Weekend Update | www.thepracticalinvestor.com
March 21, 2014
— Although the VIX closed lower for the week, it may be signaling a breakout ahead as it builds a higher base. This is the prelude to a probable run to the top of the chart that may occur over the next several weeks. The VIX is considered a leading indicator of the direction of the SPX.
SPX remains above the Wedge trendline.
SPX peaked today at 1883.97, just .40 above its March 7 high of 1883.57. It appears that equities are running out of steam, since there was no confirmation of its ever-so-slight higher high from the Industrials. There is a minute Broadening Wedge whose trendline matches the upper trendline of the Bearish Wedge. A decline beneath the Bearish Wedge trendline is an important step in reversing the trend. Long-term support at 1743.61 is the next level of support and the likely target once the upper supports are broken.
(ZeroHedge) Once European markets closed, US equity markets gave up any correlation with JPY crosses and began to fade. After bouncing off early Nasdaq-Biotech-driven lows, a ramp of AUDJPY saved the European close but that was it. There does not appear to be any news catalyst to drive this dump as Quad-witching pumps are unwound. The S&P 500 and Russell 2000 join the Trannies and Nasdaq in the red from the FOMC statement.
NDX fails to make a new high, closes at support.
NDX failed in its Friday morning rally to make a new high, leaving the March 7 high standing. It closed just above Cycle Top support at 3640.47 and Short-term support at 3622.35. Cycle Top has been its support since the October 9 low, with the exception of the brief decline in early February. This support must be broken to begin the change in trend.
(ZeroHedge) Quad-witching only added to an extremely volatile week as the entire bond, stock, FX complex pumped and dumped on the basis of whether a “considerable period” was really six months and whether “quite some time” was more or less than six months. The S&P hit record highs early on this morning thanks to a ramp in AUDJPY (but once again bonds didn’t blink). All that ended when Europe closed and the Biotech sector’s weakness spread, leaving the Nasdaq -1.4% post-FOMC (and all other indices in the red post-FOMC).The range of moves in bonds, FX, commodities, and vol this week were impressive as we noted below…
The Euro reverses inside its Ending Diagonal.
The Euro reversed beneath its Ending Diagonal and its Cycle Top at 139.44 last week. Last week I had suggested, “Ending Diagonals often have throw-overs in the final week or two prior to a reversal.” This appears to be no exception. The financial press is downplaying this event.
(Reuters) – A three-day dollar rally sputtered out on Friday as world markets adapted to possible shifts in U.S. monetary policy and the euro rose on news of a record monthly euro zone current account surplus.
The dollar, whose gains accelerated on Wednesday after the chair of the Federal Reserve hinted that U.S. interest rates may rise sooner than anticipated, eased against other major currencies.
EuroStoxx bounce in an inside candle.
The EuroStoxx 50 index regained some of its losses of the prior week, but could not make a new high. This “inside reversal” is known as a bearish Harami in Candlestick parlance. A further decline next week will confirm this pattern.
(WSJ) Given Europe’s reliance on Russia’s energy exports, much analysis of the crisis has rightly focused on the potential economic damage from a shut-off in fuel supplies by Moscow.
Europe has other economic vulnerabilities, however. That’s particularly a problem as the region tries to claw its way out of a two-year recession.
Silvia Merler, an associate fellow at the Bruegel think tank in Belgium, estimates European banks have around $150 billion in claims in Russia, compared to the $40 billion in claims by U.S. banks. With more than $50 billion in claims, French banks are the most exposed, including through Société Générale’s ownership of one of Russia’s largest banks, Rosbank. Italy, Germany and the U.K. banks also have large financial claims in Russia.
The Yen eases back to Short-term support.
The Yen eases back to its short-term support at 97.87. It is now due for a Master Cycle low, which may arrive in the next week. The degree of bearishness depends on whether the Head & Shoulders neckline is broken or not. Shold it remain intact, the current Elliott Wave structure remains correct.
(DailyFX) Half of the most liquid yen crosses closed out this past week in the green. Though, that should provide long-term bulls little relief. So far in 2014, this once high-flying group is under water. The forces that provided the momentum of 2012 and 2013 – a reach for yield and the introduction of a massive stimulus program from the BoJ – have been sidelined. And now, fear is creeping in that there is a very real risk that speculative appetites are starting to wilt and the central bank is shelving plans to upgrade its QE plans. While neither theme is threatening to collapse – yet – the yen crosses may still topple (yen rally) in the absence of further expansion.
