Market Analysis for Week of 7/27/2015

Clearly, the deflation trade has resumed over the last month.  The Fed announcement is Wednesday but the chances of a rate increase without a press conference are not very likely, so the reaction of the dollar will be very interesting.  Even though it has strengthened lately, it hasn't broken out yet, and the last few "no hike" announcements have led to selloffs, so there's still room for one more pullback before this takes off.  If it does selloff on Wednesday and gets immediately bought up, you have to assume the bottom is in and it's front-running September.  If the selloff holds, then the confidence of front-running isn't there yet and we need more time to back and fill, in which case there are several spots to watch.  The 50-day EMA is at $96.39, but it could go all the way to the bottom of the channel at roughly $93.70.  I suppose the safest way to play it remains waiting for the breakout, but if we do get down toward support, I'd like to start sneaking in early.

The concern with the continuation of the deflation trade is that it makes no sense whatsoever that the Fed will raise rates.  But they keep pounding the table about how appropriate it is.  They aren't in the business of bluffing.  They're in the business of setting expectations, so what would be completely inappropriate is pounding the table about how appropriate it is to raise rates and then not do it.  That's why I started thinking about other motives they have that aren't economic in nature.  Who knows how long they can go down the tightening fantasy path before they are forced to back off. The point is, regardless of their motives, and regardless that they will cause a recession, if they continue down this path then the dollar could have months and months in it to the upside.  Keep a close eye on this.  If the train leaves the station in forceful way it can really run.

The downtrend line in the Euro is from the highs last summer.  If we make it that far thru sideways movement or another bounce, it will force the action one way or the other.  I would consider a strong close above that downtrend line, which currently runs through 1.1350, a signal to back off the short side (or you could say putting in a higher high above 1.15).   That's why it would be a gift to see it rally following this week's Fed.  The closer you can get to the point of failure the smaller the risk OR the bigger the size.  The point is this trade is gearing up and the potential is just as big as when it was breaking down through 1.20.

Think about the reasons going forward for why this dollar trade has the potential to be special.

1.  Economic data tends to lag for quite awhile (although it's already pretty weak), so the Fed may have more room to do stupid things than we think.  Maybe they can pull off a couple hikes before they cause the next recession.  (Or should I say reveal the depression we're in.)

2.   Think about all the international corporations who should be realizing right now that they need to buy dollars to hedge their currency risks.

3.  What about all the dollar denominated debt borrowed overseas that needs to buy dollars to hedge.

4.  Momentum.

5.  If there's a crisis earlier than anticipated, safe haven flows will go toward what is working.

6.  The Eurozone is a mess now.  The US is a mess later.  The only caveat here is it should be noted during the Greece turmoil that the Euro gap-downs were aggressively bought up when it looked like Greece might exit, so when that eventually happens, we could see the Euro strengthen, but that's down the road.  What the Eurozone should do is have a northern Euro and a southern Euro with fiscal unions but that's not politically viable and won't happen unless there's a crisis.  If I was any of the PIIGS, I'd be printing roomfuls of my old currency.


Gold monthly.  The support level could be the top of the March 08' wick at $1033, or the closes at $980.  You would think since I made this call last year largely based on the fact that the creative force of the universe showed me silver going to $9 that I just made enough money to buy Greece myself, but you would be wrong because what you're not factoring in is that I'm an idiot.  Unfortunately, I got it in my head that the dollar was going to have one more leg down in its pullback so I kept looking for just a little higher in gold to get short, and by the time the dollar firmed up, I took an ill-timed break from trading and here I stand with nothing, I get nothing, I lose.  Now I have to wait for a rally.  

Gold daily.  Note the high volume hammer on Friday.  It might be wishful thinking, but if the dollar sells off from a "no hike" Fed, it's possible we see gold fight back a bit.  It usually finds a way to backtest breakdown areas.  Gold rallies are shorting opportunities until the Fed stops talking about raising rates and starts talking about QE4.  That should take awhile.

It should also be noted that the Spec position in gold is net short for the first time ever, so it's possible they get squeezed out before we resume the downtrend.  Usually what happens now is they'll use the moving averages to hold the pressure downward, but the rare positioning and a temporary dollar selloff could lead to a higher fight back rally than usual.  We'll have to see the reaction to the Fed.  Personally, I'd rather just trade the dollar bigger, but we'll see what's what later this week. 

Silver daily.  In hindsight I wish I had the conviction to have shorted every pop higher, knowing this would keep grinding lower, but it's not easy to stay short when the market goes sideways for so long and they run the trailing stops the way they do.  Check out the most recent rally high.  It poked above the previous rally high to clear out any stops before heading lower.  I'm not a billion dollar hedge fund.  I have to protect open profits.  This was hard to stay short.  I don't entirely blame myself.  I did lose focus a bit, though.  

