Dollar Days – October 23, 2011

UPDATE:  2:00 PM

Melt up continuing in what feels like an Apple or Gold-like throw-over…  Watching a rising wedge, crab pattern (just got to the 1.618 extension) and oodles of negative divergence developing on the 5-min chart.

Here we are, in late October, in the general vicinity of our December target.  Talk about too far, too fast.  The next move should be a quick dump to 1197 or so.  But, given the market’s rumor-driven euphoria, who can say when/if rational behavior will resume?

UPDATE:  October 24, 12:00 PM

Big news rumors this morning — reports that the EFSF might be increased to 1 trillion euros and/or China and Brazil might step in and buy euro bonds and/or the IMF will jump in and start supporting the euro… blah, blah, blah.

The only real news is that Markit Economics PMI (purchasing manager index) fell to the lowest level and is falling at the fastest rate since July 2009.  The PMI has been a very good predictor of GDP growth.  Manufacturing output, orders, backlogs, employment, confidence — all bad and getting worse.

In other words, don’t expect the Eurozone to work itself out of its mess through economic growth.   What will be necessary, says Moody’s, is a lot of pain.  In an article headlined “Euro Credit Pressures Yet to Peak:”

The rating agency therefore expects that severe market pressures will likely persist for the foreseeable future, with the potential for higher long-term financing costs and an elevated risk of constrained access to funding.

That’s a fancy way of saying “credit freeze.”  In the meantime, Morgan Stanley (in a blatant case of book talking) recommended clients go long the Euro this morning, with a near term target of 1.4060 before falling back to 1.30 by year’s end.  The bump was enough to complete a bearish Bat pattern, the third embedded bearish harmonic pattern over the past couple of weeks. 

EUR likely maxed out just past the .886 Fib at 1.3946; look for a reversal here in EUR/USD and SPX, which is showing marked negative divergence.


One way or the other, the Brussels befuddlement will drive markets this week.  If you’re a glass-half-full type, the long-awaited solution to Eurozone problems is imminent, and the market is due for a rip-roaring surge that’ll take us to new highs.  If you’re more glass-half-empty, this summit will be like all the rest, ending in a promise to resolve things “soon” that will be followed by… more promises.

I guess I’m more a “there is no glass” kind of guy.  It baffles me how many times the investing public has bought the “this time for sure” malarkey.   One thing for sure, there is no solution to the problem that doesn’t involve substantial write-downs for banks and other institutional investors….unless, of course, the ECB takes a page from Helicopter Ben’s book and simply starts printing (literally or figuratively.)  Neither is good for the Euro.

The harmonic patterns in the markets are confirming said diagnosis.  Take a look, for instance at the dollar index (DX.)  It reached significantly oversold status on Friday solely on rumors that things had been settled.  But, in so doing, it has traced out nestled bullish harmonic patterns.

The Butterfly pattern (in yellow) completed at the 1.272 extension, while the smaller (purple) Crab pattern completed at the 1.618 extension.   If you have no idea what this means, don’t worry.  Just know that the dollar, which recently suffered in relationship to a rebounding Euro, is about to snap back in a big way — probably to the 78.61 range.

For laypeople who think this is irrelevant because they don’t invest in currencies, think again.  The Dollar/Euro relationship has been a very powerful indicator of stock market performance for many weeks, now.  Bottom line, a surging dollar/falling Euro has been very bearish for stocks.

Look for DX to remain in the channel we’ve drawn, with Friday’s dip written off as an aberration.   Next up, the .618 Fibonacci level at 78.989 from Jun 2010, which might represent some resistance.  It’s also the .382 from the more recent October highs.

The EUR/USD, on the other hand, is poised to plunge.  Last week’s attempt to break out of its bearish plunge will fail.   It’s completed a bearish Bat pattern (in purple) at the .886 Fib and a bearish Butterfly (in yellow) at the 1.272 that should see it hit 1.35 within the next few days.  My medium-term target is 1.15 between now and mid-March 2012.

Note the recent 50 SMA cross below the 200, a so-called death cross implying EUR has officially entered a bear market.  The 50/200 weekly chart clearly shows the recent attempt to turn bullish again has failed.

More later.


