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.