S&P topping out, USD bottoming out?

Original piece here.

S&P selling
below 1130 and DX bouncing off 79.74 has technical significance. Already short
S&P from earlier this morning and now I’m going back short EURUSD as well.

The S&P
500 is selling off of January highs around 1150, which is a potential right
shoulder forming. Additionally, since the Flash Crash, it has been
consolidating in the form of a rising wedge. We have now hit the resistance
trendline from the wedge, which suggests we’re headed down back to the support
line and then through it. The support line extends all the way back to late
2008, so it would indicate a return to bear mode. 1130 was the support level
for the most recent breakout/consolidation, and with that near-term support
level broken, it looks attractive to label 1150 as an interim high.

Going
forward, especially if S&P starts to decline, I will be paying close
attention to the 1020 level. The S&P first breached that level in early
1998, but since then the level has demarked crisis/bear territory from
normalized/growth territory. The first dip below this level came later in 1998
during the Russian financial crisis. Fed-originated liquidity came to save the day,
however, and the market reversed course back upwards and through the level. The
next time this happened was after 9/11, but again the Fed came to save the day
and markets rallied back through the level into normalized territory. We broke
back below it in summer 2002, when the hangover from the liquidity injection
exposed an economy still mired in recession as well as a new war and multiple
accounting scandals. It was back in crisis mode, defined as when markets are
discounting abnormal growth environments without substantial last-resort policy.
The Fed responded with a massive 50bp rate cut in November and the Bush
Administration announced tax cuts in May 2003. The Fed cut fed funds a further
25bps in June, bringing it down to a mere 100bps. After August & September
meetings resulted in rates staying low, the Greenspan put mentality started
developing and after a third straight month of 100bps fed funds, backstopping
by the Fed became implicit and underlying growth drivers were effectively
replaced by Fed-injected liquidity, with 1020 being taken out again that month,
to the upside. We continued on that growth path until the crash of 2008, which
brought the economic system back on life support. After more liquidity and
policy response, the economy started normalizing again and by summer 2009,
crisis mode had abated and once again, we were back above 1020. We’re at the
stage where we are stress-testing the current economic dynamics and determining
if they still require emergency policy to have a normalized growth environment.
If we break below, that will mean we will need further easing just to bring us
back to a non-crisis period. Every bailout/bout of easing makes the consequent
expansive phase successively weaker, as a function of the declining GDP
generation by each marginal dollar of debt. The last expansive period was
extremely weak and in fact non-existent in the labor market and consumer credit
market. If we break below 1020 and enter crisis mode again, the upturn caused
by reactionary policy may be even weaker, and possibly non-existent or the
beginning of a new status quo.

All pure
speculation but enough of a reason to keep an eye out on how the market plays
with the 1020 level. No need for Armageddon scenario investing, but important
to realize when markets are fine by themselves and when they’re reliant on
policy just to remain functioning normally.

The DX is
bouncing off 61.8% Fibo support, retracing the late 2009-early 2010 USD rally.
DX is back above 80, so looks like we may be setting in an important low in the
dollar here.

OPEN TRADES

Long
/ZW | 701.00 | stop 674.50 | +1.68%

Long
BVN | 41.20 | stop 39.85 | +1.94%

Long
USD/CAD | 1.0285 | stop 1.0200 | +50 pips

Long
/ZN | 125’15 | stop 124’20 | +0’08

Short
AUD/CHF | 0.9490 | stop 0.9555 | +80 pips

Short
AUD/CAD | 0.9850 | stop 0.9920 | +25 pips

Short
NZD/USD | 0.7335 | stop 0.7370 | +50 pips

Short
X | 44.80 | stop 45.80 | +1.56%

Short
/ES | 1130.00 | stop 1135.00 | +1.10%

NEW TRADES

Short
EUR/USD | 1.3350 | stop 1.3425

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construed as investing or financial advice, suggestion, or recommendation. Please
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Comments

[ATG]

Another brilliant timely call by this rising star.

Someone give him a billion to run...

[gmrpeabody]

+1,000,000,000

[Spitzer]

Eventually the dollar will act the same way as the Euro does when Europe is in trouble.

In case you didn't know, the Euro goes down with Eurozone weakness, not up.

[Stonecold]

I would like to take  the opposite side of that bet

[RockyRacoon]

By golly, I believe you've pegged it!  It's all "betting".  A casino.

Gold has no counterparty risk, requires no collateral.

[Gwynplaine (not verified)]

Naufalsanaullah, I always enjoy reading your thoughtful commentary.

It is make it or break it time for the dollar right now.  Unless the Fed is going to deliberatly inflate, we will see a near term bottom in the dollar and the S&P return to some multi-year lows.   Eventually, Ben & Co. will start to inflate, but probably several months too late to save stocks (or gold in the short term). 

[Prof Quagmire]

  Good piece, whether you like it or lump it.  US$ snapback is the key.  Either it happens or it doesn't, and we shouldn't have long to wait.

[MrBoompi]

I tend to agree with the analysis of the US stock market, but does anyone have an idea what emerging markets mights do?  Those funds have been strong lately.

Or are these markets also considered synchronous now?

[ATG]

Big4 just shorted emerging markets.

Falling tide lowers all boats...

[Eric Cartman]

Nice analysis. I can't seem to get the RSS subscription on the website to work. Just wanted to make the author aware. 

[RoRoTrader]

Nicely put - no pun intended - assessing the half life of repetitve interventions as a price risk.