The first wave of the oil breakdown was a solid trade, but my ill-timed break from trading caused me to get flat and now I find myself on the outside looking in.  It's possible if the dollar sells off from the Fed that we could get a bounce in oil too.  Ultimately, this is likely going to new lows and if the Fed hikes in Sept who knows how low it can go.  When oil trended down hard last year it used the 10-day and 20-day EMAs (the blue and green lines).  So that's something to watch.  Also, the downtrend line is off the highs from last year.  When that breaks eventually, it will likely lead to a big short-covering rally, but that shouldn't happen for awhile.  

As for equities, the big money medium-term players are still short-term trading.  When the market trends it's because the active big money is holding their positions.  When they don't have the confidence to do that they become short-term players and we get a range.  It's a market maker's kind of market.  Sell the highs, buy the lows, sell premium. 

If we keep going sideways we will run into the monthly uptrend line in Sept or Oct.  Since that's where markets go to die, and the Fed is still sounding like they're gonna raise rates, it's kinda important that the bulls take the reins and break this sucker out.  The 61.8% Fib retracement from the recent low to the recent high was hit practically to the penny at Friday's low at ES 2070.  So if we go through Friday's low with force you have to be thinking bottom of the range.  But we have the Fed's likely "no hike" on Wed, which is usually bullish, so Friday's low could be it.  The Dow and Russell charts have a head-and-shoulders kinda look to them.  The S&P is running out of room in its long-term channel.  And the Nasdaq Comp is still struggling with the dotcom high.  The upward momentum is waning.  

The end of July is at the end of this trading week, so it's kinda sneaky important.  Meaning, if we close this week down, the Nasdaq Comp will put in an ugly monthly candlestick, the Dow and Russell will lose important "neckline" support and the S&P will close down at the bottom of the range, moving even closer to losing that monthly uptrend line.  However, if the bulls pull another miracle out of their hat and we close back near the highs, it will greatly shift the momentum.  I just don't see why, after all these months of sideways range-bound action, the confidence will come back to hold a breakout.  But it wouldn't be the first time I'm surprised by market action.  We'll see who's got the mojo to make a move this week.  If I trade anything long it will be the NQ.  

Nasdaq Comp monthly.  If the Comp does manage to stabilize above the dotcom highs, it ain't ovah. I would love to see a deeper pullback, but the market not only doesn't stop for me to take a break, it also doesn't ask where I want it to go.  

ES weekly.  We're running out of room in this multi-year channel.  A breakdown on volume would likely be the end for awhile.  That's why it's important for the bulls to make a move this week.  There's times when I have strong directional confidence.  This isn't one of them.  

ES daily.  Clear range.  Note how it's going to run out of room.  Comes soon, the breakdown or breakout, says yoda.  

YM daily.  While not perfect, it does have a head-and-shoulders look to it. 

Russell daily sitting on important support. 

Bonds daily.  It's not all that surprising that bonds have firmed up and found a base along with the dollar.  I do wonder if the selloff in bonds was completely due to the dollar (inflation and carry trade related), or whether there is some degree of rate hike fear even in the long end, which, if so, doesn't make sense to me.  Slowing down a pathetically limp, structurally broken economy by hiking rates should not hurt the long end.  But I also don't own a boatload of bonds, so it doesn't hurt me to believe that.  Personally, I think the bond selloff had much more to do with dollar weakness than rate hike fears.  I guess we will find out shortly if the Fed hikes in Sept.  If bonds selloff, they either know something I don't, or they will be getting it wrong for awhile because the bond bull market isn't going to end in a depression, and that's where we're headed because that's how free markets shake off and heal from the imbalance of excessive debt.  When humanity does foolish things, the laws of nature are there to correct them. 

Market Analysis for Week of 6/15/15

Whether they play out or not remains to be seen, but there's a few things you have to be thinking heading into this week.

1.  The Fed will not raise rates and Yellen will continue to be market friendly in her remarks.   This should be dollar negative, gold positive, equity positive, oil positive, and bonds who knows-ish.

2.  It's option expiration week.  We've seen this movie many times now.  If we get continued equity weakness into Wednesday you have to be looking for a vol crushing bottoming reversal that afternoon, or Thursday morning.  

If the dollar breaks down below the $93 double bottom area it will be interesting to see if it runs into a wall of buyers around the 200-day EMA at 92.41.  A close below there makes this look like a top and opens the door to the high $80s or $90 area.  

