Guest Post: Storm Pennants Are Flying In Stocks And The Dollar

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Storm Pennants Are Flying In Stocks and the Dollar

If we look only at charts and ignore the "news," we see storm pennants are flying in both the stock market and the U.S. dollar.

The stock market is wearing a T-shirt that reads, "I broke a downtrend and all I got was this lousy pennant." Having just returned from nine glorious days camping in Washington State, I have no idea what "news" has effected the markets ("news" in quotes because the news is managed for its PR effect--the real news is what has been suppressed lest it undermine the Status Quo's carefully cultivated propaganda campaign), and so I have marked up the chart of the Dow Jones Industrial Average (DJIA) and the U.S. dollar without the "benefit" of the news flow.

What pops out is a big fat pennant in both charts. Pennants can be continuation patterns--mere way points in a continuing up or down trend--or they can indicate points of trend reversals.

The key feature of a pennant is the compression of price into a narrowing channel, as the relative indecision of buyers and sellers alike causes price to fluctuate less and less.

At the apex of the pennant (note the triangle shape), the irresolution is resolved, usually in a big way up or down.

If we look at the indicators in the chart of the Dow Industrials (Indoos), we note that the oversold conditions have been worked off, and a very bullish divergence in the MACD indicator (and a positive cross in MACD) has yielded up a meager pennant rather than a clear breakout or trend reversal.

Even if you discount the "death cross" of the 50-day moving average (MA) dropping below the 200-day MA, a declining 50-day MA does not suggest a Bullish resolution to the pennant.

That intersection of the 50-day and 200-day MAs offers up a tempting target for market Bulls. What should worry Bulls is that these positive moves in the indicators have yielded up such modest results--a pennant that is a week or two away from a potentially major break up or down.

As for the dollar, the pennant may well be a sign of strength, as the Federal Reserve has been trying mightily to push the USD to a new low while propping up the euro at 1.44.

The basic reason is that a weakening dollar is the primary engine of U.S. corporate profits, as I explained in About Those Permanently Rising Corporate Profits... (August 12, 2011). If the Fed is unable to suppress the dollar via propping up the euro, then the entire stock market rally built on a falling dollar will collapse is a heap, shattering Wall Street's PR of permanently rising corporate profits.

As noted in that entry, the euro and the dollar (as measured by the DXY index of weighted currencies) are on a see-saw; if the euro breaks down as a result of the eurozone's irreversable structural dilemmas, then the dollar will strengthen and the Fed's master plan of pushing stocks up via a weakening dollar will have failed.

We have no idea how much treasure is being thrown into the fire to maintain the euro at 1.44 to the dollar, and that is the "news" which we must not be allowed to know, lest the extreme vulnerability of the eurozone financial Status Quo and the global rally were reflected in the foreign exchange and stock markets.

Being completely out of the news cycle is a blessing, in more ways than one: not only is one's mind untwisted by propaganda passing as "news," one is free to look at charts without the carefully designed biases implicit in the "news."

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Freddie's picture

LOL! Tyler's headline is great. Tyler is pretty cool even though Noeil Roubini thinks Tyler is a douche.   If I were Tyler, I would bust that dirtbag Roubini's fvvking jaw.

Pure Evil's picture

Fight Club Bitchez!!!

narapoiddyslexia's picture

Well, since TD is at least three or more people, it wouldn't be a fair contest.

It would be just, mind you, just not fair.


Spirit Of Truth's picture

One point the Roubini has highlighted which warrants attention in light of this post is that the Fed has engineered one of the most dangerous bubbles in history via the dollar carry trade.

....the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

If the dollar does head substantially higher and the carry trade unwinds, the deflationary impact could be profound across all asset classes (including gold folks).

Maybe Hurricane Irene striking NYC is foreshadowing another kind of storm.

The "Fall" Is Approaching

falak pema's picture

This Roubini article nails it down to a T. The currency war and the risk asset levitation since that article was written in 2009 has increased even further. And yes gold is also now going bubbly.

So the gold bugs better look out. Fundamentals are important. The US economy fundamentals are the worst in the world. The USD reserve currency status will not save it from protecting the risk asset levitation and the USD carry trade all in the same breath.

Something has to give and its not just the Euro.

Flakmeister's picture

Top of the morning...

