We still only have three waves down from the suspected wave (B) top, but we’re still bearish. Last week’s aggressively bearish stance against AUDUSD has been correct so far. But, a break of the .7766 level, without a new low first would mean our top count is off base. Until that happens, though, we’re expecting lower to complete wave (i), which would break the up trendline off the low. Of course, we’ll then have to allow for a bounce in wave (ii) which will likely coincide with tops in GBPUSD and EURUSD, and be a huge opportunity for the bears.
Unlike our other pairs, NZDUSD looks like five down from its recent high. Despite that, the rally has been sharp, and RSI hasn’t confirmed that prices have topped. While our top count may be correct, we’re awaiting additional evidence that the recently broken up trendline is ready to repel prices. Given the expected upside in the euro and pound, it’s conceivable that prices test or slightly exceed our top before succumbing to the larger downtrend.
We don’t have much to add to recent comments on USDCAD, except that the “Huge Support” has failed to buoy prices, and it’s now “Huge Resistance” for a wave B top and turn lower. Still, we’ll have to see the decline find its footing first, and that’s been elusive. RSI still hasn’t provided in the way of a divergence, and it’s still reading “Sustainable Bear” (lower grey zone). So, a bounce is due, and the decline of the past few days looks like an ending diagonal, which means the bounce is likely to be sharp.
New money that is borrowed to repay other borrowers is a definition of Ponzi finance. Every country on earth is currently performing its own version of this, but Japan is much further along than any other developed country. Despite its near 0% rates for 20 years, Japan still spends roughly 25% of its budget on interest payments, and its debt to GDP is off the charts at 240%. For comparison, Harvard professors Reinhart and Rogoff in This Time is Different: Eight Centuries of Financial Folly, their seminal work on debt defaults, suggest that problems eventually arise in the 90-100% debt/GDP area. Japan is well past that, which means there is NO WAY OF AVOIDING AN EVENTUAL DEFAULT. The only key word is “eventual,” as in, we don’t know when.
But, we think Japan will experience an inflationary spiral in Japan as the world goes through a “debt default, no growth” type of recession, rather than a 30s style deflationary depression. Regardless, the larger trend in USDJPY is up, and the only question is when the wave ((2)), or wave II decline, ends and the uptrend resumes.
Now that USDJPY has achieved its Head and Shoulders target off the high, we can again look for a bottom and turn higher. We think the BOJ, despite its “no action” move last week, is committed to further attempting to inflate the yen, as what’s the other strategy? Admit defeat and structurally reform? Anyone familiar with Japanese politics, history and sentiment knows that change is not something welcomed, and won’t happen until forced upon them. As such, we’re looking for prices to bottom in wave (v) over the course of the next week or so, and we’ll await a daily reversal candle and follow through day prior to turning bullish again.
Happy Trading!
The Wolf
I don’t have a specific source for my little rant. But, I believe it’s common knowledge that the SNB made a mess of their EUR peg - as all pegs eventually are.
Central banks are an affront to free markets, and I believe them to be an awful idea. But, if one wants to make the case that central banks are necessary (wire clearing agent, bank regulator, lender of last resort) then I would say, at least keep them as small as possible, and don’t allow them to make many decisions. Just let them hold precious metals as currency reserves and be done with it.
If the Swiss central bank, or Sovereign Wealth Funds, or any other government entity has “extra funds” they should be returned to the taxpayers so each may choose their own preference, not “invested” on their behalf by an entity who benefits directly regardless of what happens to those investments (i.e. salaries of SWF managers, analysts and the like).
A great source on all things central banking is my friend Axel Merk of Merk Investments.
The Wolf was fortunate enough to spend a few days last week at the headquarters of Goldman, Sachs. I say fortunate because it’s always nice to interact with smart, thoughtful people, even if you happen to disagree about the outcomes with the vast majority of these rocket scientists.
Essentially the firm opinion is that a US recession is highly unlikely to happen within the next 12 months, and that conditions are favorable for risk assets. To support this thesis, Goldman trotted out everything from discounted cash flow models to variations of the “Fed model,” which is essentially the opinion that low interest rates allow for high current valuations.
It’s a bit intimidating to taking the other side of this bet considering the brain power on the other side. However, The Wolf has come away from these interactions more confident of the ultimate outcome, if not the exact timing, of the next major recession (depression?) and bear market will begin in risk assets. Here’s the reason:
Every model Goldman (and every other bull) presents is ultimately informed by history; and, as such, it has an underlying assumption. That assumption is, “the future will look like the past;” or, another way of saying it is that the bulls use “equilibrium models.” In an equilibrium model one assumes that a lower Fed Funds rate will lead to higher economic growth, and higher stock prices. In a sense this is true because a stream of cash flows is valued higher at a 2% discount rate compared to a 5% one. But, what if conditions are so bad that 0% rates (or negative rates) are implemented?