If the EUR/USD spikes up and closes above its swing high peak at 1.1530 post Fed, it will look an awful lot like an inverted head-and-shoulders bottom and should lead to a retest of the multi-year breakdown in the lower 1.20s.  If the big sellers are serious they will defend that swing high.  Seems more likely they're waiting for higher, but we'll see.  It's down on Greece news at the moment. 

Here's the monthly EUR/USD triangle breakdown.  If this does roll back over post Fed my plan is to buy the dollar on a break of the downtrend line off the highs.  I'm thinking the dollar is going to selloff though, so I'd like to find a way into long Euros for a few weeks if it allows.  The Greece situation makes this a bit tentative, but if they follow the American script they will wait until the last moment and then concede to make a deal.

I'm interested in getting long gold.  But not until the Fed announcement for a hold longer than a day trade.  There's a trendline that could break tonight or tmrw for a short-term trade, but I'm looking at the trendline that cuts through the $1205 area for a play to somewhere between $1250-$1280.   It has to respond to the Fed in order to work.

Oil is consolidating into a tight range.  Whichever way breaks and closes beyond it should run a bit.  It would be helpful if it waits until Wed.  I would like to trade it long if the dollar is selling off post Fed and oil breaks upward.

The ES, or more likely the NQ, is also interesting to me if they repeat the same vol crushing movie we've seen so many times.  If we get the sharp reversal, it needs to run to new highs and not form another lower high on the chart, though.  I will be highly suspicious of it the whole way.  

Look where bonds stopped.   A breakdown and close below the lower trendline would be a big deal, partly because it just acknowledged its existence.   It will be interesting to see if this fills up the triangle first.  A breakout in either direction is playable.  Just don't let it go against you in case it's a fake-out.

Market Analysis for Week of 5/17/15

My blog ambition is suffering from a lack of incentive,  so I'm not sure how much longer I'll be doing this.  I considered creating a more thorough analysis as a weekly product and charging a small subscription fee, but there's just not going to be enough paying subscribers to justify creating an obligation for myself, and I don't currently have the time to build a business like that, so that means if you enjoy engaging the thoughts on this blog you're just going to have to deal with free, and therefore random and infrequent postings, until I get sick of it altogether, or I attempt to create an incentive for myself through subscriptions.  Just thought I'd explain the big gaps between postings.

The dollar trade is unwinding like I thought it would, but it happened a lot faster than I anticipated, so I'm removing the $92.50 area as a possible bottoming point to give it more room.  Rather than looking for a certain price level, I'm more interested in time.  I'd like to get beyond the June Fed meeting, which likely has zero chance of a rate hike and should continue to pressure the dollar.

I spent months pounding the table about the Fed never raising rates until I had an epiphany, which made me soften my view.  Just because the Fed can't raise rates doesn't mean they won't.  Meaning, the best way to express my view is that it is impossible for the Fed to sustain a full rate hike cycle without coming right back down to zero, but I can't know for sure that they won't raise rates for reasons that aren't economic in nature.  Maybe they finally realized that it's insane to be at zero for 7 years and so as long as the economy isn't imploding they will justify a reason to get off the zero bound.

The other scenario is the one I was originally pounding the table about, which is not only will they not raise rates, but we will be back in QE as their next significant policy move.  I know the economic bears favor this view and some make rather compelling cases that the economy will not see a bounce back this summer like last year and will in fact worsen, which will give the Fed no choice really.  And while I agree that it's inevitable, to say the data will worsen over this summer for sure is not really my wheelhouse, so I would rather get beyond the June meeting and start looking for signs of a bottom in the dollar, which could go as low as $87-$89.  I'll put it like this.  If we get to August and everything is pretty much like it is now, I think Yellen is going to set the tone for hiking rates at Jackson Hole, which is kinda their birth place for horrible ideas.  But if the data worsens significantly over the summer, or the stock market turns down in a meaningful way, then the likelihood of rate hikes happening ever diminishes substantially.  It's just too early to tell, imo.

Therefore, the big question on everyone's mind of whether this is a pullback in the dollar, or a trend reversal, can't be answered with any kind of conviction unless you already have a biased view to begin with.

Here's the dollar monthly.  There may in fact be support at the prior peak of $92.50, but it could easily go further and use one of the other peaks as a support level, so for me it's more about getting beyond the Fed June meeting, which should be dollar negative.  Also note back in the late 90s during the bull run from $80 to $120 there was a pullback from $102 to $88, so consider the emotions and changing sentiment during that pullback.  While no two markets are the same, the point is a pullback of that magnitude doesn't end the trend.  The future of this space is more about what will happen in August and September, not to mention the Eurozone, which is a project I think is destined to fail.

Dollar weekly with Fib retracement points.  The safest way to play it is to forget the bottom and wait for the triangle to fill in and finally break through the trendline off the highs.  Personally, I'm hoping to get better trade location than that.

