The most important chart in the world is the EUR/USD. Technically, the Euro is in a structural downtrend, but it's right at the backtest/breakout point. You can make the case that the strengthening of the last year was pricing in the end of their QE and once it's officially announced, it reverses and continues its downtrend. You can also make the case that the US dollar is the bigger basket case going forward due to blowing up the deficit with tax cuts, infrastructure, entitlements, potential trade wars causing recession...
But there are compelling reasons on both sides of the argument. A dollar bullish view focuses on repatriation causing global dollar shortages (as reflected in the LIBOR-OIS spread), which is a potential powder keg being lit by tightening central banks and a cautious China.
My personal belief is that US inflation is going to be largely shaped by what happens with the dollar. Sure, there are some wage increases, but the US seems to be in a structural disinflationary situation due to the burden of debt, the lack of job security for the masses, particularly going forward due to robotics, and a demographic spending slowdown, not to mention we export a massive amount of dollars in the trade deficit. If we didn't export our high-paying union manufacturing jobs, we'd probably be having the inflation of the 70s that those inclined to think it will repeat are fearing.
I'm not a believer in looking at productivity data and concluding our jobs were not exported but taken by automation. In 1992 Ross Perot stood before the world and pointed at Bill Clinton and said if you elect this man he's going to sign NAFTA, so me and all my manufacturing friends are moving our plants to Mexico. He didn't say he was going to replace everyone's job with automation. To look at another way, what if automation didn't exist? Where would the manufacturing plants be? China and Mexico, due to the trade agreements. We exported our manufacturing base.
I agree that automation over the years helped to increase the productivity of the work that was left in the wake, and it's certainly the main problem now, but the original problem was NAFTA and the WTO allowing corporations to exploit the differences in standards of living, which created an unsustainable structural problem in the world economy that fueled the global Eurodollar credit boom and allowed us to export our inflation. If these tariffs are agreeable enough to not cause trade wars and a global recession (not likely), and Trump does reduce our trade deficit, that is an argument for inflation that I can wrap my mind around because more dollars would be staying onshore and the cost to produce those goods would increase. I can also wrap my mind around the long end of bonds selling off due to oversupply. I can wrap my mind around inflation caused by a weak dollar. But I don't buy the idea that we're on the verge of inflation caused by economic growth.
I agree that automation over the years helped to increase the productivity of the work that was left in the wake, and it's certainly the main problem now, but the original problem was NAFTA and the WTO allowing corporations to exploit the differences in standards of living, which created an unsustainable structural problem in the world economy that fueled the global Eurodollar credit boom and allowed us to export our inflation. If these tariffs are agreeable enough to not cause trade wars and a global recession (not likely), and Trump does reduce our trade deficit, that is an argument for inflation that I can wrap my mind around because more dollars would be staying onshore and the cost to produce those goods would increase. I can also wrap my mind around the long end of bonds selling off due to oversupply. I can wrap my mind around inflation caused by a weak dollar. But I don't buy the idea that we're on the verge of inflation caused by economic growth.
Anyway, I like trying to understand the complex dynamics so I anticipate where I think the market is going, but ultimately the price action will speak for itself. Here's the monthly Euro chart. Note the two reversal candles at the precious downtrend highs. The easiest trade setup would be something like that happening again.
Sometimes I like to invert the chart to look at it from the other way. Here's the Euro monthly inverted. Note how many times the horizontal line was the opening or closing of a monthly candle. You can look at this like an ascending triangle breakout that is backtesting, and of course going a little further to suck people in and shake people out.
Here's a zoomed in look at the inverted weekly Euro. One scenario - if the Euro is topping and resuming its downtrend - is to wait for it to form a head and shoulders pattern by moving to the 1.16 area and then pulling back to form the right shoulder. Remember this is inverted.
That would be waiting for the dollar to get back above its breakdown level to tag the $95 area and pullback to form the right shoulder. Of course, this is the conservative way to do it, waiting for it to show its hand and avoid the possible one last shake-out new low reversal that could happen. Or the "you got it wrong it's a breakout in the Euro" scenario.
Clearly, the best risk/reward is entering now, but I suspect once this announces what it's doing, it will last for quite awhile. I'm thinking if the Euro does rollover and resume its downtrend, it could go all the way to the .70s against the dollar. Conversely, if I'm wrong and it breaks out in the coming months, it very well could go all the way to the old highs. That's why this is such a big deal. I favor the global dollar shortage/Eurozone mess in the future more at this time. But I will submit to the chart.
