Divorced from Reality

The market this weekend is quite the mess.

We  have currency pairs (particularly AUDUSD) which seem to be out-of-sync with other USD pairs. But, we do have the Euro headed back up (and the US dollar down), which is what we want in order to get a logical top in place.

The US Dollar has been ‘in the doldrums’ the past few weeks, gradually drifting upwards, but to deflation. The Federal Reserve calls it ‘a liquidity problem.’ It is, but it’s a problem they won’t be able to solve. It isn’t just affecting the US banking system — it’s a problem that’s much larger than that, as countries move away from using the reserve currency (largely due to it be “weaponized by the US government, as they dole out sanctions to anybody they don’t like.

The movement of the US Dollar this week will be thanks to Jerome Powell of the Federal Reserve. The stupidity of this latest move should be apparent within the next month, or so, as I’m expecting to see the start of the expected mini-crash this coming week.

However, the timing of the pandemic gives President Trump something to blame the coming fourth wave on. We know why it’s coming, but the rest of the world doesn’t and the narrative on this one is going to be really interesting — anything but the truth — the times we live in.

And then there are the other central bankers. Some of them have negative rates in place, and in Germany, there’s a report that banks don’t know where to put the cash that’s piling up. In short, as a group, they’ve ruined the financial system, due to greed.

That’s insanity (the negative rates, that is). There’s so much insanity around that it’s difficult to list it all — the list is simply too long.

“At the extremes, the herd is always wrong. One should not under estimate its capacity for stupidity.” — The Secret Life of Real Estate, Phil Anderson

Back in the good ole’ US of A, we have the Federal Reserve this weekend buying up bonds and other monetary vehicles in order to inject more debt (the monetary system is based on debt) into the system to keep the US banking system from freezing up.

What’s particularly interesting about this is that Jerome Powell, as the head of the Fed, is actually hastening the demise of the stock market. What he’s doing is forcing the US Dollar to the downside, which is where the technical target is for a turn back up to the upside (which will result in a turn to the downside in the US indices). It will start the crash we’ve been waiting for (actually a fourth wave) in the US equity market. (see the chart of write-up this weekend on the US Dollar Index).

Along with all this, we have the highest prices in Super Bowl tickets in 5 years (an inflationary blow-off?), at a time when the fans can least afford them. A large gathering like this reminds me of the top of the Roman Empire, when appeasing the populace with death and destruction in the Colosseum was all the rage (football destroys brain cells, so it’s not far off the mark from the gladiators and animals that met similar, but faster deaths two thousand years ago).

The present situation, which is the beginning of the demise of the “empire of the day” is eerily similar.

Central bankers are completely nuts; they’re out-of-control. They’ve created so much debt that they’re simply out of ideas as to how the keep this house of cards from imploding. Implode it will; there is no solution.

At the same time, we have a pandemic on our hands, the first of many on the horizon. Pandemics always occur when climate turns colder and dryer, which is has. The fires in Australia and (in recent years) on the West Coast of the North American continent attest to the dryness. It’s the new normal.

Back to these central bankers. We haven’t seen the end of them. At the bottom of the fourth wave (when we hit the area under 2100 in SPX that I’ve been predicting), I expect to see a massive injection of liquidity, so that the market heads back up for one final kick at the top, before keeling over in what promises to be the most devastating financial meltdown in history. Hopefully, it will be catastrophic enough to end humanity’s experiment with fiat money — something has been tried over and over again throughout history, and has ALWAYs failed.

In any event, we’re going to need a new financial system eventually, but any thought that this new system will be introduced without extreme pain for a very long time, shows no understanding of the depth of human ineptitude.

It will be painful, a lot of lives will be lost, famine and disease will be rampant, but we’ll have the opportunity to learn from this mistake. And, if history is any teacher, we won’t.

In any event, it’s not the end of the world, I’m just able to see it from here …

Now, while this sounds quite negative (and it is), out of the dust will be born a much better world. It’s not going to happen in my lifetime, but there will be a time sometime down the road when all the corruption is uprooted and driven out of the system.

In the meantime, we have central bankers to deal with, but the good news is that it won’t be for all that much longer ….

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DXY (US Dollar Index)

Above is the daily chart of the DXY (US Dollar Index).