Check out the weekly EUR/USD chart. If it simply backtests the multi-year breakdown it would retrace all the way back to 1.21 without damaging the overall downtrend.  The next Draghi Day is Wed, June 3rd.  Clearly, the Greece situation could alter things, but this has been a textbook example of what happens when positions and sentiment get extreme.  Everything has to go perfect.  If there's the slightest change, it causes an unwind that perpetuates itself until all the short and medium term players are washed out.  Another area of interest is the downtrend line off the 1.39 highs that runs through 1.17-ish.

It's not a coincidence that oil and gold bottomed roughly the same time as the dollar topped, which is clearly why commodities in general have come off their lows.  The deflation trade was on from last summer till about March.  Now it's getting some relief.  Therefore, I believe oil and gold have potential for some upside since I'm not convinced the dollar has bottomed.  These correlations aren't 1:1 by any means, but you can't ignore them either.  

Oil had a clear topping tail two weeks ago when it found an abundance of sellers in the $63 handle.   But Friday it had the opposite as it found buyers in the mid $59 area at the 20-day EMA.  

I'm thinking oil should make it to at least that down trendline around $64/$65, and if we get dollar weakness through June possibly as high as the $75 breakdown level.  At that point, I'm thinking the deflation trade will resume, but as I said I'm open to the opposite depending on what looks likely to happen with the Fed and the dollar later this summer.   

Gold is sitting just under its 200-day EMA, but the way it recovered on Friday to close there is encouraging for the bulls in the short-term.  There may be a low risk breakout trade above Thursday's $1227 high that should not hesitate or you bail and could run to the downtrend line around $1270.  I'm expecting it to fail there, but it's all tied into the dollar.  That is an inflection point.  A strong weekly close above let's say $1280 would open the door for an extended move up in gold, but it's only likely to happen if the sentiment starts to shift toward prolonged weakness and therefore trend reversal in the dollar as we head not toward rate hikes but more QE.  It's just a matter of getting the order and timing correct.  In my view, futile rate hike first followed by ZIRP and more QE second. 

Silver has more clearly defined spots.  Should this short-term move up in the metals continue, a likely target for silver is the $18.50 high, which would hit the top of this multi-month range.  But check out the space it has if it broke through there.  For the first time in quite awhile there is hope for a prolonged move up in the metals, but it will be dependent on the dollar, imo.  

The biggest surprise for me was the move in bonds.  Clearly, it was kicked off by the Bunds, but I believe it was amplified once the dollar breakdown became obvious.  Meaning, strong dollar = deflation trade = good for bonds, weak dollar = inflation trade = bad for bonds.  This is the continuous contract adjusted for rollover gaps.  Note the poke to new high failure as a warning.  Have I converted anyone into being scared of that yet?   (I think on the front month contract it ran a little higher before losing the breakout).  It's not like it works everytime, but I'm afraid of it for a reason. 

Needless to say I'm not a believer in the end of the 35-year bond bull.  To me that could only happen in one of two ways.  1.  The economy revives to the point of sustained growth that leads to real wage increases for more than just the bosses that leads to real inflation (and not just dollar weakness) caused by increased demand for everything, especially bank loans, and we reach escape velocity and all hail the Fed, QE worked! (I'm trying not to laugh)  or 2.  Everyone figures out the US is going to default.  I believe it will be choice number two, but it won't happen for years.  First, a deflationary depression will happen. 

If you look at the bonds monthly chart, it just got overextended to the upside and had nowhere to go.  German Bunds selling was surely fueled by the Euro bottoming.  If that trade reverses like I'm expecting it to later this summer, then I would think bonds will resume their uptrend, or at least be contained within a range.  I don't want to talk anyone out of their position, though.  Just don't sell em' in the hole.  

In short, I think roughly July-August will be a major inflection point for all the above markets.  Either the deflation trade will resume, or we will be reversing the trend of the last year and returning to an inflation trade in anticipating of more QE by the Fed.  Look how far bonds could fall without losing the uptrend.  If you want to talk end of 35-year bull market, it needs to first breakdown in a meaningful way for sustainable reasons.

 Stocks are in a world of their own.  Clearly, in the long run a super strong dollar is bad for overseas earnings and therefore the stock market.  But stocks don't care about reality until its too late.  If we go down the road of more QE without ever getting to rate hikes, the sky is the limit for stocks.  

