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Wednesday, 22 September 2010

Waiting for USD Confirmation

I'm still not 100% sold on the bullish scenario here. It is looking very good, and has to be the primary scenario until proven otherwise at this stage, but looking around at the already bombed out economy and at our fearless leaders dropping ever more fiscal bombs on it from their helicopters it is hard to feel very optimistic about the future of anything at this stage other than precious metals.

If current political and financial leaders in the US in the US have a creed to operate by it is that 'if it isn't working, try doing more of the same'. They've been saying the same in Japan for twenty years without doing anything other than making default in the next few years seem a likely prospect, and I can imagine that lemmings, if they could talk, might be saying the same as they widened and deepened their cliff-diving strategy.

Equally I hear a lot that Bernanke and Obama must know what they're doing, and will therefore be proved right in the end, because there's no way that they could possibly drive the US economy off a longer term cliff in the way that they appear to be doing. I've read a lot of history and economic history though, and that's unfortunately simply untrue, as few things are as well demonstrated historically as politicians' penchant for doing exactly the wrong thing from a confused mishmash of good intentions, ignorance, and short-term expedience, and of the tendency of large numbers of eminent economists to recommend exactly the wrong action in a crisis situation. As Ronald Reagan said, the scariest words in the world are 'I'm from the government, and I'm here to help'.

Fortunately, for the next few months at least, independent confirmation is available. The SPX IHS has broken up, and that has made the main bull case for equities here, but for confirmation we have the big H&S pattern on USD, and when we see a close below the neckline at 80, I'll be taking that as the green light that we are very likely indeed to see 1250 SPX in the next few months.

I had thought we would see a test of 80 on USD in the SPX 1170 area, but I reckoned without the almost magical power of Bernanke to wither the US currency, and after his strong commitment to inflationary policies yesterday USD has plunged to the 80 neckline. We will see if it holds, but if we see a close below it then I'm going to write off the bear case until we reach 1250 SPX at least:

On EURUSD we see the IHS target at 1.325 made after Bernanke spoke yesterday and then the August high at 1.333 broken overnight. I'm seeing a likely trendline target just under 1.34. I've marked it as slightly over 1.34 on the chart, but it looks as though EURUSD may make it to target before the markets open today, which is faster than I was expecting:

GBPUSD has been underperforming EURUSD recently, and the IHS and channel target at 1.586 target looks like a stretch from here. I'm not expecting to see that made before the next pullback. Note however the series of channels that GBPUSD has evolved through as it has reversed in a rounded bottom. A very big pullback looks doubtful here:

30 year treasuries made the second low of a double bottom yesterday and bounced powerfully. If equities are going to rise strongly over the next few months then this rally looks doomed, but we could see a strong retracement and I've marked the most likely retracement targets if they can get over 133:

USD may have crumbled since Bernanke spoke, but we saw no big move up on SPX, which has continued to respect recent overhead resistance. USD is likely to bounce here I think, and if so, then the chances are that SPX will be retracing for the rest of the week. SPX also has a strong recent support trendline that I've marked the chart and if SPX can break back below the IHS neckline at 1130 then we are likely to see a retracement to at least the gap support at 1115 SPX. A break below the IHS neckline would weaken the case that the IHS will play out somewhat and we may well not see it as 1130 SPX should now be strong support:

One interesting pattern I was looking at yesterday was a possible bearish gartley pattern on SPX with the next upswing target in the 1175 SPX area. I was thinking that a move there, and with resistance from the May high at 1173 in the same area, might coincide with USD hitting 80, but clearly that won't now happen. Interesting chart though and thanks to Keirsten for posting it at TTW:

If we are going to see an equities retracement from anywhere near here, then retracement here and now looks most likely, and there is some support from copper for that view. Copper has been struggling to break resistance at 352.2 convincingly for most of September, and looks ripe for some retracement here:

I don't see much hope for the bears here on balance, but if we are going to see a turn then the bears' best chance for a serious reversal is with the USD at 80, and we have that today. We are likely to see at least a short period of SPX weakness here and that could develop into a deeper reversal. Once USD closes a day below 80 though, then in my view at least, the bear case will look dead for the time being, and it will be too dangerous to short this market for anything but short term counter-trend reversals.

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