I would say without a doubt the most lopsided trade in the world right now is the long dollar trade. Virtually everyone has become convinced that the dollar is going to 110, 120 or even 160.
Folks when everyone is thinking the same thing … then no one is thinking.
So let’s take a look at this “one way” trade.
If the dollar is going higher then it goes without saying that it should continue to make higher highs and higher lows. That is the definition of a rising market. But last month the dollar not only broke the triangle consolidation pattern, but it dropped below the intermediate cycle low in May. That is a failed intermediate cycle. Failed intermediate cycles generally only occur when the larger multi-year cycle is in decline.
Next let’s look at the two largest weighted currencies that make up the dollar index, the euro and yen.
For a currency that we’ve been told is going back to par, I have to wonder why it’s making higher intermediate highs & higher lows, regained the 200 day moving average, and broken the year long down trend line.
The same thing is manifesting in the yen. A major multi-year down trend line has been broken and the 200 DMA recovered.
If these two currencies are bottoming then the dollar is topping.
Next let’s look at a long term chart of the dollar. At the recent peak earlier this year the dollar had retraced almost 62% of the previous bear market. The bull in the 90’s retraced about 50% of the previous bear before rolling over. This bull is almost 8 years old and it may very well be time for the next bear market to begin.
Now let’s go back and take a closer look at the dollar cycle. First note that the last intermediate cycle low occurred in May. The most recent low occurred in August on week 15. Week 15 is generally too early for a final intermediate cycle low. They usually take 20-25 weeks before bottoming. Also note that the dollar has not been able to recover the 10 week moving average.
This is suggesting that the dollar isn’t done going down yet. It should have at least one more smaller daily cycle down before the larger intermediate cycle bottoms.
Now let’s go to the daily charts and we see that indeed the current daily cycle appears to have topped on day 8 having failed multiple times to regain the 50 DMA. A top on day 8 indicates a left translated cycle is now in progress. Left translated cycles almost always drop below the previous cycle low. That means the dollar is now highly likely to fall below the August lows.
Now here’s the thing. Almost no one is prepared for the dollar to drop. Everyone is convinced the dollar is going higher, and everyone is positioned long. Everyone is on the same side of the boat. When that happens invariably the boat tips over.
So here’s what I think is going to happen. the dollar is going to continue down in this left translated cycle, and at some point its going to break through that August low. When that happens the currency markets are going to panic because no one is prepared for the dollar to drop. It will trigger a waterfall decline that will at the very least test the breakout at 88-89. But it may be worse…
As I have noted before intermediate cycle lows in stocks almost always correspond with either a top in the dollar cycle or a bottom, then we can probably assume that the final 7 YCL in the stock market is going to occur in conjunction with the crash in the dollar.
And as the Fed continues to intervene in the markets they are virtually guaranting there will be a second crash in October. I’ve said all along that all the interventions this year to prop up the stock market would just cause a crash, and sure enough that is exactly what has happened. They haven’t learned their lesson and further interventions will just exacerbate the next leg down.
If the second leg down is as large as I think it will be (possibly testing 1550 on the S&P) then the dollar may not stop at 88-89, but could drop to the next support zone (85) in an all out panic.
Now you see why I think that commodities may have found their 3 year cycle low.
The next leg of the commoditiy bull market was never going to be driven by fundamental supply and demand. It was always going to be driven by the currency markets. So it makes no difference if there is an oversupply of oil. All that matters in the years ahead is that there will be an even bigger oversupply of global currency units. While all commodities should benefit, gold and silver should benefit the most, and the mining stocks are now in position to generate one of the largest bull markets in history.
Remember the larger the bear market, the larger the bull market that follows. The juniors are down 90% and the majors 84%. Without a doubt this has been one of the most destructive bear markets in history. It’s going to spawn one of the largest bull markets any of us will ever see.
So when. Dollar and market crashing in October , do you expect gold and miners to to go up in similar magnitude? Or everything goes down ?
Gold is already going up. The sector just had to weather a little manipulation last week to produce the final test of 100 in the HUI and kick everyone off so big money could enter at the exact bottom.
Except that we are not at the exact bottom in gold yet.
Agree with your analysis, would like to add that I think the government bond market is saying the same thing. TBT looks like it is ready to get going up. (Look at rsi, tsi and macd on a weekly basis for TBT). I believe all of this is telling us the fed is either not raising rates or if they raise rates they will make it clear it is a one and done on rate increases, which should put pressure on the US Dollar to the down side. Your thoughts on the 10 year treasury?
I’m not really a bond guy but it does look like bonds are already beginning to price in coming inflation.
I think at this point you are now eerily aligned with both my macro view and near term trading view. You also happen to be aligned with the market anthropology people as well, who are very macro in nature. All this alignment around such a very contrary position is making me a little nervous!
