members… (more…)

We got a rally yesterday that was either a great harbinger of a political breakthrough — or an amazing head fake.  In either case, it shows the strength of the pent-up bullish fervor.  If D.C. gets it together, we should see some nice follow through.  If not, all that fervor will be instantly transformed to disappointment — and, you don’t want to stand in front of that train wreck.

ES and SPX have obviously bulled their way back into the broken purple channel.  SPX closed there; ES is currently about 4 points above the channel bottom.

My expectations for this rally remain the same as yesterday:

I would short here at ES 1672.50, with the understanding that it could just as easily be a small pullback on the way to 1683.30 (.500 retrace) or even 1693.50 (.618.)

1693.50 is only a few points away and would make for a nifty IH&S, so we’ll go with that assumption for now.

UPDATE:  10:30 AM

Almost to our .618 ES 1693.50 target.  Anyone still long might want to think about stops in the 1683 range.

UPDATE:  12:00 PM

There’s the tags on the .618 for both ES and SPX (which also just tagged the important 1700 level.)  Good place to try a short position — though with tight stops in case the pols actually do make a deal.

continued for members… (more…)

Apologies for the late post this morning.  I’ve been working on the mid-range forecast and the market was moving higher as expected.  I wanted to get the next few weeks mapped out, as we should see some huge volatility and — with some help from our friends in D.C. — some juicy returns.

We’re getting the bounce we’ve been expecting after SPX finally caught up with the E-minis after a tag on the yellow .786 Fib line.

We had been aiming for a reversal at ES 1646/SPX 1649, so the markets overshot that just a little — but not so much that it derails any of the patterns we’ve been watching.

Both have reached our initial target area — a back test of the purple channel and tag of the top of their respective falling white channels.  I would short here at ES 1672.50, with the understanding that it could just as easily be a small pullback on the way to 1683 (.500 retrace) or even 1693 (.618.)

I show the actual purple channel bottom at 1675.50 or so, and the yellow .500 is at 1675.75.  So, don’t get nervous if it leaks a little higher.

Recall that when we adjusted our initial downside target to 1646.58 on Oct 3 [CIW: Oct 3] we didn’t specify a price level for the subsequent bounce.

Just dropped through ES 1666.75.  Next stop is the .618 at 1663.71 — though there’s no real good channel support there.  There are lots of other potential turning points, including my favorite from the 30th at 1657 and my new favorite of the yellow .786 at 1646.58.

Having the purple channel break down was obviously key to the the downside of the past several days.  We almost always get a backtest of broken channels, so we’ve satisfied that requirement.  And, the falling white channel was due for another tag on its upper bound.  So, the intersection of the two was the logical spot for this rebound.

But, it isn’t a great spot from a harmonic standpoint.

continued for members… (more…)

ES reached our 1646 target from Oct 3 (the yellow .786 retracement) yesterday — but an hour after the cash market closed.

SPX missed out, so it’ll need to run down to 1649 or so to play catch up before the bounce can get started in earnest.

Obviously, the House and the President remain locked in a high-stakes poker game that could turn the market on its head quite quickly.  So, always use stops.

The last FOMC meeting minutes come out at 2PM EST, so look for some action around that time.

UPDATE:  11:11 AM

SPX just tagged the .786 at 1649.38.  ES at 1643 — off 3 from yesterday’s lows and theoretically not a Butterfly Pattern killer.  We should see a turn here, or else there’s 10 more points of downside until the SPX .886 (9 for ES.)

UPDATE:  EOD

So far, so good.