The Nikkei is easing toward its Head & Shoulders neckline.
The Nikkei eased further toward the neckline of its Head & Shoulders formation at 13995.86. Once the neckline is broken, the Nikkei may drop below its weekly mid-Cycle support at 11793.42. The Cycles Model projects a decline into early April.
(Reuters) – Japanese stocks retreated from one-week highs on Thursday after Federal Reserve Chair Janet Yellen raised the prospect of interest rate hikes starting earlier than previously thought, sparking a selloff in equity markets and lifting the U.S. dollar.
The weaker yen helped to contain broader market losses as a softer Japanese currency is generally seen as a positive for exporters’ income.
U.S. Dollar reverses from Ending Diagonal.
After extended its Master Cycle low yet another week, the Dollar finally broke out of its Ending Diagonal formation. It ended the week closing at weekly Short-term resistance, just beneath its Triangle trendline. While breaking above the trendline the dollar will also emerge above Intermediate-term resistance at 80.46. What appears to be a temporary reversal may become a real problem for the Dollar bears.
(ZeroHedge) While the talking heads are desperate to maintain the myth that this statement is dovish, the fact is, the flow of free money from the Fed is slowing and confusion of the outlooks for growth (and more Fed member see rate hikes in 2015) means Yellen’s dovishness is being questioned aggressively by the bond and stock markets. The S&P 500 fell 12 points. Treasuries are getting clubbed with major short-dated selling (and bear-flattening). The dollar is surging and gold is down modestly.
(Bloomberg) The dollar gained to the strongest level in two weeks against the euro after Federal Reserve policy makers signaled they’ll probably raise interest rates by the middle of next year.
The greenback rose versus 14 of 16 major peers after Fed officials raised interest-rate forecasts yesterday and Chair Janet Yellen said borrowing costs could start rising “around six months” after the Fed stops buying bonds.
Treasuries challenging Long-term support.
Treasuries declined to challenge Long-term support at 132.50. The Cycle high made on March 3 remains intact. Should the March 3 high remain, we may see a surprise collapse in bonds over the next two weeks.
(ZeroHedge) Something hilarious, and at the same time pathetic, happened earlier today: at precisely 9 am the US Treasury released its delayed Treasury International Capital data (which was supposed to be released yesterday but was delayed because it snowed) which disclosed all the latest foreign Treasury holdings for the month of January. Among the key numbers tracked and disclosed, was that China’s official holdings increased from $1.270 trillion to $1.284 trillion, that Japan holdings declined by a tiny $0.2 billion, that UK holdings increased by $7.8 billion to $171 billion, and that holdings of Caribbean Banking Centers, aka hedge funds, declined by $16.7 billion. Here is Reuters with the full data summary (save it before this article is pulled).
So why is it hilarious and pathetic? Because just three short hours later, the Treasury – that organization that has billions of dollars at its budgetary disposal to collate, analyze and disseminate accurate and error-free data – admitted that all the previously reported data was in effect made up!
Gold makes a hard reversal.
Gold made its peak retracement on Monday as suggested in an irregular Intermediate Wave (2). The Cycles Model calls for a month-long decline that may break through the Lip of a Cup with Handle formation in the next two weeks. The potential consequences appear to be severe.
(MarketWatch) — A day after Federal Reserve Chairwoman Janet Yellen threw the market a three-word curveball, sellers were in control — sending prices for gold and silver futures down for a fourth-consecutive session to their lowest settlement levels of the month so far.
Gold for April delivery GCJ4 +0.30% fell $10.80, or 0.8%, to settle at $1,330.50 an ounce on the Comex division of the New York Mercantile Exchange. Prices had already tallied a loss of 2.7%, or nearly $38 an ounce, over the past three trading sessions and tracking the most-active contracts, they closed Thursday at their lowest level since Feb. 28, FactSet data show.
Crude bounced off Intermediate-term support.
Crude bounced from Intermediate-term shpport at 98.16 to retest Long-term resistance at 100.24. The next support level to be tested is the weekly mid-Cycle support at 96.30. There is a Head & Shoulders formation at the base of this rally may be overshadowed by the Cup with Handle formation, with an even deeper target.
