Apr 102014
 
 April 10, 2014  Posted by at 6:40 am

Be careful what you wish for… that’s my advice to Janet Yellen. Despite the Fed tapering, the dovish tone set by Yellen is crushing the US$. This is a double edged sword. The US exporters (and China) will no doubt benefit from a weaker US$ but at what cost? Commodity price (cost push) inflation and a potential flight from US$ denominated assets. I’m not buying what she’s selling because I believe the US$ is the canary in the coalmine warning that all is not well in the state of Denmark.

The SPX reversed lower like clockwork (as per last week’s chart), trapping the newly initiated longs which is what (b) waves tend to do. This is why I trade EWT, it gives me an edge for excellent r/r probability based trading. Yet another expanded flat and 3 waves into recent highs. As I’ve said before, this market just loves expanded flats. This week’s decline met the minimum conditions for the (c) wave of a textbook expanded flat (terminating below the extreme of wave (a)) and implies new ATH’s immediately ahead (black count) after finding strong support at the 50 day sma (near term bullish case). Even if we make new highs, I expect limited follow through given where we are in the longer term count as these 4th and 5th waves unwind.

There is however a more immediately bearish case which I prefer given the heavily skewed risk/reward and similar probability… That the initial 5 wave decline from ATH’s was merely wave i of (c) and this rebound is a counter-trend wave ii rally as part of a larger 5 wave decline (red count). I just like the r/r profile up here for short positions. My analysis continues to point to limited upside and significant downside risks so I will continue to trade it that way. Both counts are detailed below…

SPX 60m

SPX 60m

The primary reason I favor the near term bearish count for equities is the USD/JPY which has begun a 3rd/C wave impulsive decline. I tweeted last week that once 103.77 was exceeded, I remained strongly bearish with a 104.00/104.20 sell zone target. The post NFP high was 104.13 which quickly reversed lower, confirming my bearish count. I do not expect the 104.13 high to be exceeded in the near term before 100 is breached and more likely much lower towards 97.00. I remain strongly bearish this pair.

USD/JPY 240m

USD/JPY 240m

The AUD/JPY count I’ve been following for some time is now in its long term sell zone. While minimum requirements for wave c of 2 have been met (above wave a), the structure doesn’t yet look complete. My ideal sell zone is 97.50-98.15 to get short this pair and stay short.

AUD/JPY Weekly

AUD/JPY Weekly

Occasionally, I like to post this DJIA chart for a bigger picture perspective… just to drive the bulls crazy LOL

DJIA Weekly (semi-log)

DJIA Weekly (semi-log)

That’s all for now. Take care đŸ™‚

  4 Responses to “Market Update: April 10th, 2014 – Risk/Reward”

  1. Love your analysis as always – you have been spot on. Have a question for you – why has the USD been going down even when the Feds have embarked on a tapering program and plan to end QE by fall. I know Yellen was dovish yesterday but USD should strengthen given the QE is likely to end. What is your take on it.
    Thanks!

    • The US is still printing while the Euro zone and Asia are not. Deflation in Europe in increasing the value of Euro’s outstanding. The US economy is in a liquidity trap. Germany with strong Current Account to GDP, US a deficit country with structural problems. These are only some of the reasons.

  2. Just a retroactive pat on the back to you Mars. Great update and great calls as you essentially road-mapped this entire drop in advance. Thanks for all your work. I miss reading you on the board but appreciate the time-sink all that chatter requires. Cheers and best to you.

  3. Mars,
    Congrats on another spot on forecast! I have been up to my eyeballs in other ranch projects partly because it appeared to be a good time to do nothing except wait for the top to develop. Especially good week thanks to your help. Any thoughts on the PMs?
    Best, Mike

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