Painted Into a Corner


Three Down Means Higher Into a Top

Friday’s break of 1.1399 means EURUSD traced out three waves down from the 1.1465 high. So, we’re now looking higher into resistance, and as most are focusing on a potential breakout, we see a “sell the range high” type of situation unfolding. Of course, we’ll need to see how next week plays out first, but it’ll take a break of the up trendline to suggest something more sinister to the downside is developing. Until then, RSI found a bottom in the Bull Support zone (lower blue), which points higher near term, at least to eclipse the wave (a) of Y high.


Higher Into a Top

Same story with GBPUSD – higher into a top. Prices have pushed past the red line, but remember to think of structural resistance more of as a “zone” as opposed to a “single point.” So, there’s still plenty of overhead resistance despite the push past the internal trendline drawn off the wave (1) low. That said, we need to allow for higher prices before things top out, so perhaps we’ve got some weak data coming in the US, and some dovish Fedspeak from the bafoons at the FOMC.

As the headline says, central bankers appear to have painted themselves into a corner. When  the BOJ “failed to act” last week, the yen rallied and stocks there sold off hard. Since Japan must “print or die” there’s little doubt further easing will be coming from Japan. And, with Bernanke, Krugman and the rest of the Keynesian/Monetarist clowns calling for fiscal helicopter drops of cash(Since QEs effectiveness at improving economies has proven to be futile.) we expect nothing less.

The hubris and egos of the central bankers won’t allow them to admit failure; instead they will simply pivot to some additional “tools (fiscal printing)” in addition to more monetary stimulus (QE). Part of the reason Bernanke is promoting fiscal printing now is to give his monetary policy failures some cover. If Congress fails to add more fiscal stimulus, Bernanke will blame that, rather than the boom/bust cycle that was turbo charged by absurdly loose monetary policy.

Keep in mind, that the Taylor rule, a Fed created model, suggests the overnight rate should be 2.8% even now! Talk about ignoring data. Listen, monetary policy can’t fix structural problems, and when structural problems abound (too much debt and overcapacity) too loose monetary policy makes things worse.

Taylor Rule
2.8% Says the Fed’s Own Model, Not .375%


Down to Complete (i)

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.


Kiwi Finds Support, Rally Sharp

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.


Prices Pinned Lower

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.


BOJ Must Print of Ponzi Ends

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

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.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge.
The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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