Against my better judgement and after getting stopped out on Friday’s open, I went ahead bought back everything I sold at Friday’s close. Why? The stop run and subsequent reversal smacks of manipulation and a DCL in gold with smart money positioning ahead of the FOMC’s announcement. The weekly swing high in the USD and the fact that Gold’s daily cycle is long in the tooth pushes the odds that a massive countertrend rally is close. The 84% to 94% losses in mining company shares are brutal, it’s going to take a crash in the USD, a Comex default or both at the same time to rescue these mining companies from their pending bankruptcies. God help me next week! ?
The bigger the bear the bigger the bull that follows. The artificial nature of this bear market just means the bull will be even bigger as it has been forced down against the natural trend for a very long time.
If a counter-trend rally occurs in gold as the Fed declares no rate hikes in Sept; I would not call a rise to $1200 “massive”.
Sold JDST on Friday for a good profit and bought LABD, only to have biotechs ramp in my face into the close, naturally. But I’m holding. I really doubt commodities have bottomed if the market is going to crash again. I’m just sick of the central bank saver-punishing criminals propping it up.
I’d save my dry powder for end of the year post-tax loss selling for any long term investments in these commodity stocks. Just look at the coal and uranium miners, they have been pulverized even worse than the precious metals stocks, don’t say it can’t happen again.
Based on cycle analysis the CRB is well into the timing band for a 3 YCL and sentiment is extreme. I wouldn’t count on it stretching to the end of the year.
Pardon for differing, but:
USD: I thought a rising USD was negative for US stocks as history shows. Higher USD makes US exports more expensive to international buyers, hence it affects US global companies earnings adversely, hence stocks go down.
How can we then say that a falling USD will coincide with a next leg down on US stocks? esp when history has shown stronger USD is actually bearish for stocks?
USD is going to appreciate even more as global “scared money” will buy USD and later US stocks as the new safe havens.
Oil: How can price of oil be only dependent on “currencies” when Saudi Arabia the biggest producer of oil has shown its resolve to keep oil supplies plentiful as its strategic regional goal is to suppress and weaken the Iranian regime–its arch enemy in the region– by suppressing and driving down the oil price? Saudis have proclaimed they can withstand oil at $15 a barrel even. We cannot ignore the mega strategic stuff going on on oil and simplify oil price to be dependent on “currencies” only. Oil is headed to the mid-$30s initially.
Gold: It seems ready to break down thru the $1100 level and retest 1079 and then 1020. Huge head & shoulder pattern on the chart. Miners have another as much as 50% depreciation from here.
No one in gold longs is panicking now, there is no ‘gloom and doom for gold” in the air; this is not the bottom in gold. Gold and miners have yet to make their final bottom. Probably by end of this year.
Stocks have been going up with the rising dollar for over a year. A strong dollar equals a weak euro and that has been pushing European bourses higher and the US market has followed.
GDX’s major constituents’ analysis – consistent 1-day reversal pattern that supports either a trend change here or at least strong counter rally within the broader bear market.
https://www.linkedin.com/pulse/gdx-constituents-analysis-william-yii?trk=prof-post
Could be a potential spike on Sept 17th from the Fed NOT hiking rates. Probably not more than 1180 worth. But I doubt it will happen as gold is just not with it until it makes a bottom by Dec this year.
Again Gary I would like to thank you for the work you put in to your analysis whether one agrees with you or not. Just to clarify though, is it now your opinion that the final low in gold and silver has been seen (even if we bounce around ugly for a sometime) or you think we will head lower after some sort of rally before coming back down to test around $1000?
Many thanks
Gary has outlined a plausible scenario. I think we will see the 85 level for DXY before the end of the year. Commodities will rise accordingly but without an improvement of the over-supply issue , gains will be limited to the effect of the currency fluctuation. In other words, a drop in the US dollar, by itself, will not ignite a long term commodity bull market.
Thank you Gary you are an ambitious guy for sure. I concur with the gold is overdue for a bear rally and the dollar is about to tank, that is logical. Not so convinced about a stockmarket crash though, i think stockmarkets is about to consolidate for a year and then crash. Swedish OMX was up 12% earlier this year and that was mostly related to the currency weakening.
Gold, yes maybe the truth is in the charts? Look at Yamana’s beautiful correction path with almost 5 waves completed. It suggest a turnaround is imminent imho 🙂
http://www.tfmetalsreport.com/comment/508126#comment-508126
Good luck next week with FOMC and everything else.
Oh I almost forgot Geopolitical violence is at a steady high level and serves as a safety net for gold and silver. I do not see a crash below 1080 anytime soon.
Gold has not responded to geopolitical turmoil since its bull market started, with some exceptions during the current interim bear market when Ukraine was flaring up, only to give back those gains and more when Ukraine went away.
Same with Fed FOMC meeting no hike this week; it could provide a temporary push up for gold: an opportunity to add shorts IMO.
Great work as always Gary, in my opinion you’re spot on !
The Euro is slowly and quietly being transformed into The New Deutschemark, and this has been Germany’s plan all along. They’ve always wanted to control Europe; they tried twice in the 20th Century and that didn’t work out too well for them, did it, so they learned to have a little patience here in the 21st Century and now they’re about to take over Europe without firing a shot. As they say in the Guinness ads, “Brilliant!”