The US Dollar is, of course, the world’s reserve currency. The international economy revolves around it and, for the past four years, or so, other assets classes have been becoming more aligned with its movement. These days, the international stock markets are moving more of less in lock-step with the US Dollar Index, as the reported 250 trillion dollars in worldwide debt fluctuates.

For months now, I’ve been calling for a trend change in the US indices when the US dollar reaches the bottom of the last leg of what appears to be an ending expanding diagonal (marked 1,2,3,4,5) showing as a sort of “channel” between the slightly rising trendlines in the chart above. The important turn I’m referring to will be red 4 (a turn to the upside into the fifth wave).

The US Dollar moving up is deflationary (it increases in value) and inflationary in the opposite direction. The EURUSD has a similar pattern in the opposite direction (a regular ending diagonal in that case). When the Federal buys more debt, this injects liquidity and the dollar moves to the downside (decreases in value).

The Dollar Index requires one more test of the level at 96.35 before a turn up into the fifth and final wave of the ending expanding diagonal. The liquidity problem has been obvious in that the dollar index has been slowly sliding higher in a corrective wave pattern over the past couple of weeks (to about 98.20).

This week, the Federal Reserve announced that it is resuming the liquidity operation it began in the fall of last year, in an attempt to increase reserves in the US banking system. We’re seeing this effect the last couple of days, with a final wave in progress to our target (96.35).

We should reach our target this week, which should also (FINALLY!) lead to a trend change in the US indices.

Know the Past. See the Future.

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US Market Snapshot (based on end-of-week wave structure)

This chart is posted to provide a prediction of future market direction. DO NOT trade based upon the information presented here (certainly NOT from a daily chart).

Above is the daily chart of ES (click to enlarge, as with any of my charts).

This past week, I had my hopes set on a final high shortly after the Fed announcement on Wednesday. We rallied into the announcement, as expected, and then ... nothing. In fact, I think it's the first time I've ever seen no reaction to a Federal Reserve rate announcement, whether it resulted in a rate change, or not.

In any event, as I said the week before, the waves down are corrective (a final fourth wave) and so we wait for a final small 5th rally to a new high across the indices. That will result in a major trend change.

It all seems to center around the US Dollar. It's been slowly rising in the past few weeks due, apparently, to the bank liquidity crisis (at any rate, that's what the Federal Reserve is focused on). In fact, the problem is much larger than just the American banking system, as countries are fleeing from using the reserve currency. The administration has been quite vocal as to how they've weaponized the dollar, reducing its use by countries around the world (as a byproduct of sanctions).

This reduces the number of US Dollar transaction (limited US Dollars in the broader economy, and forecasts a period of deflation). However, the Federal Reserve announced this week that they're re-instating the liquidity operations that began late last year in an attempt to shore up the US bank reserve system. This will have a short-term effect of lowering the Dollar Index.

After sitting idle and/or slowly sliding for the past few weeks, earlier this week, we saw the result; the US Dollar Index has turned to the downside and we're finally heading down to my longer term target of at least 96.35.

As the Dollar Index generally moves with the US indices, we should start seeing the effect in the US indices with a final wave up to a new all time high in ES. Once we reach that new high, expect a turn to the downside and the larger 4th wave down to the 2100 area in ES.

The DAX appears this weekend to have topped. If that's the case, expect a rally here, too, this week, but only to the 62% retrace level.

The larger, overall pattern across all US indices appears to be an expanded flat. That strongly suggests we're going to see a large C wave (in a 5 wave pattern) to the downside under the 2100 level in ES, as I've been predicting.

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There is an option of a set of zigzags down to the same level, but it's much less probable because there are so many flats set up across multiple stocks and indices. If a zigzag is the pattern that traces out, the retraces up will not be as strong as they would be with the C wave of a flat. We'll get a lot of information about the probable path from the first wave down.

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Summary: The current B wave up is most probably the B wave of an expanded flat. The A wave ended on Jan. 26, 2018. The B wave rally has all but ended, as other asset classes I cover have turned, or are about to turn after one more small wave.

We're going to drop from here into a large fourth wave. Look for the ultimate bottom to be somewhere under 2100 in ES.

Once we've completed the fourth wave down, we'll have a long climb to a final slight new high in a fifth wave of this 500 year cycle top.

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