Japan is the poster child for the failure of equilibrium models. 0% rates didn’t work there, because, at some unknown point, it crossed over from a country of equilibrium to disequilibrium. The crossover point isn’t known exactly, but essentially it is the point where debt service crowds out and consumes capital rather than grows it.
The Elliott wave model is a disequilibrium model. It says, once a trend is fully formed (five waves up), it will correct. The larger the trend, the larger the correction. The larger the trend lasts, the closer you are to the ultimate correction. Equilibrium models tend to extrapolate the past, and since the US has had a great past, they assume the future will be equally as bright. But, inherent in the US today is a “survivor bias.” In the past 50 years a number of one-time events occurred, which are unlikely to exist in the next 50 (WWII destroying economic capacity in Europe, debt buildup to 110% of GDP, USD hegemony, etc.).
The point is, if one assumes an optimistic future, one should use equilibrium models. But, equilibrium models (like the Fed model) fail miserably once a country crosses over to a disequilibrium world. The Wolf would argue that almost eight years of 0% is evidence that this threshold has been crossed, to the utter astonishment, and ridicule, of anyone still living in an equilibrium assumed world (Goldman, Bernanke, Obama, the establishment, etc.).
OK, rant over, now onto the Elliott wave charts.
Prices reversed Monday from the internal trendline and followed through to the downside. We only have three waves down so far, and we did register a small Sustainable Bull reading on RSI, so the bears aren’t in complete control, but we’re bearish against 1.1530 looking for five down and a trendline break.
Here too, there was a significant reversal last week, from resistance. We are bearish here too, especially considering that on a weekly bar chart we had a bearish engulfing candle and a key reversal (a new high for the week, with a lower close). We’re looking for a wash-out new low here, and in EURUSD on the back of “bad news out of Europe,” although we suppose it could be on USD positive news (Fed rate hike?). Frankly, it doesn’t matter, we’re bearish, and that’ll only change on a push past last week’s high, although prices should remain well below that.
Indeed the tide has turned per our bearish assumption. Last week’s spike and reversal leaves us looking much lower. We can drop our critical resistance to the .7691 level, but there’s little reason for prices to push above the sharp down trendline. In fact, any touch of the line would have us looking to get even more aggressively bearish. Use any bounce to join the down trend. Prices should find some support near the previous peaks around .7400, but the RSI profile continues to point lower.
We have less confidence of a lower NZDUSD, but that’s not what the count suggests. No Sustainable Bull readings, a loss of the 50 RSI level and a double top in wave (ii) means any bounce should make a bearish turn.
The grinding into a low is complete, and the wave B bounce is now underway. The plethora of Sustainable Bear readings (lower grey RSI zone) suggest that the bounce is corrective though. We’re likely looking at a zigzag up towards the 1.3000 area. Notice that prices are now back above the red “Huge Support” area. Better late than never, I guess.
Prices traced out the pattern we thought: one more new low followed by a reversal. We think the larger downtrend is complete, but it’s too early to be certain. A period of backing and filling, and even a marginal new low isn’t out of the question. We’re going to need to see five up, a break of the red down trendline and then a corrective decline prior to getting ready for 150.00. Part of that reason is that USDJPY has been highly correlated with risk assets. In order to see 150.00 on USDJPY, we either need a break-down of that correlation or we need to prepare for an orgy of action to the upside in risk assets. What we’d like to see is strength in USDJPY start to correlate with USDTRY (and other EM pairs) rather than with the S&P 500.
Happy Trading!
The Wolf
Friday’s break left a three wave rally in place, which we’ve labelled wave (ii). We may get an early week rally attempt, but we think the euro has turned lower. That’s not to say it’s going to be a straight shot lower, in fact, after reaching parity, it seems likely that EURUSD will be back at current levels late this year, according to our top count. In other words, this next decline towards parity should complete the larger degree decline and lead to a return towards the 1.2000 level.
Nearer term, RSI has dropped below 50, and while we will likely see some support from the up trendline around 1.1200, any support should be temporary. We’re bearish against the wave (ii) high, although prices should likely remain well below that level.
Would Brexit be GBP bullish since it would sever the link with the debt troubled Club Med countries (Spain, Italy, Greece, Portugal), or would it be GBP bearish since it would leave the BOE more free to print pounds? Any analysis you read on Brexit won’t be able to answer this question, because we simply don’t know. So, while Elliott wave analysis isn’t perfect, it does give us objective criterion to prove or disprove our thesis.
