Guest Post: A Glimpse Into The Future Of The Stock Market And Dollar

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

A Glimpse Into The Future Of The Stock Market And Dollar

The "accident" many have been waiting for has finally happened, and it's called Europe. That doesn't bode well for the U.S. stock market.

A lot of technical analysts and financial pundits are expecting a standard-issue Santa Claus Rally once a "solution" to Europe's debt crisis magically appears. There will be no such magical solution for the simple reason the problems are intrinsic to the euro, the Eurozone's immense debts and the structure of the E.U. itself.

We can fruitfully start a speculative look into the future of the U.S. stock market and dollar with a quote from John Mauldin's book Endgame: The End of the Debt Supercycle and How It Changes Everything:

Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, which makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained —or might not be.


Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.

The accident has finally happened, and it's called the euro/European debt crisis. I see a lot of analysts trying to torture a Bullish interpretation out of the charts, so let's take a "nothing fancy" chart of the broad-based S&P 500 with five basic TA tools: Bollinger Bands to measure volatility, relative strength (RSI), MACD (moving average convergence-divergence), stochastics and volume.



If we use Technical Analysis 101 (basic version), a number of things quickly pop out of this chart--and none of them are remotely bullish.

1. This market is not even close to being oversold. Bulls are hoping that the selloff has created an extreme of negative sentiment, which would be a reliable indicator that the market is about to rally. But there is no evidence of such an extreme, and the VIX/VXO (not shown) is also not at an extreme.

Rather than an extreme of negative sentiment, we see complacency, and a long way down to reach extremes in RSI and stochastics.

2. The 200-week moving average (MA) has offered picture-perfect resistance and support. The entire August-September period of wild swings of volatility can be seen here as a struggle around the 200-week MA.

In a classic retracement, the SPX shot up and recovered the 50-week MA, but failed to hold that level. Now it is heading back down for another retest of the 200-week MA. Only this time the chart is significantly weaker than in September, and the low-volume "oversold/hopium" rally in October was technically underwhelming.

3. Another clue that supports the notion that the 200-week MA will fail to hold this next text is the beautiful (to technicians) complex head-and-shoulders pattern which is made up of a shallow HS triple top formed from March to August of this year, and a second outer left shoulder formed in November of 2010.

The corresponding right shoulder was traced by the October rally that just rolled over. This completes a long-term head and shoulders topping pattern.

4. The MACD is extremely negative, being well below the neutral line and rolling over into a bearish cross. Coincidentally, the stochastics also rolled over in a bearish cross.

5. Price tends to alternate between the Bollinger bands; rallies will rise to the upper band and push it higher, while declines will fall to the lower band and ride it down. Thus the lower band is a reasonable initial target for this decline. The problem for Bulls is that this target is well below the 200-week MA, meaning that hitting the lower band will mean the 200-week MA will be decisively broken.

If price does fall to the lower band, we can anticipate an oversold rally back up to the 200-week MA, followed by a renewed plunge to new lows.

An insightful technical analyst who prefers to be known only as "Chartist Friend from Pittsburgh" shared two very long-term charts of the Dow Jones Industrial Average (DJIA) and the U.S. dollar. As I have noted here many times, the current era has seen the DJIA and the dollar on a see-saw, meaning a falling dollar has corresponded to a rising stock market, and voce versa.

These charts are remarkably self-explanatory:

The implications of this chart are not exactly Bullish, as it targets a long-term bottom between 1,000 and 600.

Turning to the U.S. dollar, our Chartist Friend observed, The monster decade long head & shoulders on the DJIA is well documented, but I have yet to see anyone other than myself make a connection between the DXY mid-90's bottom and the bottom that it is forming today."







Our Chartist Friend from Pittsburgh has noted how a classic 5-point pattern may be repeating, which targets the 86-88 level in the DXY near-term. Longer term, this chart suggests a rally of much greater duration and vigor than most analysts dare extrapolate in the current dollar-Bearish climate.

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HedgeAccordingly's picture

Good post... worth noting oil's strength into the close friday and ES weakness.. something brewing -

In Fed We Trust's picture

Wht are you calling it an accident?

As much as an accident as AIG was dude.

max2205's picture

So if I get 50,000 cash out of the bank, will I be able to buy anything with it.


gmrpeabody's picture

"MACD below the neutral line and rolling over..."

