BTC, Apple and Emerging Markets

BTC and Apple are the two most important chart junctures for the bear market right now. Not more important assets than the U.S. dollar or bonds, but they are sitting right near major support lines and both are core assets for the speculator and investor classes. If these charts break their support lines, it's a big bearish signal. Conversely, with the maket going on nearly one-month of a rally, failure to break lower here would provide a new bullish catalyst.

Emerging markets are also sending a bullish signal. However, they sent a false signal in 2008. Not for themselves; they didn't make a new low after bottoming in the autumn of 2008. Their low signaled the coming change in leadership, but U.S. markets wouldn't make a low until March 2009.

The Korean won is rallying and the South Korea ETF is nearing its former long-term support. If emerging markets have legs, it looks like South Korea is the leader. If this rally is going to give way, South Korea is also reaching a spot where a reveral is likely.

Won Gone

It ends when it ends.

EWY took out long-term support.

Korea On the Line

Won Enters Crash Zone

Dollar Breakout vs Won

The deflation/recession argument is winning in some markets, while the inflation argument (crude oil) is winning in others. On net I remain on the deflation side, with crude as the "show me" asset. Cannot rule out something totally new either, because correlations can break permanently in secular market shifts. For example, maybe demographics catch up with Japan and Europe and we get a world where inflation and the U.S. dollar crossrates rise together. Looking at the won, there are touches of resistance in the Asian Crisis, 2008 financial panic, 2020 pandemic crash and now. An overshoot like in 2008 and 2020 could be coming, or a major breakout. Either way it is short-term bearish if USDKRW goes higher.

Emerging Markets Ready for Downturn

FYI: Most of these patterns could be easily invalidated by a sharp rally next week, but a downturn in EMs would conform with my macro outlook.

August has been a historically bad month for emerging markets. Indonesia is a worst-case example of this with both August and September negative for the Indonesia ETF (EIDO). It has a limited history though. EEM goes back farther and it too is historically negative in August. I do not place much stock in seasonality, by the way, but I do believe one should pay attention when "the stars align."

The blue lines are major support/resistance going back to 2011 and 2007 peaks.

The China ETF (FXI) could resolve bullish or bearish, but the gap between the support and resistance is only 5 percent.

India ETF (EPI) has broken its uptrend.

Brazil (EWZ) could stand to rally given its more localized issues, but it too has experienced a failed breakout.

Malaysia (EWM)

South Korea (EWY) isn't an emerging market, but its also experience a failed breakout, negative for EMs considering it is highly reliant on trade and China.

Emerging market local currency debt has broken out, but this was partially driven by falling interest rates. A strong dollar rally would turn this into a failed breakout as well.

Mexico (EWW) could be bottoming on extreme negative sentiment, but in context of everything, a breakdown is possible.

U.S. Dollar Index Bullish ETF (UUP) hit a new 52-week high on Friday.

Finally, here are a number of currencies. Many sport basing patterns similar to the broader U.S. Dollar Index and trade-weighted USD. There will be no significant breakdown in emerging markets without a major breakout in the dollar.

South Korea on Edge

I was going to release this post later in the week, but seeing as the Kospi fell on Monday while the rest of the world's stock markets are rallying...

The bearish case for South Korea (stock market and currency): it is reliant on exports to China and the Chinese economy is in a cyclical slowdown, not a trade related blip. The prime macro asset here is the U.S. dollar. A China/global slowdown includes a stable/rising U.S. dollar. Given the position on the charts, one could take the other side of the argument. I believe the downside for $EWY exceeds the upside in a bullish scenario, there are likely better assets for those bearish on the dollar and bullish on emerging markets/China, but South Korea is still a great indicator.

Roughly half of South Korea's economy is exports and of that, more than one-quarter go to China.

Given the trading relationship, the won has been highly sensitive to the Chinese economy, but has become even more sensitive as speculators look for currencies that will suffer from a Chinese currency devaluation.
Reuters: South Korea's won is Asia's whipping boy in U.S.-China trade war

As trade tensions flared up between the world’s two largest economies last month and the Chinese yuan threatened to fall past the key 7-per-dollar level, the won slid to near 1,200 per dollar, its lowest since January 2017.

“The won is like a proxy currency to not only global growth sentiment but one that’s also related to U.S.-China trade talks,” said Park Sang-hyun, chief economist at Hi Investment & Securities in Seoul.

“It won’t be easy to keep the dollar/won level of 1,250 should the U.S.-China spat intensify, with possibly additional tariffs, for example.”

The won corrected along with the yuan and U.S. stocks in June, but all three remain in bull markets.

There's no end to the bull-bear debate over the U.S. dollar. One bearish case for the greenback is the Fed unleashes global quantitative easing and rescues the ECB, BOJ and PBoC. It goes from being "the cleanest dirty shirt in the laundry" to the dirtiest. Another dollar bearish scenario is the 10-year depression ends and inflationary growth returns. This could include stagflation in the developed economies, but primary industries (mining, agriculture, energy) are much larger portions of emerging market economies. They should see positive growth. Finally, the dollar has followed a roughly 18-year cycle going back to the 1980s, with roughly equal parts bull, bear and consolidation. The current bull market began in 2014 and would be likely to terminate over the next 12 to 18 months. It could dip and retrace back to current levels as it did in the early 2000s, but would not make a meaningful new high.

