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…
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.
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.
Occasionally, I like to post this DJIA chart for a bigger picture perspective… just to drive the bulls crazy LOL
That’s all for now. Take care 🙂