In the short-term, I'm thinking the Nasdaq is going to at least pierce the dotcom high above 5131 on the Comp.  I'm worried about that spot, though.  First we have to get there, but it seems like the perfect place for big sellers to linger.  A strong reversal there could be a technical event that leads to a decent 5-10% pullback.  However, if the sellers aren't there and we stabilize above the dotcom high, we could go hundreds of points higher.  We just have to wait and see.  It is worth noting the Russell has been lagging and they've led the market on many occasions.  Clearly, market internals have been weakening.  And the buyers have been very short-term orientated for months now, selling into strength and not holding breakouts, so I don't see why they would suddenly have the confidence to buy with abandon to sustain the dotcom high, but stranger things have happened I guess.  You have to be open-minded.  

In the short-term I'd like to see some selling early in the week down to the 20-day EMAs and then make a run at that dotcom high.  Then we see if there's sellers or not.  Could be quite the short if they are.  

NQ daily.  The 20-day is 4440.  Until the up trendline is lost on a closing basis the bulls still control this market.  

The ES range continues but the higher lows will run out of room soon, so there will be a resolution in the coming weeks.  We're either gonna make a legit breakout and another run higher, or the buyers simply won't have the conviction and a big move lower will take us to the bottom of the channel likely led by the Russell and possibly timed with a dotcom high reversal.  We can only hope it's that clear and easy.  It never is.  

That's what I'm thinking at the moment.  Till next time.  Not sure when that will be.  Best of luck to you.

Market Analysis for Week of 4/20/15

The most important day for the dollar is Wednesday, April 29th.  It's GDP and Fed day.  It seems like GDP is going to disappoint and the Fed isn't going to raise rates without a press conference, so I'm thinking the dollar gets crushed and continues the correction to the lower $90s.

Dollar daily is currently holding the 50-day.

Dollar weekly has trendline support around the $95 level.

Dollar monthly has horizontal support at $92.50.  This is the level I'm hoping it gets to.  But it might take a June Fed meeting with no rate increase and a couple average job numbers to get there.  Ultimately, I'm still thinking the dollar goes way higher, more from anti-Euro sentiment than pro dollar sentiment.  If the Fed does attempt to raise rates in Sept it will only help.  In the meantime, a band-aid for Greece, a poor GDP print, and no rate increases from the Fed should continue to pressure the dollar as a natural unwind of extreme positions happens.

Gold and silver are a mess.  I have no idea.  You would think as long as the dollar is correcting lower, the metals would sustain a bid.  I'm not interested personally.

Oil too should benefit from a dollar correction.  The 200-day is currently at $69, which is also the approx area of a 38% Fib retracement of the big down move.

 Oil weekly had classic RSI divergence, which I didn't notice.  I regret not going long, but when it didn't hold new lows that was a warning sign to at least stop the short side.

 One more oil consideration.  Take a look at this China growth chart that shows it peaked in 2007, roughly correlated with the $147 top in oil, which was also the top of the Fed induced housing bubble.  We know China has created the biggest debt bubble in history, so most of that growth is unnatural and unsustainable.  Since the oil bottom in 2009, much of the rally has been fueled by Fed QE and the hopes of it fixing the economy as oil traded in an $75-$115 range.  But what if the natural demand for oil when you strip away all the debt based QE and China fuel is actually in the $40-$75 range?  Meaning, what if everything over $75 is based on the false optimism of QE working and false demand of deficit spending from both the US and China?  I'm no oil expert.  It's just something to consider.  Everyone seems to think below $75 is the aberration.  What if it's the other way around?    

Usually when you see stocks selloff like they did on Friday, it's the first of two or three waves that tend to stair step downward.  There is a trendline at 2057, but I'm leaning toward this going to the bottom of the range at 2037 where I'm looking to be a buyer.  Monday, April 27th is Apple earnings and since Apple is the entirety of the stock market, as long as they come in decent, I'm expecting stocks to bottom and make another move toward the top of the range and likely attempting the breakout. 

If you look at the consolidation in January there were three peaks before it broke out.  We just put in our third peak, so maybe the next time will be the charm.  I'm thinking there could be another range expansion on the backs of short covering and then another rollover.  Without QE there just isn't the conviction of the large players to absorb the amount of contracts they need to sustain new highs.  So what they're doing is buying the bottom of the range, selling the top, getting others short, and then they break it out and expand the range as they unload their longs to the shorts forced to cover.  Then there's not enough new buyers so it rolls back over.  I would expect this process to continue until there is some kind of catalyst one way or the other.  The bulls haven't lost control of this market for one second.  It just seems that way at times.  