The charts also raise the possibility of an explosive (catastrophic for the global economy) dollar rally. If the Fed cuts rates, but the global central banks have to initiate extraordinary monetary policy because they have less room top cut (ECB,BOJ) or because their economies will suffer far greater losses in a recession (PBoC), the dollar should rally as it did in the early 2000s recession and during the 2008 financial crisis (yen being a potential outlier). Multi-year and multi-decade basing patterns are within striking distance even after the recent pullback in the dollar. The flipside of a dollar breakout would be inflationary pressure overseas as currencies devalue against the U.S. dollar. The extreme case is an echo of the 1930s when global currencies devalued versus gold. The country most similar to 1930s USA is China, but with more debt, less productive investment of that debt and worse demographics.

Along with the macro and currency case for South Korea, the South Korea ETF is at an important resistant level.

The China ETF is at a similar point.

There are only a handful of South Korea ADRs and even fewer with ample trading volume.

The 2019 Pivot in Asia and Freegold Too

Last year I posted 2018: The Pivot Year and Dollar Breaks Again. I also did similar posts around 2015 or 2016. The posts were based mainly on technical analysis, with charts indicating a possible shift in market direction. Commodity charts and commodity producing countries had inverted head & shoulders patterns completing back in 2016. Last year and this year, there are false breakouts that reversed. Last year, I stuck with my macro position on dollar strength despite some dollar weakness and chart breakouts and it was the correct one.

Right now, the number one chart is still the U.S. Dollar Index, but for now the most important "subchart" is the offshore yuan, USDCNH. The PBoC chief drew another redline at 7.00. 人民币会“破7”吗？刚刚，央行副行长给了颗定心丸！ For myself, a move through 7 to 7.25 or 7.50 is fine if it is driven by the U.S. dollar. If DXY is above 100 or at 105, USDCNY 7.25 signals nothing more than dollar fluctuation. Yet the PBoC has boxed itself in with a narrative here. The risk isn't that CNY goes through 7 as much as the "ominpotent PBoC" "they have reserves and can force the market whichever way they want" narrative dies.

iShares MSCI Emerging Markets (EEM). The red horizontal is from the 2011 top, the blue from 2007. Prices are $40.01 currently and $39.72. A break below these levels could invalidate the 2017 breakout. Support is down near $34 if it breaks. EEM is trading at $40.11 in pre-market on Monday.

Trade is the big story and South Korea is an economy that lives and dies by global trade. ROK's trade surplus was 8 percent of GDP in 2017, exports and imports combined for 70 percent of GDP. The target for USDKRW, if that's a completed H&S pattern, is 1250. If USDKRW makes it there though, it's likely there's breakdowns elsewhere, such as USDCNH. As for the iShares MSCI South Korea ETF (EWY), it has a failed breakout, major support around $45. EWY is below its 2018 low.

Below are several Southeast Asian ETFs. Indonesia (EIDO) is close to have a major test of support.

For "corroboration" here's the S&P 500 Index. The blue line is the trendline from the 2009 Satanic low of 666. It must recapture 2895.

Finally, here's the ratio of GLD to SLV, and GDX to SIL.

I won't rehash the topic here, but in quick and simple terms, freegold is the "freeing" of gold away from a medium of exchange and into more of a monetary asset, mainly a reserve asset that might be likened to Bitcoin's role in the cryptocurrency ecosystem (if transaction speeds never pick up). Gold is money as they say, whereas even silver has substantial industrial demand. The exchange rate for money/currency can be set an any amount. The dollar can equal 100 yen or 1,000,000 yen, and the economies adjust around that exchange rate. Obviously a transition from 100 to 1 million between dollar and yen would wreck the Japanese economy, but the initial exchange rate doesn't matter. Had they set it in the millions, we'd all be saying USDJPY 1 million. The same is almost true of gold (it does have some industrial users that will be upset by a soaring gold price) because it is money. Moreover, if all fiat currencies crash versus gold, the economy suffers a less disruptive adjustment because relative prices and exchange rates won't be as directly impacted they way they would if a similar collapse took place against oil or agriculture. USDJPY is 100 and gold is $1300 an ounce and USDJPY might be 120 if gold is $5000 an ounce. Finally, soaring gold valuations life central bank reserves, shrinking their debt levels and allowing them to restart the credit system.

In practice, freegold will be visible in the price of gold breaking away from silver, other precious metals and all commodities. The gold/silver ratio

Since this chart is about pivots, this might also be a great time to be buying silver. It might be a great time to buy emerging markets if you think the dollar is peaking. Both the silver and EM trade should be powered by global inflationary forces. Or maybe the larger trend is still in place, but it's time for a short-term trend reversal. If instead there's a breakdown in emerging markets and gold takes on greater monetary status, it is likely deflation is out of control again. Currency volatility will take off. For myself, I'm still leaning towards a higher U.S. dollar and trouble ahead.