Currently, our thesis is that GBPUSD is going lower, towards 1.33-1.30, and potentially lower. We can now lower our critical resistance to the wave (ii) high, similar to EURUSD. A push above that means something more complex to the upside is taking place for wave (4), or something more bullish, perhaps. But, until then, we see the rally off the low as a three wave move that’s complete. We have five down for (i) and a three wave correction for (ii). Look for support to prove temporary.
We’ve been aggressively bearish AUDUSD, and we see no reason to change that view. Certainly, a wave 2 bounce is going to happen, but only after five down are complete for 1. We could force a nearly completed count for 1, which allows for a bounce back towards the .7600 area, however, it seems more likely that we’ll see lower first, given the downside momentum. That means a bounce for wave 2 could be contained by the down trendline and the .7400 pivot area. The failure to hold that level last week, after a corrective bounce, leaves the bears in control.
NZDUSD closed the week below the up trendline. Without a Sustainable Bull reading (upper blue zone) within the wave C of (X) rally, there’s little reason to consider the current decline a correction. In fact, even if the larger trend had turned up, the choppy diagonal up from the wave B low would still mean a return to .6400 first. A rally back above the wave (ii) high would change things though, and that remains our critical resistance.
Our USDCAD count shows the difference between trading and analysis. While we have a completed rally into the January high, it was accompanied by Sustainable Bull readings on RSI, with no divergence. Then, prices collapsed in a relentless selloff, with multiple Sustainable Bear readings, and no divergence into the low. So, even though we’ve been expecting this wave B rally for sometime from an analysis perspective, we haven’t once become aggressively bullish. As traders, when a picture isn’t crystal clear - DO NOT TRADE IT. A mentor once compared trading to fishing. Most of the time you’re sitting around, waiting for a bite, you’re not constantly reeling 'em in, right? So, we’re expecting a further bounce to complete B, but is wave (b) of B complete? Is the rally going to a new high per the Sustainable Bull reading? Too many questions, when the counts elsewhere are clear.
There’s still only three waves up from the low, but we think we’re going to see a small wave higher to complete wave (i) or (a), prior to the (ii)/(b) decline. Perhaps a deep retracement for wave (ii) would test the low, prior to a significant move higher on some more idiocy by the BOJ. We’ll see. Instead, if price drop below 107.46, then maybe the ending diagonal for 5 is per the alternate count with the wave 4 high where we have (ii) of 5 now. Either way, the next week or two should be range-bound.
Happy Trading!
The Wolf
There’s no change to our bearish view, and we can now lower critical resistance to the wave (i) low at 1.1386. If our top count, and bearish view, is correct, then prices are unlikely to see that level again until the ultimate low near parity. Look for the up trendline to provide some support, but rallies should be corrective.
From a bigger picture perspective, EURUSD has been trading sideways for quite some time. Rather than seeing this as a consolidation that will lead to much lower levels, we see this as part of a bottoming process. A new low near parity is still the call, but look for the decline to be a choppy one rather than a trending type of a move.
Prices pushed higher intra-week, prompting quite a bit of doubt in our bearish view. However, Friday’s reversal leaves us with the impression that bears are still in control. Recall the importance we put on Friday closes, and see that traders were unwilling to go into the weekend long. As such, we’ll hold to our bearish view while prices are below the red down trendline. A push above that would mean that wave (4) up is still underway, although ultimately a bearish resolution comes under that count too.
The reason we keep these Elliott wave charts is to provide Context to a situation, to see if they “tell” us anything important. Sometimes, when in doubt, doing nothing is the only thing to do. In addition, we always like to think in terms of scenario planning with our top count. In other words, our top count is 60-75% likely in GBPUSD, but there are ALWAYS other counts. For instance wave C of (4) up, is 15-25% likely, while a (1) (2), 1 2, count up off the low is also a 5-10% probability (with others possible too (like a wave (4) triangle)). Thinking in this manner prevents one’s ego from becoming too invested in their top count, which as traders is important. Flexibility in one’s thinking, or scenario planning (what can go wrong with my trade), is the only way to go.
Aussie continues to trade heavy, registering Sustainable Bear readings on RSI (lower grey zone). We’re going to get a wave 2 bounce at some point, but we doubt it’s going to produce much of a rally given the nature of the decline. We think the larger downtrend has the bears in control, and any bounce is an opportunity for the bears. Unlike GBPUSD, Aussie’s picture is much clearer, and will likely continue to lead to the downside.