Well..., it happened that way in March of '09, and the rest is history. Hard to rely on technicals when the markets are so manipulated and bogus. Just saying...

Johnny Yuma's picture

Looks like you don't know how to use the MACD... In March of '09, the MACD was in an extreme oversold area and created a bullish divergence that got "everyone" long at that point. The MACD currently is at a very high level even though it's below the zero line. This is typical for a retracement in a bearish market cycle. By the way, it's ridiculous to think that the market is manipulated. No one is bigger than the market, not even the Fed which is why we've seen them lose their grip on the equity markets even though they are still conducting POMO and other market operations...

gmrpeabody's picture

A thousand pardons Bounty Hunter..., it surely was oversold at the time. As to whether the FED has lost their grip is still very much up in the air, and the subject of this and many other hotly debated threads. Unlike yourself, I am very unsure that the can has been kicked as far as it will go. That is what brings me here.

traderjoe's picture

Not manipulated? That's absurd. The PPT, POMO's, CNBC propaganda, hype for IPO'S like GM, etc., the 'stress tests', GE hiking the dividend right on the announcement of the first EU stress test, the very meme of buy-and-hold, the notion that stocks are the best long-term investment, etc.

It's all manipulation, man.

i-dog's picture

... and, on top of those points you mention, the Dow itself is priced in dollars (which are heavily manipulated). Plus, it is further adjusted from time to time to replace falling stocks with rising stocks.

The Dow is not an independently analysable variable. This charting "might" be more useful if it were conducted with the Dow priced in gold.

Pegasus Muse's picture

 This article ought to appeal to your “inner scientist” and your ability to analyze a problem logically based on empirical evidence. 

Check out the USD Half-Life Chart and how closely the data fit the classic logrithmic decay curve found in radioactive isotopes. 

It would seem Nature prevails ... even in a world rife with currency manipulators.


November 14, 2011

Europe Crumbles

As the wheels come off in Europe, be prepared to take advantage of any pull-backs in physical gold, silver, platinum, and in mining stocks.

Volatility is high as rumors circulate about the latest bailout plan, change in leadership, and massive public demonstration. Do not let this fool you: governments will create the currency to kick the can down the road. It's a game of musical chairs, and nobody wants the music to stop on their watch.

But it's not an all-or-nothing game, either. Especially in Europe, there are many possible outcomes: dramatic restructuring into a United States of Europe with countries essentially devolving into provinces; Germany pulling out and leaving the rest of Europe to fend for itself; some or all of the PIIGs getting kicked out of the euro and reverting to their former currencies; and so on. What all of these scenarios have in common is massive currency debasement.

Bad debts have to be liquidated, one way or another. And while that sounds deflationary, it will trigger currency creation in unheard-of proportions as the "too big to fail" banks, corporations and governments are kept afloat. 

Keep an eye on the half-life of the dollar

There is plenty of room at the bottom of this chart for a gradual default on all the debts, public and private, that can never be paid back in honest money. But don't be surprised when at some point, maybe next week, maybe next year, or maybe next decade, the markets suddenly wake up and smell the coffee – and realize that they have been conned. By that time, you want to be as far away from fiat currencies as possible.

Also expect a gradually tightening noose of capital controls, increasing taxes, and encroachments on civil liberties as standards of living fall. All these things will be done "in your best interest", to "create jobs", to keep you "safe", and make sure "the rich" pay their "fair share". This gradualism may also give way suddenly to a declaration of war, a state of emergency, martial law or an outright dictatorship – possibilities you have to prepare for.

Watch for buying opportunities and continue to accumulate physical gold, silver, platinum and high quality resource stocks. Diversify your geopolitical risk by having some of your savings (precious metals and investments) outside of your home country. Have a place which you and your family enjoy that you can slip away to if necessary. Hope for the best, but prepare for the worst! 

johnu78's picture

The PPT should have been disbanded by Congress in September '08 for their market rigging practices!!!



Johnny Yuma's picture

"Not manipulated? That's absurd. The PPT, POMO's, CNBC propaganda, hype for IPO'S like GM, etc., the 'stress tests', GE hiking the dividend right on the announcement of the first EU stress test, the very meme of buy-and-hold, the notion that stocks are the best long-term investment, etc.

It's all manipulation, man." 

