The year 2015 was one of divergence. The S&P 500 closed very near its all-time high, despite the significant declines in the Russell 2000, Dow Transports, junk bonds, energy, materials and retail stocks. A sustainable trend is typically marked by uniformity, where every index acts nearly the same. Trend divergence, or non-uniformity is a sign that a trend is about to turn. The impact for the US dollar should be significant, with much of its rally in 2015 coming on the back of “policy divergence;” the idea that rates are heading higher in the US because of its economic out performance. We think both “policy divergence” and economic out performance will prove to be myths by year end 2016. Let’s see what the charts say.
First, for perspective, let’s back out and look at the long term chart. I believe the most important feature of this chart is the breakdown, and subsequent failure at 1.2000. That level acted as support in ’08, ’10, ’12 and briefly in ’14. The rally to test that level failed in August of this year. While the alternate count is still a possible interpretation, which implies a larger upward bounce toward 1.2000, it’s still the alternate based on the lack of impulsive structure up from the March 2015 low.
In addition, our RSI studies both point lower with Sustainable Bear readings on both the weekly and daily time frames. Shorter term, we can count an impulsive decline from the wave 4 high, but if that’s the case, prices should head lower directly. We’d rather not see a push above the short term down trendline if wave 4 is actually complete. A push above the wave 1 low would activate the alternate count putting prices in wave (C) of ((B)), either as a flat or triangle.
Friday’s collapse below the support level around 1.4800 leaves the bears in full control here. While prices are now nearing longer term support once again, the trend is clear, lower lows and lower highs with yet another Sustainable Bear reading on RSI. Use any rally to join the bears, not to try to call a low. We have added an alternate count that suggests wave 1 was a leading diagonal, which would explain the choppy decline also, but both counts point lower in third waves, so the distinction isn’t really worth making at this point. Only a rally back above the wave i low would alter our bearish view.
With last week’s rally, the decline from the December high is clearly a correction. That’s all that’s really important for the next several week’s – prices should head higher. Heavy resistance exists in the .7533-.8000 range, and we think that’ll be the action for the next month or two. Look higher. Could this AUD rally mean a relief rally in the commodity complex for early 2016? Perhaps it is.
Same story with Kiwi – it’s headed higher into resistance from .7176-.7700. It’s difficult to say exactly where prices are within this bounce, but the top count is still in effect until we see something different. Sideways action this week may lead to a push up towards .7200, so use it as an opportunity to turn bullish.
Unlike its commodity currency cousins, the loonie seems to be set to weaken further. A very clear flat correction unfolded for wave (iv), and given the Sustainable Bull readings, another high is in store. It’s possible that prices will stop at 1.4082, which is the 100% expansion of wave 4 (including the wave (b) high), but it’s also possible that the wave iv of (iii) low should be where we have the wave (iv) low. Don’t fight higher prices, unless both the red and black trendlines give way, or we see a blow-off type of move.
The huge outside, down day last Friday shifted control from the bulls to the bears. Follow through to the downside this week, breaking the up trendline off the wave (A) low, means we must respect the idea that a larger downside correction is underway. Nonetheless, the clear three wave structure of the wave (A) move, means that the one degree larger trend is higher. Perhaps we’ll see a spike back down to the 116.00 area prior to a launch higher.
With Japan back in recession yet again, how long will it be until the BOJ goes full socialism as it purchases individual stocks? Japan has shown no monetary sanity for so long, that its next reflex move will be to use “unlimited QE,” similar to what was perceived to “work” here in the US. Contrary to Bernanke, Yellen and the other stuffed suits at the Fed and in academia, though, QE actually make problems worse, by sending signals to the economy that things have been fixed and normalized, which allows people and companies to continue to lever up. They’ve done that with abandon, and have created the #JunkBondBubble, which is collapsing as we speak.
P.S. We will be moving to a bi-weekly update for 2016. Should you have a question about an individual pair, feel free to send it along in the comments.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.