(Reuters) – Crude oil futures rose on Friday as fresh U.S. and European sanctions on Russia renewed fears of a supply disruption from the world’s second largest oil producer.
The European Union imposed sanctions against the Russian deputy prime minister, two aides to President Vladimir Putin and nine others on Friday, adding to the nearly two dozen prominent Russians (that) Washington sanctioned on Thursday, including Gennady Timchenko, co-founder of oil trading firm Gunvor.
Within hours of Thursday’s sanctions, Gunvor announced Timchenko had sold his near 50 percent stake in the company to allow the firm, which handles almost 3 percent of global oil supplies, to avoid disruptions to its operations.
China stocks bounced at a neckline.
The Shanghai Index bounced from its Head & Shoulders neckline to challenge Short-term resistance at 2053.63. The Cycles Model calls for a brief bounce before it resumes the decline beneath the neckline. The ensuing decline may be swift and deep. There is no support beneath its Cycle Bottom at 1938.33.
(ZeroHedge) We have described in detail over the past two years how we believe China’s twin excesses (excessive investment funded by excessive debt) will inevitably unwind, causing a substantial slowdown in China’s economy, significantly below market expectations. In recent weeks, a trip to the region and further research into China’s shadow banking system have convinced us that China is approaching its “Minsky Moment,” (Display 1) which increases the chances of a disorderly unwind of China’s excesses. The efficiency with which credit generates economic activity is already deteriorating, as more investments are made in non-productive projects and more debt is being used to repay old debts.
The Banking Index repelled by Cycle Top.
BKX rose to test its weekly Cycle Top this week at 73.63. This is the final probe higher in the Orthodox Broadening formation with bearish consequences. The Cycles Model suggests a new low may be seen by mid-April, which heightens the probability of a flash crash.
(ZeroHedge) It’s mid-March, which means it is time for the annual confidence boosting theatrical spectacle known as the Fed’s stress test (for those who may have forgotten last year’s farce when Jamie Dimon preempted the Fed by announcing a dividend in advance of the results, can read here). And like in the past, there were absolutely no surprises with 29 of 30 banks passing with flying colors. Of course, since it is a “test”, and someone has the be sacrificial calf, this year that honor falls to Zions Bankshares. Last year its was Citi, SunTrust and MetLife. In both years the results are completely meaningless, as the Fed neither then, nor now, has any methodology for how to calculate capital in case of the same kind of counterparty failure chain as happened during Lehman, and when no amount of capital would have been sufficient to preserve the financial sector. Like we said: theatrical spectacle. But at least everyone’s confidence has been boosted.
(ZeroHedge) Moments ago the “absorption” of Crimea into the Russian Federation was completed after Putin signed the final previously passed by parliament. And with that, in less than a month, the Crimean “question” has been answered. The only question is whether Putin will stop here or will the ease with which he just expanded the Russian political map leave him hungry for more.
In other news, as part of the Western escalations against Russia, Bank Rossiya, the one bank exclusively identified in the sanctions list, announced that Visa and MasterCard have stopped, without notification, providing services for payment transactions for clients. Another bank that saw the drop of merchant credit card services was SMP bank, co-owned by brothers Boris and Arkady Rotenberg, who were also on the latest U.S. sanctions list.
(ZeroHedge) “Of late there has been much breathless wonder expressed at the Bank of England’s supposedly ground-breaking release. ‘Money in the Modern Economy’, in which it argues – shock! horror! – that banks do not lend out previously received deposits, but that they create the latter ex nihilo by first making loans. Alas, as Gunnar Myrdal waspishly observed of Keynes himself, this has been a reaction plagued with the ‘unnecessary originality’ of those who don’t know their literature.
(ZeroHedge) With Bernanke gone, the remaining Fed members knowing full well they will be crucified, metaphorically of course (if not literally) when it all inevitably comes crashing down, are finally at liberty with their words… and the truth is bleeding out courtesy of the president of the Dallas Fed, via Bloomberg.
FISHER SAYS QE WAS A MASSIVE GIFT INTENDED TO BOOST WEALTH
Have a great week!
Anthony M. Cherniawski
The Practical Investor, LLC
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