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Table of contents: Macro overview of the GDP print, EURUSD, Bitcoin, Gold and Bonds.
On Friday the US reported a GDP print of 3.2%. From that print only 1.1% was CapEx and Consumer Spending, the rest was government spending and inventories. Thus, 2.1% of the GDP print is reliant on factors that won’t be present in the next quarters, inventories will get sold off as companies overproduced and government spending will decrease substantially. However, there is also another thing to take into account when looking at this GDP number. It is the Inflation deflator that was used. The presented deflator was 0.64%, if we used the inflation number reported from the US government via CPI the GDP print would be about 1.6%. That is a big difference isn’t it ? Taking into account the already mentioned factors of inventories and government spending, real GDP growth will come to about 0.4%. That is what you call a really bad number and one that brings us close to recessionary levels. That is also exactly why Bond Yields plummeted significantly.
The economic situation is not rosey and the only reason stocks are where they are is the extremely sharp decline during December that left investors scared and allowed algo’s to completely take over as the Fed did a complete U-Turn. We expect the next 5% move to be to the downside and we expect that to happen fairly soon. To support our bias we present the following evidence:
- Short interesting approaching record lows with VIX shorts by Hedge funds at record highs. We last saw this before we crashed Q4 of 2018.
2. Both DeMark count and Elliot Waves point to a correction. In terms of Elliot Wave our base case is the completion of an ending diagonal that should give us a sharp move to the downside.
We suspect that longs will achieve their targets @ 2950 and perhaps even extend a bit further to 2970. However, we don’t expect a significant break out to occur and instead we suspect that a significant correction should occur. We have reached a point where being long at these levels is surely a risk endeavour.
We need to take into account and remember that we have the Fed next week. Considering the levels we are at on indecies we believe the market vastly underestimates the possibility of Fed leaning hawkishly again. It is unlikely that they will go really hawkish, however, should they entertain a hike more seriously this should have its mark on markets. We indeed have expected that the next rate move would be lower, however, consider the fact the Fed has made it abundantly clear that their rate decision policy is based on the level of S&P 500, they might in reality be forced to hike soon to avoid further reckless risk taking and increases in bad debt. Truth be told, they are in a difficult spot. The contrarians we are, we do think now, having changed our mind, that the risk of a surprise hawkish tone is increasing as we are breaking to new highs daily.
What will be the cause? Who knows. Do you short blind? No. What needs to happen is to wait for confirmation by a break out of the triangle. Once we believe we have established a series of shorts we will let you know.
There is one more component to this which should bear reminding which is DXY. DXY appears to be attempting a breakout and we pounder how long can indecies sustain this high with DXY breaking out and EM’s getting crushed. The rumors and stories of dollar shortages are only increasing and we believe it is a logical question to ponder over. While, USD strength hasn’t put much of a dent in this rally, in the event of real dollar strength one can reasonably expect this phenomenon not to persist. However, this brings us to our next chart, which actually suggests some short-term dollar weakness might occur soon, which ironically aligns with a turn in indecies as we have seen that in the short-term we have a positive colleration been risk and dollar until real risk aversion kicks in. This became rather evident in December.
Next up we have EURUSD.
After countless sleepless nights of pondering over what EURUSD wave count was we have not become convinced EURUSD is completing a 5 wave decline with an Ending Diagonal, we particularly enjoy this possibility due to the fact that our long-term short targets on two big daily shorts target the bottom the triangle @ 1.108.
Considering the event risk this week from Spain with elections we believe that should a good gap up present itself we should short it expecting 1.108. However, should we have a gap down into those levels, we suggestion initial caution before turning long. While this is a very good setup we do not to take our chances because should risk-aversion kick the dollar can really scream. That being said like with S&P500 positioning is in our favour, so we indeed consider the risk of being long EUR at these levels as lower than being short in the immediate term. Invalidation of this view would be a sustained close under the bottom of the triangle.
Speaking of EURUSD and DXY it’s time for us to take a look at Bond Yields. The chart below explains is 10 Year Treasury Yield.
Bonds are following a series of 50% shorts of the highs and the recent advance from the 2.345% came into the next in the series short and was tamed by a trendline from the highs. We now expect yields to further go down and reach their profit targets at 2.237 unless the Federal Reserve shifts significantly hawkish. Regardless of that it is safe to say that the GDP print we had on Friday wasn’t taken well by smart money and the bond market called “bull” on the 3.2% reported GDP.
Now let us take a look at Gold.
We remain intermediate term bullish on Gold as long as price stay above 1230. The equality of waves from the highs comes at 1253 and further short-term weakness can be expected. Should however, none such present itself look for a break out of the wedge off to highs to signal a bottom. Our main view is that we should at least get a push to the 1360’s before we can make a conclusion on the daily triangle that has developed on the daily timeframe. The one thing we can say with certainty almost is that in the longterm timeframe 10 years + Gold will indeed be going up. For this to change we would need to fix our debt problems which seems like an impossibility. We suggest readers that can purchase physical Gold to do so anywhere between the 900 and 1100 mark should we see further extension to the downside.
In the meanwhile, as we await for these setups to unfold we believe that some of the best trading opportunities have come from the unlikely space of Crypto. We focus on BTCUSD specifically, but should another interesting setup present itself we will post it.
Below you will find the interesting case of BTCUSD which is trading same anchor new high for the 3rd time in a row.
This same anchor new high setup is coming from an anchor 4190.5 and has now traded twice to target. We do not take the Tether scandal lightly, but we also need to be aware that only the market knows what really means. The report do seem to suggest it overblown for now, but as new information presents itself who knows what will happen. Thus, we believe the way to view the situation is that this rally lies upon this long setup. We believe that BTCUSD is bullish above 4.7k and if have a break under the 4.7k level we could see a move back to the lows of the year of 3.1k and even extend further down the 2500 level. This view aligns with the fractal similarity of this rally with 2015, which suggest we get a sharp move to the downside that consequently gets reversed.