Charts I’m Watching: Oct 21, 2013

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.

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