Spoken like a true rookie... It's blatantly obvious that you don't understand what I meant. Sure, there are attempts at manipulating the market however, nothing has been able to keep it's grip on the markets...

Barry Freed's picture

You don't have to be bigger then the market to manipulate the market.

If I have my thumb on the scale, I'm not bigger then the scale, but I'm manipulating it.

akak's picture

Good point.

In addition, one does not need to exercise total control of a market (or anything else) in order to effect influence over it and within it.  This is similar to some of the specious and idiotic arguments against the idea that the price of gold is officially (but surreptitiously) manipulated: "If they are manipulating it, then why has the price been rising?"  Who says the price would not be rising even faster if there weren't any manipulation occurring at all?

Bendromeda Strain's picture

I trust everyone remembers what Goldman Sachs said when they set the Feds upon Sergey Whats-his-name over that "trading" software he "misappropriated".

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public yesterday. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

As opposed to manipulating markets in fair ways?

gerryscat's picture

Actually a large percentage (50% if I remember right, NYSE) trades via Goldman Sacks, so they know what is going on and can manipulate with that knowlege. And Kramer is famous for saying he only needed a few million to push around some stocks, what would a few billion do with the S&P? Plenty. 

Tom Green Swedish's picture

The market went up on March 10, 2009 because the Uptick rule was going to be reinstated.  Now the MACD is like a trend indicator and if it can't get about 0 and stay above zero thats bad news.  Of course there is hardly a way for it to know whether it will stay above zero for an extended period of time thus indicating a rally, short of quick rapid upturns or downturns.  The recent IMF blunder of the 800 billion dollar bailout might change things to that line though.  Its all about the news, the indicators only confirm or do not confirm time cycle trends. RSI , Bollinger bands and Moving Averages, and maybe MACD are the only ones worth using along with Candlestick analysis.  The rest can be thrown in the trash.

svoboda59's picture

MACD oversold ?

MACD is not a stocastic indicator !!!

Pls go back to TA 101

tooktheredpill's picture

technicals are good mainly because everyone else relies on them

Big Slick's picture

Its in there somewhere. Let me take another look.

jaffa's picture

An alternative and more plausible theory goes that the Dollar Sign $ is directly borrowed from the sign used to represent the Spanish Peso which is in fact a $ and is said to come from a representation of one of the Pillars of Hercules with a motto ribbon as depicted in the Spanish Coat of Arms. Thanks. Regards, Winfield Estate

jaffa's picture

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. Thanks.
rv dealers

disabledvet's picture

gee, i wonder what that could be? hey look! war in the oil rich Middle East again! Never have so many of our cherished freedoms let alone our entire way of life been destroyed by so few people. it is indeed "the oil curse." the irony that it could bring about the destruction of mankind should be lost on no one. "Atlas Shrugged" as they say.

GeneMarchbanks's picture

That DXY chart is something three words from Bernanke can render meaningless.

Mariposa de Oro's picture

This American ALWAYS skips it!  I don't understand why any thinking human would willingly put themselves through that.

fonestar's picture

People on the right shoulder, watch for falling dandruff!

eddiebe's picture

Seems like everybody keeps looking at the equity markets. I think the big story shortly even (and especially in the U.S) will be the bond market and then confidence in the $. That will make stocks look like a store of value.

devo's picture


This is when gold will shine (and be confiscated)

Michael's picture

(and be confiscated)

400,000,000 personal fire arms says otherwise.

TeamDepends's picture

Arms are for hugging

your guns

Michael's picture

Improper grammatical usage not withstanding, I've been waiting for positive confirmation of complete and total economic collapse events to answer some nay-sayer people I encounter on a daily basis, did the collapse happen today?, why yes it did. The Eurozone domino has reached the point of no return with complete and total collapse inevitable. It can't be revived at this point in time, game over. Thank goodness I have a spell checker, although I find I need it less and less these days.

TeamDepends's picture

Improper grammatical usage?  Have you never seen an "Arms are for hugging" bumper-sticker?  "Your guns" is our hilarious punch-line.  What is spelled incorrectly?  We are not sure what you are waiting for, but it seems to us that the vast majority of people who visit this site know that the crapstorm is right around the corner, possibly Monday.

jeff montanye's picture

i think michael was being self-deprecatory.  it's a pretty good slogan though perhaps vulnerable to the old rifle/gun fighting/fun ambiguity. 

