Mid-week summary

BOTTOM LINE: The market continues to rally on weakening internals (volume, breadth); the US dollar is building a medium-term base.

I believe that right now, the cleanest and clearest counts are in FX, with the US dollar having built a solid "leading" diagonal from its lows immediately after the Fed announcement last Wednesday. If this count is correct, then the US dollar is currently completing its correction lower, which took form of an irregular, and should begin rallying past this week's highs.

On an hourly chart of the EUR/USD below, a short-term correction could be complete.

In Equities, while confidence is very high that a medium-term top is being built, short-term structures remain ambiguous. In Asia, with high probability, tops are in. In US, some sectors, like Retail, Finance, Homebuilders and Oil have topped as well. In fact, the broader indices in the US still have great impulsive structures down from last week. If a fall were to happen from current levels, that would not be surprising. In Europe, the picture is mixed. A number of sectors, notably Banks, suggest that the top is very close. At the same time, it could only be a top of a smaller third wave, pending a decline of about 2-3%, followed by a ~5% advance into 5800-5850 level on the DAX.

On the daily chart of the DAX below, both counts suggest more upside. Minimal conditions for the blue count have been met, and the fifth wave could end here, truncated.

Prospects are still weak.

I apologise for disappearing for one week - this was due to a fabulous holiday in Greece.

BOTTOM LINE: Risk will likely consolidate between the highs and lows of next week for a few days. There is still a 50% chance of a run at the highs across most major stock averages, particularly in the EU.

As expected (see Friday 18 September post below), the move up from September lows finished after the Fed announcement last Wednesday. That whole move was likely the penultimate move higher. The decline after the Fed announcement is impulsive in case of US indices. It is not really as clean in case of EU indices. Therefore, it is likely that the post-Fed decline is part of an ongoing correction which will provide a base for a move to around 5800-5850 on the DAX and 1100 on the SP500.

I give the above scenario a 50% chance of occuring, and will tweak the target levels as the structure unfolds. If equities were to start moving lower from current levels, without a new high, I would not be surprised. However, in this case, I could only describe the way the top was established as "strange".

Elsewhere, USD is bottoming against everything.

Weak prospects

BOTTOM LINE: Risk is close to completing the move higher that started in the beginning of September. USD likely bottomed, give or take another 1%.

I am not very clear how the very last leg higher in Risk and related assets (from 3 September 2009) is related to the prior move up from July lows (in thick blue). In any case, this last leg is close to its end. I expect it to end anywhere from here to around 2% above current levels (DAX 5720).

In FX, get ready for a fairly big and meaningful appreciation of the US dollar, about 10% against majors, and 20% against EMFX, as shown below on a daily chart of USD/BRL (Brazilian Real):

USD bottoming in the long-, medium- and short-term.

BOTTOM LINE: The US dollar is bottoming at these levels. My conviction in this call is very high, as high as conviction in the beginning of March 2009 that equities were at their lows.

Below is a daily chart of the US dollar against the Brazilian real. The real is likely to weaken substantially in the coming weeks, as the dollar strengthens across the board.

At this stage, my medium-term bearish outlook on equities is somewhat contingent on the dollar. While FX patterns are fairly clear, and point to imminent reversals in favour of the dollar, equity patterns do not yet look complete.

USD near to medium-term

BOTTOM LINE: The US dollar is at or very near a medium-term top. Yesterday, I started buying March 2010 SP500 puts. This now seems premature, but I continue to believe that stocks are close to putting in major highs.


Below is an hourly chart of EUR/USD, which is completing its move off the 2 September lows:

Almost there

BOTTOM LINE: Asset markets (Equities, Gold, EMFX) are living on a prayer. Chances are high that the top is very close (this week/early next week).

European stock market indices, illustrated here with an hourly chart of the French CAC40 are in the process of fnishing their fifth (and last) waves higher. At this stage, this process could end and reverse anytime.


This is a daily chart of General Electric, currently the sixth largest company in the US by market capitalization. The stock is also in the final stages of its fifth wave higher, which will complete a much larger corrective pattern higher, and set the stage for a substantial decline.

In FX, we have a bottoming USD. Below is a daily chart of the Brazilian Real against the US dollar. The chart looks quite USD-bullish.

Against the EURO, the USD is also in its final stages of weakness, shown below on an hourly chart of EUR/USD.

The top in risk might be in. Again.

BOTTOM LINE: Various asset classes followed the projected paths, and may have topped this morning. I also begin coverage of ECX Carbon Futures - the price of carbon monoxide emissions as traded on the European Carbon Exchange. While not the most liquid of instruments, I find that it is beautifully technical and is likely to shed light on what might be happening in other asset markets.

Below is an hourly chart of the DAX, with counts and projections not updated since Thursday last week. As can be seen the market followed projections, and as of right now fell in an impulsive way on short-term charts. Following a retracement, this market is a sell against the highs of last Friday.

Below is a chart of the Australian against the US dollar. The count and projections have not been updated since Wednesday last week. The market, so far, is following an orderly path, and the USD will likely continue to strengthen.

This is an hourly chart of the USD against the Polish Zloty. Along with other Emerging Market currencies, the Zloty has likely topped against the dollar.

This is a chart of ECX Carbon Futures. This market is very weak, and is likely to head towards the lows established at the end of last year. Carbon prices, generally, reflect levels of industrial production.

What is going on, what is happening?