The ideal scenario is the start of a breakdown below 2037 that runs into a black hole of buying that closes near the highs.  Every move from bottom to top and top to bottom of these ranges have seen pretty violent intraday swings, and if it works again, this time won't be any different with GDP and the Fed upcoming, so it's not exactly the easiest trade to sit through.  But if you want to be long you have to buy when it's hard at the bottom of the range.  Use smaller size to start.  This way if the range breaks down you take a small loss and can fire another bullet at the monthly trendline closer to 1940.  I'm thinking Apple, GDP, and the Fed will all be bullish catalysts though.  The other thing these long sideways ranges do is create room to the upper channel line. 

    

  

Market Analysis for Week of 3/23/15

"Back in 2009 if I went to the gym, I could bench press about 180 pounds, naturally.  And if I worked out every day for the last six years, I could probably bench press over 300 lbs by now.  But instead I took steroids, so now I'm in beast mode and I can bench press over 600 lbs!"  -said This Guy.

His name is 'Merica.  And the steroids he took are called ZIRP and QE.  So, how can you measure his real strength when all the data points are distorted by the steroids?

Here's what he looks like off the 'roids:

To be fair, his name could also be Japan, China, Europe, or any other nation with a central bank.  The sad part is he has cancer, but it's being masked by the steroids, so the doctors are misdiagnosing him with the common cold, and telling him the 'roids are making him stronger.  Unfortunately, if he stops the steroids his muscles will deflate and he'll have to deal a very painful situation that will take a decade to heal.  The good news is the human spirit is irrepressible and in the long run he will innovate a way to beat the cancer as his immune system naturally clears the excessive steroids to return him to health.  But what a painful journey it will be.

Here's a chart of the Fed Funds Rate dating back to 1955.  Take a look at the uptrend from 1955 to 1980 and then the downtrend from 1980 until the present and think about the overall economy that characterized each era.  You have the post WW2 baby boom from the beginning of the chart that not only unfolded in a mass simultaneous spending wave from the population expansion (i.e. buying houses, expansion of roads, cities, buildings...), but there was also an overall period of technological innovation that led to organic economic growth as loans from the bank were in high demand and issued hand over fist.  Not to mention Nixon's fateful mistake in 1971 when he unlinked the dollar to the restraint of gold and unleashed a tsunami of deficit spending that culminated in the 1980 need of Volker to slow down the runaway credit expansion train.

From that moment on, every time interest rates have gone up, they were forced to lower them again until finally reaching the zero bound in 2009, and then Bernanke's foolish attempt to get beyond the zero bound through QE.  What's really happening in this chart is an attempt to keep the baby boomer debt expansion and simultaneous spending wave going by making debt cheaper and cheaper when underneath the surface there is actually an extinguishing of debt as the new demand from the following generations is not sufficient to continually expand the credit in a natural way.  

Note the dramatic lowering of rates after the dotcom bubble burst to reflate.  And then the rate hike cycle from 2004-2006 as they attempted to slow down the housing bubble they were creating.

And now we're stuck at zero because the transmission mechanism of the Fed's futile attempt to expand the money supply to reflate their burst bubbles is all being funneled into financial products and not the real world, creating a third bubble.  I wonder what would have happened if Glass Steagall still existed?   What if the Fed bought bonds from banks who were restricted from using the free cash to speculate in the markets?  Would they have recklessly lent the money in the real world as they sought a yield by issuing loans to everyone who walked in the front door with a pulse and actually achieved inflation?  That also would have failed as the false wave of credit was unsupported by natural demand, but it's an interesting alternative world scenario that would lead to the same outcome: the deflation of a falsely created bubble that ends in depression.

The Fed will never create the kind of inflation they are trying to achieve because it's all going into the stock market.  There's your inflation.  Stock prices are up nearly 300% in six years.  If prices in the real world increased at that rate, the Fed would be forced to raise rates in attempt to slow down the overheating economy.  But since the entirety of the Fed's plan is some kind of magical "wealth effect" that occurs when you make rich people richer, they have no incentive to prick the bubble on their own.  I've heard a lot of comparisons to the Fed not wanting to raise rates too soon like 1937, but that's rooted in a misunderstanding of where we are in the process.  It's more like 1928.  The real correction of the excessive debt hasn't occurred yet.

To navigate the current market environment requires a proper diagnosis of three things: the real economy, the futility of the Fed, and the psychology of the market participants.  To understand the real economy you need to understand the unsolvable structural problems rooted in the demographic trends and globalization.  To understand the Fed you need to realize the difference between debt that is based in natural demand by the free market and debt that is forced into the market through central planning trying to compensate for the lack of the former.  To understand the psychology, you need to understand the bias of Wall Street for a bull market, how the broken transmission mechanism of the Fed's credit channel is funneling all the cheap debt into financial products, and how it is impossible to have sustained selling without the sustained fear of a real world crisis.