If I controlled the universe, I'd rather trade gold from the long side, so I would prefer a Euro breakout, but I have trouble accepting that outcome on a fundamental basis. The gold trade is quite clear. If the Euro breaks out and gold breaks out above the $1378 level and both hold, then gold will likely move to the $1525/$1600 area fairly quickly. If there is a breakout reversal and it happens on ECB or Fed news, I would not ignore that. In fact, that scenario would create a nice risk/reward to short gold and the Euro. Currently, there is no setup from a risk/reward technical perspective until there's a breakout, or a breakout/reversal. I suppose a breakdown from this clear head-and-shoulders bottom is also a trade, but that's sketchy. Horizontal breakouts are more reliable.
Bonds daily. This is backtesting the neckline of a head-and-shoulders breakdown. From a risk/reward standpoint, what I'm looking for is a clear reversal off the 147/148 area. If there's no reversal candle there is no trade. The long end could totally return above the neckline, making the high yield in for the year, but that bullish thesis would likely require a flight to quality during a stock market selloff, or I think a strengthening dollar would keep inflation down and possibly be bullish for bonds.
In my view, raising interest rates is bullish for the long end, particularly against the short end. I don't see why the yield curve won't continue to flatten, except if the stock market breaks down. Then it makes sense to think the short end would rally more due to the Fed being forced to slow down. The bottom line is the Fed will tighten until a plunging stock market stops them, so the default expectation should be a continual flattening until they break something. The long end of bonds certainly has supply concerns over the next few years, which is why everything is very complex right now, but this is how technicals help.
So if bonds recapture the neckline in the mid 147s/148 without reversing, you have to take notice. I don't think you can be short the long end if it breaks through that downtrend line, which would likely only happen in a stock market selloff. I will consider shorting bonds if they reverse off the neckline and establish a clear risk/reward, or if they breakdown to a new low (high yield) without reversing. It makes sense to me that a stock market breakdown would cause a steepening, but I won't be trading that because historically the Fed tightens until the curve inverts, so I'm not going to fight history on this.
The stock market is a hot mess right now. Take note of the volume. The trouble right now is we're heading into earning season, which is typically hard to be short. I don't think there's a good risk/reward in this unless it fights back to the downtrend line around 2720s, or if it breaks down below the 200-day, which everyone is watching like a hawk.
Here's the ES daily. NFP is Friday. Maybe it will provide a reversal candle to short off the downtrend line, or a breakdown through the 200-day. Whenever this gets outside a technical area you have to be on high alert for a reversal due to its nasty status. Once you know how it works, it's way easier to avoid damage and play with them instead of being the stooge getting shaken out.
The oil market has me the most confused. If I look at this chart, it looks very bullish. A double-top interpretation needs to close back down near the recent lows. If I was long, I would have taken profits at the test of the highs and waited to see what happens. You can always get back in.
I like to say there's only two technical trades: breakouts and reversals. There's a modified third trade, which is a second breakout. What I mean is a breakout reversal that closes back in the range because it ran into too much supply, but then it holds near the top of the range and chews through it and breaks out a second time. That's a worthy risk/reward also.
This helps me clarify my thoughts, but it takes too long, so I'm probably done for a bit. Maybe I can just post one chart when it's relevant from now on. Check out my monetary system post in the morning. I think you'll enjoy it.
Here's a few other people I pay attention to:
I watch the Jeffrey Gundlach webcasts every quarter at Doubleline
The crew at Mauldineconomics
Peter Schiff - I don't know why so many people give him a hard time. He's got a thesis and he sticks to it. Due to the binary nature of the Euro/Dollar setup, he's either going to be very right or very wrong for quite awhile, starting sometime this quarter, I suspect. Maybe the June meetings. Unless it's a data point first, not sure.
David Stockman and Zerohedge understand that debt growing faster than income will always end badly. It seems a lot of bulls like to look for sources to confirm their bias, whereas I like to seek out the potential risks. I read a wide variety of perspectives and decide for myself. Since I tend to have skeptical/sound money/bearish tendencies, my challenge is seeking out bullish views, which is not that hard to do.
