Here are some long term charts that we feel will be a source of trading opportunities in 2015. It’s not a license to trade them blindly with no risk controls, but we do like these ideas. This piece is meant to highlight some technical, and fundamental, concepts we’ll focus on when looking for actual trades this year. We will apply our Momentum and Signal processes on top of these Contexts. Let’s take a look.
We’ve talked about the problems brewing in Turkey before. It seems that its Prime Minister is more concerned with penalizing detractors, organizing graft and shutting down YouTube than he is with the business at hand (which is hard enough already). Here’s what we had to say back in October:
…according to our charts, and our contacts, more lira selling is directly ahead, while geopolitical and fundamental problems may actually lead to a currency or debt crisis similar to that of 1994. With last quarter’s GDP showing contraction, official inflation rates north of 8% and a current account deficit/GDP above 8% the central bank is in a quagmire. It wants to “support growth” with lower rates, but in order to attract capital and keep inflation low it’ll need to hike rates.
All of that remains true today. What we believe is going to happen is that a drop in the Turkish lira will force the Turkish Central Bank to raise rates to defend it, similar to what recently happened in Russia. The central bank has preferred a “growth policy” which means rates have been held lower than they likely should have been. These “lower than needed” rates make the currency vulnerable.
Prices have indeed pushed to a new high, but we believe there is more to come. In December, prices found support around the 2.2000 area, and that is near term critical support, although there’s little reason for prices to be below the grey up trendline. We’re looking for prices to reach at least the 2.4782 area, where wave ((5)) would be .618 times the length of wave ((1)), with potential to the equality measurement at 2.7357. The 100% expansion of wave ((4)) is just shy of that equality measurement, which make a nice cluster of targets around 2.7300.
Here is a weekly chart of the euro versus the Swiss franc. In 2011, around the time of the Greek default and European sovereign debt crisis the Swiss franc saw a lot of capital inflows that were looking for a safe haven. Well, the Swiss National Bank (SNB) had a response for those looking to preserve value…don’t use the franc. What a difference from the past.
Switzerland was one of the last countries to sever its currency tie with gold, and it has historically been a currency that held its value better than most others because of its stable geo-political climate, fiscal/monetary policies and rule of law. But, now that central planners/bankers run global central banks, SNB included, the Swiss have decided to print their currency into oblivion, just like everyone else. One day, a central bank somewhere, will actually realize that a strong currency makes most citizens wealthier, makes saving more attractive and creates a positive feedback loop for the economy. But, that day is not today.
In fact, our idea here is to believe exactly what the SNB says. That it is willing to print unlimited amounts of francs to defend the 1.2000 peg versus the euro. So, if that’s the case, your risk is limited to slightly under the 1.2000 area, and the upside potential is tremendous (towards 1.3000).
That concurs with our wave count, which suggests a five wave rally for (A) and a three wave move, in an expanded flat, for (B). That means that another five wave move up is coming, and based on recent action, it may already be underway. During the week of December 13th, prices fell below the 1.2000 level for the first time since 2012, but they reversed hard creating a bullish engulfing pattern and key reversal. We’re bullish here now, and if we’re right we will eventually see a big rally.
We’ve also been covering the Junk Bond Bubble in great detail. We like the idea of the junk bond bubble bursting even if we only see a slight slowing of the global economy. We like the idea so much, because of the parallels with the subprime housing bubble and bust back in 2007, that we created a way to track it with our Junk Bond Bubble Dosimeter. We continue to add names to the list, so check back with the JBB Dosimeter often.
Since we last posted this chart, prices have broken down sharply. There’s plenty of overhead resistance now, and we do have five waves down from the wave 2 high, even if they are overlapped. We’ve chosen not to label the decline rather than guess whether it’s a series of ones and twos, a leading diagonal for (i) of 3 or something else.
Instead, we’re going to look for resistance to hold in the $40-$40.50 area, we’ll be a seller of rallies and we’ll look for reasons to be betting against the riskiest corporate bonds. We think the “reach for yield” is going to end up “reaching a panic” instead.
EWQ – France ETF
In French stocks, we have a market that is nowhere near it’s ’07 highs; and, in fact, it’s closer to the 2009 low than the 2007 high. Certainly, it’s underperforming the S&P500 in the US and Dax in Germany. We’ve generally found that it’s easier to short stocks, sectors or markets that have already exhibited weakness, like the CAC40 in France.
We have a clear five wave decline from ’07-’09, and the bounce since the low is clearly corrective, so we’ve labelled them (A) and (B). That means we should be looking for a wave (C) to the downside eventually falling below the wave (A) low. We’ll be looking for opportunities to get bearish here over the coming year, and possibly beyond. Support exists at the up trendline and wave B low, but resistance is also formidable in the $28-$31 area.
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.