All of this is creating the greatest bull market in history with no economic legs to stand on.  Is anyone going to seriously make the case that the economy is overheating to such a degree that for the first time in 9 years the Fed needs to raise rates to slow it down?  And for the first time in 35 years, we are about to embark on a sustained rate hike cycle that will finally end the downtrend of interest rates?

The only reason the Fed wants to raise rates is because they're backed in a corner and want to be able to reload the gun in the near future.  The last six years has proven that the Fed is incapable of creating inflation in the real world.  They are inflation impotent and there isn't any Viagra to help them get it up.  The deflationary wave they are fighting is too large.  Even if they go back to QE there are not enough bonds to purchase.  The government would have to return to multi-trillion dollar deficit spending.  And it won't work anyway.  We just tried that.  The experiment is over and it failed.

There's two things that are most important to get right over the coming years: the future path of the dollar; and the likely path of the Fed.  No one can know for certain if the Fed will be able to accomplish a pointless 25 or 50 bps rate hike.  That doesn't matter.  What does matter is understanding that it's impossible for them to normalize interest rates without bursting their own bubble.  So the Fed is on a leash when it comes to rates.  That is important for bonds.  

The dollar recently played out how I thought it would, although the flash crash was a surprise.  I can't remember the last time a market got so crowded to one side in anticipation of something that wasn't likely to happen.  The kind of volatility we've seen the last two weeks is typical of what happens when a lot of the big players are exiting and letting the trend followers push it back up only to sell into them again.  This is why I often say strong trends don't just stop and reverse on a dime.  There's an unloading period.  Note the distribution volume.  I'm thinking this is the start of a larger correction that will take us to the uptrendline around $93/$94.  I would think any bad data releases will be met with dollar selling because it pushes out the Fed.  Despite what Yellen says, there is zero chance the Fed raises rates for the first time in nine years at a meeting without a press conference, so that means the date for the possibility of their next mistake is June 17th.

There are three main reasons the dollar will likely bottom and go much higher:

1.  The Fed is incapable of creating inflation in the real world.  Ask Japan how that's working out.
2.  The Euro is based on a flawed union that is destined to fail.
3.  The dollar is the most widely used currency in international transactions.
Bonus reason: In the 2008 financial crisis the dollar was a flight to safety.  

Dollar daily.  I'm thinking we pullback and consolidate for weeks.  The point where I'd have to reconsider my view of the future would be if the dollar ever loses $90, which seems highly unlikely.

Euro weekly. I'm thinking the Euro could make it to 1.15/1.16 before rolling back over.  This would all be perfectly normal.  The Euro seems destined for all-time lows.

Clearly, commodities are responding to the dollar.  I would think gold and silver should maintain a bounce as long as the dollar keeps pulling back.  I'm staying small in my counter trend trades, which are dangerous.  I'm more interested in the resumption of the overall major trends, so that would be shorting gold from higher prices and getting long the dollar again from lower prices.  

COMP monthly.  There's no way we've come all this way and we're gonna stop short of the all-time high.  I'd be highly attentive to how it acts upon the pierce of it.  There's a good chance you'll see big money selling there and a pullback similar to what we just had.  So the breakout is guilty until proven innocent.  I do believe, however, IF we pullback from there, it will be contained and once price establishes itself back above the all-time highs, we will go much, much higher.  Like hundreds of points higher.  Why?  Because selling can't be sustained in this environment until there's a crisis and the Fed is in no hurry to create one.  Clearly, the degree of selling off the all-time high pierce, if there is any, would influence my opinion.  But I suspect it will be contained.  

NQ daily.  We might consolidate to build up energy for the run to new highs, but stocks will likely break upward sometime over the next two weeks.  

ES daily.  Same thing.  The upper channel hasn't broken in 3 years.  I'm looking to lighten longs at new highs and hopefully reload from slightly lower prices, which may be timed with the COMP pierce.  There's more room on the SPX cash, so it's just a matter of how we approach the new highs and what the price action is when we get there.  Maybe it happens on NFP day in two weeks.  The market seems more like it's in "two steps forward one step back" mode now that QE is over.  

Bonds daily.  There's no reason why bonds will have any significant selling ever again.  Not until the US defaults one day, but that's years away.  (By significant I mean the second half of 2013 selling, not the recent pullback, which, while severe, was normal.  The end of the 30-year uptrend in bonds is not likely to happen.  Deflation is the problem.)

TLT daily.  Just showing this to see how far bonds have to go to get to the recent high before the pullback.

Oil.  I could not be less interested in this.  It was a nice short to new lows. But whenever a market makes new lows or highs and can't hold it, red flags go up.  Mostly because that's often how big pullbacks happen and it's never possible to know the extent of the pullback with certainty, so I always err on the side of caution.

