It seems likely that the Fed will raise rates in December despite some underlying weakness in the global economy. That would explain our “stronger dollar” theme in today’s report. Perhaps it’s “one and done” though, where the Fed raises rates 25 bps in December, only to proclaim QE4 as an emerging market/junk bond bubble default spree accelerates early next year.
I’ve heard many repeat the “three steps and a stumble” mantra regarding risk assets and Fed policy. That’s the old rule – after the third rate hike, stocks begin a correction/bear market. That was the basis of Marty Zweig’s famous, “Don’t Fight the Fed” Fed Model he wrote about in Winning on Wall Street back in the early 90’s. While that may have been true pre-QE, The Wolf thinks we’ve crossed the event horizon with respect to monetary policy, across which old rules no longer apply.
For example, when the Fed ended QE1, that was technically a “tightening” move. Then it started QE2, a “loosening” move. Ending QE3, for instance was a “tightening” move, witnessed by the taper tantrum in the summer of 2013. Each time the Fed has ended QE, there has been a “stumble.” And, with junk bonds and emerging market dollar bonds in such tough shape, we think any tightening is likely to be the straw that breaks the camel’s back. So, rather than three steps and a stumble, we think “one hike and a face plant” is more likely.
Little changed last week. We saw yet another corrective bounce end with Friday’s collapse. Given the importance of Friday closes, the Sustainable Bear reading and the inability of the euro to bounce, we’re continuing to look lower. Short term, we can use the down trendline, and really Friday’s high as critical resistance, although we don’t expect those to be tested. The 1.0830 level gave way fairly easily, and that was the last real support above the 1.0462 low.
Watch the old, broken down trendline for support, eventually. We are anticipating economic and political problems to emerge out of Europe (Club Med debt problems for instance), but we’re not anticipating a bottom substantially below 1.0462, since we see problems with the USD too. In fact, the Fed may use “unexpected” problems out of Europe for holding off any further rate hikes beyond December’s measly 25 bps.
We like the idea of the pound following the euro lower given Friday’s failure near a confluence of resistance. A loss of the 1.5170 next week is needed to keep the bears in control. Friday’s high is key, and a push above that could mean something less bearish was taking place, such as a triangle from the wave ((A)) low.
Nearer term, though, we can count a series of ones and twos from the wave ((B)) high, and prices failed to get back above three trendlines late last week. The close back below two of the three on Friday suggests a “failed breakout.” Failed breakouts are often powerful signals in the opposite direction. We’re aggressively bearish GBPUSD against Friday’s high.
We aren’t able to count an impulsive decline from the October high, and the sharp reversal last week is testing the longer term down trendline. A push above that will put the bears on notice, and set the stage for a retest of the .7500 area. We’d rather be bullish AUD against the European currencies, since it seems those down trends are solidly in place. There’s still a number of ways to count wave (iv) underway, or something else that ends up with a new low, but we’re not interested in fighting higher prices on a push above the down trendline next week. In fact, one could make the case for a “bullish surprise” against last week’s low of .7069. Especially since RSI found support in the Bullish Support zone (lower blue), above the Sustainable Bull (lower grey). Some markets bottom in such a manner: a double bottom, with RSI firmly above the old low.
Similar to AUDUSD, the action down from the October high isn’t impulsive. As such, we could turn bullish against last week’s low. It’s a bit premature to do that here, but it would come as a surprise to most if the supposed “commodity” currencies were able to rally in the face of continued weakness in the commodity sector. A push above the two down trendlines will allow for further upside to test the .7200 area. Notice the RSI behavior at last week’s low – significantly above Sustainable Bear territory.
Unlike the commodity currencies down under, the Loonie continues to fall. That keeps us aggressively bullish here. Prices should remain above the red up trendline if our top count is correct, although critical support isn’t until the wave (ii) low. Prices have traded sideways since the wave 3 high, unlike NZDUSD and AUDUSD which are significantly above their August lows. We’re looking for a push to new highs, and potentially a blow off top more similar to the European counterparts than the commodity currencies, which USDCAD more typically tracks.
We’ve detailed our bearish yen theme longer term, with our target of “infinity” for USDJPY based on the incompetence at the highest levels in Japan. But, is it headed there directly, or will we see a set back to complete wave II first? We’re not taking a stance here one way or the other yet. We can count five waves up from the October low, so we want to see the structure of the pullback first. We’re neutral here awaiting more evidence, but we’ve laid out both the bull and bear cases above.
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.