BOTTOM LINE: All asset classes are moving along the expected lines. Medium-term tops are close. 1-1.5% moves lower are expected today, after which I expect final exhaustive moves to the upside.

Below is an hourly chart of the DAX, which is very, very heavy. I could make a strong case for that the structure from the September low is finished, and we have topped for a while. However, I equally cannot rule out an exhaustive move to a marginal new high following a 50-70 point correction. It is the nature of this expected immediate-term run down and the subsequent bounce that will tell us whether we topped or not.

Below is an hourly chart of General Electric, currently the fifth largest stock in the SP500. This stock is ripe for a mighty move down, which is likely to start very soon.

Elsewhere, a number of FX crosses are signalling an imminent reversal for risk - USD/Central and Eastern Europe may have bottomed. EUR/Commodity currencies may have bottomed also.

USD update

BOTTOM LINE: US dollar in its final stages of bottoming.

Internally, the structures against the USD are maturing. On the hourly chart of the AUD/USD below, third wave is probably complete. We are now due a 1-1.5% relief rally in the USD, followed by one final push to the upside (likely into the end of the week).

No change

BOTTOM LINE: Fourth waves developing in most asset classes. Further "pokes" to the upside are likely into the end of the week.

There is very little change to my view from end of last week and yesterday. Ideally, we have two more "pokes" to the upside left.

On a fundamental note, the Federal Reserve Board released the change in Total Consumer Credit Outstanding as of the end of July. Total Consumer Credit fell at a record 4.2% annual pace in July, with negative revisions for June and May. From the chart below, it can be noted that Total Consumer Credit often leads the change in CPI. The message is fairly clear - we are on our way to deflation city.

Patience

BOTTOM LINE: "Risky" FX crosses, such as EUR/AUD suggest a final "poke" to the upside, for risk, this week.

Well, it appears that we have a bit longer to wait until risk starts to sell-off. I suppose by that time "recession is over" will be all we hear.

I will start with the USD, which is breaking down through widely watched levels. The internal structure of the Australian against the American dollar looks fairly clear, and calls for a few, relatively short "strikes" to the upside, which I expect to finish around 0.87 by the end of the week.
Another clear structure has unfolded in the EURO against the Australian dollar. I expect one more move to the downside, following which a recovery will begin. I expect that recovery to signal a medium- to long-term base, and the see the cross 10-15% higher in a short while. As I expect EUR/USD to trade down, this implies a collapse in AUD/USD, which would likely coincide with a fall in equities.

On the last point of correlation between fortunes of the AUD and equities, the following is a chart of the AUD against the EUR, in red and Nasdaq100 futures, in black. I don't think there is much hope for either, beyond 2-3% of upside.

And finally, the DAX. Well, it looks like it finished waves 1-3 of its ascending structure. What remains, before a correction of at least 2-3% are waves 4 and 5. I expect wave 4 to form through today and perhaps tomorrow, falling towards 5450 or so. Penetration of last week's lows puts us back onto the bear count.

Equities near the highs

The sell-off did materialise, but it was much smaller than I expected of a fifth wave of the first impulse down. US indices, the Dow and Nasdaq in particular, could be counted as having completed five waves down, as illustrated on the hourly chart of the Dow below.

However, I cannot say that I am very happy with that count. It is not supported by EU indices, which look like corrective "three wave" moves down, and the wave labelled "5", on the Dow, is too short.

Therefore, my position right now is neutral for the short-term. I still expect the market to be substantially weaker in 3 months' time, but if we go on to make a new marginal high, it would fit in well with one of the counts I am following, illustrated below on the daily chart of the EuroSTOXX 50:

Count keeping

Equity markets are likely in fourth wave consolidations. At this stage, targets for the fifth wave, for most equity indices, are located around the lows of mid-August. Following a decline today/tomorrow, I expect a meaningful bounce of about 2-3% that lasts for 2-3 days. It will likely coincide with the employment report.

Elsewhere, the US dollar is bottoming against a wide array of emerging markets currencies, and commodities are topping. In the G7 space, I no longer think that bonds are poised for immediate upside. I would prefer to see them lower first. This might happen on Friday.

Below is an hourly chart of the DAX. I expect a decline of about 120 points soon. Folowing that, I expect a meaningful bounce.

The return of the Bear

Friday 28 August and yesterday, 1 September felt good. Long may this continue.

Risk most likely topped for a while.

Below is an hourly chart of XLF, the financial ETF. We have likely finished the third wave of the very first (of many) impulses down. I believe that mid-August lows (labeled "4" on the chart) will provide several days' of support, and meaningful bounces. For most broader averages, those levels are about 2-2.5% lower.

Bring it on!

Done?

Following a 50% retracement for SP500, DAX and others, sing to the tune of Bon Jovi's song:

Once upon a time
Not so long ago

Bankers used to have a decent job
Markets went on strike,
They’re down on their luck… it’s tough, so tough
Ben works the printer all day
Working for his men, he brings home their pay
For inflation – inflation

He says we’ve got to hold on to one thousand mark
Cause the world goes to hell
If we don’t make it this fall
We’ve got green shoots and that’s a lot
For inflation – we’ll give it a shot

Whooah, were half way there
Whooah, livin on a prayer
Take my CASH and well make it - I swear
Whooah, livin on a prayer

So far, market developments have followed an orderly, technical path. If they are to continue, it will be a long, long time before we see last week's highs. However, even if we do, that would be a further selling opportunity.