I have no idea how much oil will respond to a potential multi-week dollar pullback since oil has fundamental reasons to go lower, which is why I'm not interested at the moment.  Too many conflicting forces for me.  I still think we haven't seen the lows in oil, but until I feel like the dollar has bottomed, I'm fine with missing out if oil keeps going down without me.  I'm hoping oil retraces higher and offers a better shorting opportunity that is timed with the dollar bottom.

 

Market Analysis for Week of 3/9/15

The dollar go boom.  I'm still thinking it reaches the mid $99 handle.  If the price action allows it, there might even be an opportunity to get short for a sizable pullback just below that $100 level.  Because it's counter trend I would need a high to get put in and a retest that fails.  Then you can use that high for a small risk with potential big reward.  In the bigger picture I do believe for multiple reasons that the upside in the dollar is going to surprise a lot of people.  But a lot of that is going to come from a flight to safety rather than a sustained rate hike cycle, which is impossible.

I'm thinking the Euro bottoms when the dollar approaches $100 and the pullback will last a couple months.  It's likely the Fed removes the word "patience" at the meeting in 10 days because the "strong" jobs number is forcing their hand, but since the economy is actually very weak under the headlines, Yellen will downplay any rate hike and may even take June off the table.  So what we could see is continued dollar strength into and through the announcement,  but the possibility of a reversal during her press conference.  Take this with a grain of salt.  I'm just trying to envision a scenario that causes the dollar to temporarily top out.  This is one way.  I think it's important to anticipate things before they happen, but you have to be willing to let it go if it doesn't happen or if price doesn't confirm it.  The best trades are when you envision a scenario ahead of time, and then it happens, and price acts exactly how you expect it to.  Those are trades that give you opportunity to push open profits.

Gold is going way lower.  I thought we might see a bigger bounce from the $1200 area, but it never happened.  If the dollar does pullback from $100 for awhile, I could see gold putting in a double bottom at $1130 for a sizable bounce, but I wouldn't trade the long side of gold without a small defined risk.  It certainly doesn't have to bounce just because the dollar pulls back.  It could easily blast through $1130 into the 1000 handle.  A test of the downtrend line could offer a small risk entry around $1180.

Gold weekly.

Gold daily.

I'm leaning toward stocks selling 5% or so till the Fed meeting.  Maybe NQ 4220/30 area.  Fed week is options expiration, so if we get back into last year's rhythm, how about the idea that we bottom out after the Fed (or that Thursday) and have a vol crushing rally into Friday and then into the Spring to pierce Nasdaq Comp all-time highs?  

The ES has the 50-day EMA at 2064, so a close through there would open the door all the way to the 200-day and trendline around the 2000 area.  If things accelerate and go through there, I'd expect a stop run under all those lows and a reversal.  I don't think we've seen the highs in stocks yet.  But it'd definitely a time to err on the side of caution.    

Oil looks like it's starting to roll back over.  It's holding beneath the 50-day like the dollar held above its 20-day, which means large sellers are defending it.  So it's going to take some kind of massive change in sentiment to get through there.  I don't see it happening.  

While I figured bonds could pullback this much, I'm surprised they actually did.  I think it's approaching overdone, but I'll wait until after the Fed to see how they react.  Bigger picture, I don't think downside prices in bonds are sustainable.  First, even if the Fed makes it to the point where they can pull off a token 25 or 50 basis point rate hike to take a little heat off of them, there's just no way the economy can handle a full-on rate hike cycle back to historical normal levels.  I don't even think they can make it to 1% before they have to retreat back to zero and they're going to be in no hurry about hiking.  Bonds don't have to worry about interest rate risk.  

I expect a massive flight to safety bid in bonds and the dollar when the stock market has even the normal and inevitable 20% correction, let alone the collapse of the current financial system that we're heading for.  I used to think the Japan default would be the cause, but I'm warming up to the idea that it will come from a China implosion. Either way, the US is not an island of strength in a sea of economic woes.  We're in big trouble, just less than the rest.  When they go down, we go with them.  And tons of money will flow into the dollar and US bonds.  To think the economy can handle a full-on rate cycle increase is kinda silly.  There's a reason why interest rates have trended down for the last 30 years.  There's no economic Renaissance.  There's a multi-decade asset bubble suppressing reality. If the economy was actually strong and in need a rate hikes then bonds would be in trouble.  But it's not.  

Here's the chart for notes because the bond chart is all screwed up from the rollover gap. 

In short, this "strong" jobs number is scaring everything into thinking the Fed will hike sooner, and while they definitely want to change forward guidance to give them more freedom, I'm thinking she pushes out expectations in the press conference and that could be a turning point into Spring.  We will see.