Small Signs of Change
By Frank Barbera CMT. November 25, 2008
Like a fighter knocked senseless by an upper cut to the jaw, the financial markets have been getting up off the mat and recovering over the last few days. In the Gold Stock Technician Newsletter, we highlighted the recent stock market low in real time, about an hour before the bottom was seen late last week. Since then, stocks have gone on a tear with the DJIA up over 1000 points from our buy signal. Yet, while the rally in the stock market, and in particular, the recovery rally in the financials, does represent a positive step in the right direction, other markets have yet to fully turn. The Dollar, which we highlighted back in late October has been especially tough until recent days.
In the chart below, we show the US Dollar Index which ended at 84.37 on October 21st when I first wrote about a potential turn in the Dollar. In that article I maintained that the Dollar strength was a result of purely mechanical ‘carry trade’ unwinding, which I still believe was entirely the case. After all, both the Yen and the Dollar, the two strongest currencies of the last three months are also the two lowest yielding, and apart from that, have nothing else to commend them. In the case of the Yen, it was the currency which highly leveraged hedge funds borrowed in, and in the case of the Dollar, many OTC derivatives can only be settled in Dollars, so the conversion back to Dollars had to be done in order to unwind leveraged bets. In my article, I did note the following:
“Either the market is in ‘kick off’ mode and is signaling a major intent to move seriously higher on a sustained basis, or the movement outside the upper band is a marker for an over-extended market that is about to reverse. In such cases, the reversal is usually compelling and usually comes within just a few days.”
As it happened, and as it turned out, the market actually peaked the heart of the advance four days later on October 27th, 2008 at 86.75. For the next 19 days, the Dollar hovered between 85 and 88 moving up and down in erratic fashion. In 20/20 hindsight, that trading range appears to have left a large double top, which with the weakness over the last two days is beginning to look more like a completed reversal pattern.
Above: Dollar Index price capped by long term upper band
Still, the Dollar has yet to break down in truly convincing fashion and to take on a more bearish look. Several daily closes below 84.00 will probably need to take place. While I was “early” in my take on the Greenback, the overall price action (of the last few weeks) does seem to be price capped below the upper band, with the market now more poised for a “downside reversal” than a “continuation” of the uptrend. In my work, I always like to view a given market from as many different points of view as possible. Where the US Dollar is concerned, the Dollar Index is actually not the best gauge as almost 50% the index is one currency, the Euro. While the Dollar Index is not a “bad index,” given that a large quantity of trade is done in Euro’s and Yen, let’s say that it is skewed to represent the larger economies of the G-7. When looking at a broader universe of currencies, that version of the Dollar has actually been slightly stronger until the last few days, but like the ‘larger cap’ US Dollar Index, also now appears to be rolling over. We can see this behaviour two different ways. In the chart below, we have constructed an unweighted Dollar Index, which is a G-7 type gauge based on the price action of publicly traded US ETF’s, issues like FXE, FXA, FXM, FXS, FXF, FXB, FXC etc… Here we see a classic five wave Elliott pattern that has completed and now turned down over just the last few days.
Above: Dollar Index using ETF’s (publicly traded)
Above: ETF Dollar Index with MACD
Within the Unweighted ETF Dollar Index, the MACD and RSI also did not make new highs during wave (5). In the next chart, I show a far broader version of the US Dollar, this time set up against 30 currencies around the world, all on an unweighted basis. In the longer range chart shown below, we see this index retraced just over 50% of the prior multi-year decline.
Above: The Dollar as expressed by an Equally Weighted Basket of 30 world currencies.
Above: GST Global Dollar Index with medium term RSI, RSI is diverging in bearish fashion.
What’s more, like the ETF Dollar Index, the unweighted GST Global Dollar Index has also developed an extended topping pattern with bearish divergence on the RSI. This index has also just begun to roll over during the last two to three days, so the suggestion would be that a Dollar peak may be in place. As noted in my prior article, this is of potentially huge importance for a wide assortment of very depressed asset classes ranging from Precious Metals and Base Metals, to Spot Commodities and Energy. For all of these, a weaker Dollar will be a healing tonic.
Finally, another market that still needs to improve is the market for short term interest rates, where 1 month yields ended today at .015% and 3 month yields ended at .11%. We can see this collapse in short term rates as a basket by viewing the chart of the Short Term Interest Rate Index shown below. Clearly, with short term rates very near zero, there is still a great sense of distrust, and a profound lack of confidence. Over the last two days, this index has notched up by .10 bps which is a step in the right direction but would be more compelling, if say, three month yields could start moving back over .25%.
Above: Short Term Interest Rate Index has plunged indicating very weak confidence
Above: Close up view of Short Term Interest Rate Index with Medium Term RSI
In the final chart shown above is a very close up view of the Short Term Rate Index, including the upward reversal of the last few days. Over that same time, several SWAP spreads have also ‘come in’ quite a bit, showing at least some hope that confidence may be finding some better ground. On the Short Term Rate Index, RSI has a potentially positive set up, so rising short term rates in the days ahead seem to be in the technical cards and that would be a good indication that perhaps the current period of stability may be taking root. For those who do not wish to see the unemployment rate skyrocketing toward 25% in the next great depression, (i.e. most of us) any upward movement in short term rates should be seen as a material step-back from the abyss.
At the close, the DJIA ended up 36.08 to finish at 8479.47, the S&P higher by 5.60 to finish at 857.41, with the NASDAQ slightly lower at 1464.73, down 7.29. Nearby Gold ended 1.50 at $821.00, while nearby Oil ended down 3.53 at $50.97. The Euro finished at 1.3061, with the 10 year Bond ending at a yield of 3.08%, and the 30 year Bond at 3.61%.
Wishing all readers a very Happy Thanksgiving,
© 2008 Frank Barbera