Naw... no bubble, not even close. Au keeps rising untill the equivalent of BW III...

falak pema's picture

lol, to you too.. if you say so. I'm no trader myself but I have a feeling the big boys could manipulate it when they feel its in their interest. I don't know when that point will be reached. But fire away!

This guy Roubini feels like we may already be there. I don't know how much past history expressed in charts can predict irrational investment future patterns as the USD carry trade and derivative bubbles make the roller coaster very much "new irrational, green fields" territory. We are in places where we have never been in the asset risk investment cycle.

Flakmeister's picture

Irene's eye is about 80-100 miles due south... (not really an eye, more like an epicenter...)

Strange, so far like a good ol' fashioned Nor'easter, but the rain is warm...


falak pema's picture

Hope you guys don't feel her scorpion's tail and its bite...take care NY!

janus's picture

yes, falak, i believe there was just such a tail attached to camille (68' -- destroyed biloxi, then unleashed devistating flooding in the ohio valley, long after its winds had died.


redstuffer's picture

18 months ago:

Roubini: I don't believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there's slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there's no inflation, and there's not going to be for the time being.

e_goldstein's picture

You fucking assholes are forgettting the first two rules of fight club.

Personally, I'm going to introduce these two latina strippers to the joys of Hayek.

and, I'm gonna quote Forrest Gump:

"Stupid is as stupid does."

Enjoy the hurricane, bitchez.

janus's picture

we got some puerto rican girls that's just dyin to meet you.


but you do have a point: in the new age, stripping will be most difficult for young ladies accustomed to the easy-to-manage paper dollar...tiny silver dimes are a real bitch to corral in a dark bar littered with glittering flahes of light.  maybe they'll start to issue strippers-stickers that we can affix to our favorite fox...kinda like hello kitty, but with strippers.

erg's picture

It sounds like a flying trapese troupe. The Flying Roubini's. Or a faded magician with calcified sleight-of-hand.

The Great Roubini coming to a community centre near you.

papaswamp's picture

Roubini's problem is the same problem Wall Street has...they are ignoring the plight of main street. The Big R seems to want a big dose of stimulus …this repeatedly has shown to only keep banks alive..not main street. Debt has expanded at a 1:1 ratio (real GDP) until debt crossed over GDP. This clearly shows the Keys econ theory with high debt levels doesn't work.

Debt to Real GDP is now 110%

css1971's picture

Wasn't cash about 50% of the money supply when Keynes was around? These days it's about 2%.


Or was that only when he was done with the printing?

SuperRay's picture

spinone, you were first and that's all you had to say? could have at least said "First bitchez!"

MoneyWise's picture

If you trade Forex, you would know, that looking at the

same chart traders will have different outlook, so?

Post the charts and do not comment, cause it's useless.

As of now those charts are not bullish nor bearish.


Bob Paulson's picture

With the above charts, as is usually the case with Technical Analysis, half of the indicators are bullish and half are bearish.

Terminus C's picture

you are so slow you can't even beat yourself.

caerus's picture

i'm pretty sure he beats himself

Revolution_starts_now's picture

Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

LeBalance's picture

Are you seriously engaging in technical analysis in these structurally kablooey markets?

That was ever the arena of shills and conmen, selling crack stock to noobs, but to engage in it in the post-HFT digi-lemmings-uber-alles era is .... just a comment that maybe you should go back to your "camping."

Freddie's picture

...but Buffett said we should buy now.   Buy solid banks like Banco of America.  The bank for illegals.

Divine Wind's picture

"The bank for illegals"

I wonder how much of the crap on their books comes from their dance with the illegal immigants, from credit cards to mortgages.


indygo55's picture

That looks cheap to me!

Freddie's picture

Half of the shit Banco de Americana lent money for left for south of the border in probably a new pickup and trailer. The house was foreclosed on.  The illegal scammed that POS bank "real good." 

sun tzu's picture

Yep, those auto loans went back to Mexico when the construction workers lost their jobs. So did the credit card debt and mortgages. Good luck collecting on those loans. 

scatterbrains's picture

I'm not sure now that pomos have stopped.  That head and shoulders on the /ES sure worked out well.

Landrew's picture

What you fail to realize, this chart is not only about market trading day to day, it is about the social mood of the country! The mood of the country is the direction we are going! The mood is not good, even at the top. The stock market reflects the mood first as you see the death spasms of a undulating plateau. When you look at the chart patterns preceding all the greatest market collapses you will see this pattern.