Landrew's picture

Why do you believe the Euro is dead? Most likely the Euro will free fall to an extreme lower level to the dollar,pound and yen. At that point I believe Euro debt will default. If you are claiming the lower Euro is a dead Euro I agree, however the Euro will still be used. This will most likely unfold as Argentina did. Any thoughts?

akak's picture

This will most likely unfold as Argentina did.

For the last several years, I have also come to feel, and believe, that the Argentine economic and currency collapse of 2001-2002 is by far the closest analogy to what is going to be experienced in both the USA and Europe --- not a total collapse of the respective currencies, merely a 75-90% decline in the values of both the US dollar and the euro over a roughly one-year period (which may not coincide precisely for both currencies).

Michael's picture

$600 trillion of worldwide credit derivatives collapsing has that affect.

Freddie's picture

Anyone here looking at the chart for TLT - the iShares 20-year T Bond ETF?   The long bonds look like a mega bubble.  The TLT is up about 30% since this summer.  

krispkritter's picture

In the process of auctioning/selling off some 40 guns. Even in this economy there is no shortage of buyers.  My local gunshop is hopping and now stocks probably 50% paramilitary gear. Was actually thinking of buying out a retiring gun shop owner in town. 

Shell Game's picture

Did he say confiscated from citizens?  NY city vaults store 70% of the world's gold.  Let that sink in.  That stored gold is sovereign gold.  Germany, Japan, IMF, et al. will never see their gold again, according to Jim Rickards. 

No, it won't be our measly portion of gold confiscated, for the reason you mention, but that's not to say we won't see a new 90% sales tax if sold through 'official' channels. 

cranky-old-geezer's picture



So when your relatives, friends, neighbors, etc turn you in for being a gold hoarder and they send a swat team to arrest you, you'll whip out that gun and get blown away before you can get a shot off?

The only way that 400 million guns will do any good is a massive coordinated revolution, like the Revolutionary War.  

Short of that, forget it.   One of you against several of them is a losing deal every time.

RafterManFMJ's picture



This is when gold will shine (and be confiscated)




Big Slick's picture


I love it.  But the phrase always makes me nervous.  Ballsy as hell, but it still didn't quite work out for King Leonid. 

All Mr. Holder needs against me and my (icon)-47 is an ATF agent with night vision and a Heckler Koch MP5.


RafterManFMJ's picture


Well disperse your metals and hope for the best. Frankly, my game is to do the minimum necessary and withdraw from the system.  Nothing overt, just a kind of Ghandi-esque disinterest.  And still, if Mr. Holder does as you say, well, the .gov hasn't won a war since '45...

...what makes you think they can kill off/suppress say 20 million Americans? But I don't think it will come to that. Hope not!

FinalCollapse's picture

Question: can both the US credit markets and the stock market to go down at the same time?

If so, then there will be no store of value (gold?) left as the money starts disappearing down the deflationary vortex. It is not M1, it is M3 so once the deleveraging picks up the speed.. 

Landrew's picture

Very good question and I think the answer is yes. Currently we still see monies moving to credit when the equities move down, however, in the past as governments, states, companies fail the money will move as they say under the mattress in the form of debt repayment and commodities. As many articles here point out, the turning point will be any ones guess. As in the past there is a panic at some point that those in power can not stem because they were in charge even if they made the right decisions. Once full faith and credit are lost the road is long and hard to recovery as history tells us. Many a PHD thesis is being planned on just this event.

GtownSLV's picture

They could but they probably won't. I've been running through scenarios and the most likely outcome is the US credit market has several weeks to months to keep inflating as world equity markets plummet. This goes on for as long it takes the EU destruct. When enough wealth is destroyed world wide the US bond market bursts and WW3 starts shortly there after. If you look at World news you can see sides are already starting to get drawn up.    

YC2's picture

just one note - bonds are higher in the capital structure in a corp, so they would always be a "store of value" over equities.  For this reason, I am guessing you mean govt bond market, right?  

I have been turning this one over in my head, how debtholders could take a hit on the govt side, then affecting the corp bonds and corp equity.  Would be odd if govt bonds were wiped out but corp equity stayed in the game.  Welcome to planet starbucks, to quote fight club.