Dollar Days – October 23, 2011 — 7 Comments

  1. Well I sure as hell was wrong about that call hettygreen. What can I say? Who knew the Euro would explode higher on the day they announced a "solution" to the Greek default issue by doubling the number of Euros in existence? Tos say it's pure insanity and illusion building by the manipulators would be the understatement of the year. Either the Euro should have dropped by 20% on that announcement… or there's the sudden realization that the deflation monster has been unleashed in Europe and all the money printing the Eurozone can produce is not going to stop it. A massive hike in a currency (Euro)is extremely deflationary. I was expecting that in the USA and a corresponding surge in the USD… not in Europe.

    I'm stumped… because if the currency is going to surge like that, equities in Europe should have absolutely tanked. Instead, France rises 6%. The American dollar tanks and yet the Russell also rises 6%. Can you see the insanity of it all? So I must apologize for sticking my neck out and giving my opinion on the dollar. Clearly I do not function well in a world where logic has been outlawed. I guess Goldman has purchased the rights to it.

  2. I respect and appreciate what you guys (pebble and AR) are putting up. Great insight and commentary on what has become a circus freak show in my humble opinion. Personally I'm out but enjoying the show nonetheless. Keep up the great work.

  3. Hetty: well, that's a good call, as we not only hit the .618 retrace you're talking about, but also the .382 of the Jan – May 2011 move. I view these past couple of days as a throw-over. AR is correct about the weekly picture, but we've seen 4 50/200 crosses in the past several years — which to me means it's building a base for the next move up. I think there's plenty of support down here, and am looking for a move up to 87 or so. But…it all depends on the EUR, of course. Anything short of a real fix (and there ain't such a thing, IMO) should gut the EUR like a fatted PIIG.

  4. Hettygreen, I don't know what the sentiment on the dollar is at the present time, but I'm seeing meaningful signals now. The weekly chart is still looking rather bearish for the dollar, but any chart smaller than the weekly is definitely showing signs that a breakout higher is just around the corner. The daily is starting to look bullish. For a 60 min. look, I have to use UUP as a proxy and it too is definitely flashing bullish signals. Further, from the EW perspective, the dollar has arguably put in a completed 5 wave structure lower on several different levels. I think a low is very, very close, if not already in place.

  5. I don't know if any of you read Bob Hoye but on October 6 he said the Dollar should correct 50 to 62% of the advance out of the July/August low (bottom between 76.55 and 75.82) and the process could take four to five weeks. He went on to say if support holds the Dollar could move into the 90s. It wouldn't surprise me to see it overshoot to the downside – anyone know the current bull bear percentage?

  6. Pebble,

    Do you see the S& P going to the 200dma before reversing? The dollar is still quite weak. It almost feels like it needs a defrillator to be alive again.

  7. Hi Pebble. How've you been? I hope your new venture is going really well for you.

    Great work as usual. You mentioned "It baffles me how many times the investing public has bought the "this time for sure" malarkey." In my view, the "investing public" is just as baffled as we are, and it is not "the investing public" who is continuously responding in such bizarre fashion to the greatest series of bullshit lines ever to have been fed to the human race. It is the banks who are causing these gyrations, 'in hopes of sucking in' the investing public and hedge funds. It's all about continuing the illusion. Of that I have no doubt whatsoever.

    I wanted to let you know that I have once again fired up the insta at Seeking Alpha that pertains to the Hindenburg Omen phenomenon. The HO had become "offline" back on June 3 and has been unable to issue a signal ever since. Although it was issuing a lot of rumblings just before the April top, none was issued before the HO became "neutered" by the 50 day moving average on the NYSE. That's what 5 months of sideways action did to the HO… neutered it.

    Well that thing has finally awoken from its slumber an is now once again in perfect working order. The next signal it issues will be a doozie. I'm not sure if you know what it's measuring, but even if the HO doesn't issue an official signal, just by monitoring it's inner workings, I can get one hell of a good advance warning about very serious fractures within the markets. In fact, my followers got ample warning when I reported that the HO was "extremely close" to issuing a signal on two occasions, one week before the flash crash, and on the "morning of" the flash crash. Those who just sloughed it off based on the idea that it hadn't "officially" triggered got burned badly. And I dare say 'deservedly so'. I didn't… I was short for the flash crash. And I plan on being short for the next one. If you're interested, you can follow the developments as I report them here:

    If you wish, you can also post the above link at Daneric's site, since I don't care to participate there any further.

    Hope you are doing well my friend. All the best.