Terminus C's picture

Do technical analysis and chart patterns even matter in this 'market'?

HAL 9000's picture

Yes, technical analysis still works.


1) Buy value stocks with a margin of safety - on short term technical weakness.  Sell at Intrinsic Value - on short term strength.

      Works for Buffet and plenty of great value fund managers, will work until the end of the world.

2) Momentum works on non-corellated asset classes

      Works for Mebane Faber

3)  Buy into Weakness, Sell into Strength

      Works for Tom Demark (his Sequential indicator is outstanding)


Freddie's picture

Works real well until the fiat currency becomes worthless thanks to Obam loving scum like Buffett.

HAL 9000's picture

#2 and 3 above put me 50% of portfolio in GLD/SLV/GDX (yes paper products, I know) thanks to #2 and 3 above. 

Like many here I'm a Ron Paul voting, Jim Rogers reading - Libertarian.  I just use a few TA systems to aid with portfolio construction.

Buffet may have faults but he's no scum.

mr66's picture

Buffett is a member of Augusta National golf club and also

The Cypress Point Club.  Check out the members yourself then make your determination. And for some strange reason he doesn't list his golf scores for handicap purposes with the United States Golf Assn.

Landrew's picture

Buffett is scum, Warren Mr. Potter Buffett!

harveywalbinger's picture

If you are trading on TA patterns, you haven't yet figured out that you are inside the matrix.  By using these "tools" you effectively allow banks to make decisions regarding the distribution of your wealth on your behalf (the portion of after tax wealth you had thought was under your control...).

The global banking mafia direct the charts per a predefined buy/sell script (and the "market"can be moved whatever direction is desired).  Many a presumptuous jackpot pretends to be clever by using TA to read the tea leaves & unravel the message. This process is as scientific as alchemy (in fact, it IS alchemy if you are a banker).  One could compare our "market" to a poker game in which all other players at the table (of the money trust) are well coordinated in efforts to cheat you. 

TA is likely very useful in free markets. But, sadly, there are no free markets. Consider the possibility that the decoded message is a fiction.  Don't ignore TA.  Just beware.  You rely on the "tools" of TA at your own peril.

Kill the beast.  Choose to not participate.  Instead just buy physical.  

whirlybird rules's picture

Works well for USD/EUR!  TD says the 1.44 level is all the Feds doing, but the PBoC and Merkel & co. are also players.  PBoC wants to bring the US down to its knees.  (Personally I think this type of war is much more rewarding than half of the shit we do in military projects.)  Merkel and the rest of the European leadership understand the importance of a strong Euro realtive to the dollar.  All levels of European society, from the bottom up, I mean the guy or woman with no education, knows how the Euro is doing against the dollar.  The European banking system is about to implode, but as long as the Euro is strong, the masses won't panic - yet. The strong Euro illusion worked for Greece up until about 3 weeks ago when the average citizen started withdrawing their money. Since these people do not have the capability to open up a Swiss franc bank account, they are literally stuffing the money in their mattresses! ...   side note- PBoC is starting to get nervous about the Euro promotion program.  Notice how about 2 months ago, Chinese leadership stopped banging the drum on a new world reserve currency?  You're hearing little squeeks from Chinese leadership for the first time warning the Europeans to fix their problems asap.  Next step, Chinese shift a percentage of their reserves back to USD. 

zoggl's picture

TA is an instrument if you don´t have enough fundamental information. But if you have an Information like "BERNANKE SAYS EXTRA DAY TO ALLOW `FULLER DISCUSSION' OF TOOLS on Sept. 20", the expectation of QEn annoucement on the Sept. 20 will drive all assets higher which profit from money printing. So I don´t relay only on TA in this case. 

Doug's picture

The only thing I ever learned about TA is that the more obvious the pattern, the LESS likely the expected outcome.

Galen Slade's picture

You could trade on that - think about it....

oobrien's picture

I still see deflation.

After Europe shits the bed, the dollar is going to get a lot stronger.

But that's me.

What do I know?

gtb's picture

Perhaps you need your eyes/vision checked.

DeadFred's picture

I think your right but I think the dollar will soar for all of a week or two before the printing turns the trend around. This 'most ugly' contest is matching up two real dogs. Dollar and Euro bitchez!

SuperRay's picture

no, oobrien, the dollar may get stronger against the euro, if it still exists, but it's still gonna cost $20 for a happy meal...