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.

What's Next for Markets

Many traders are looking for a low around the 3500. Some are short-term oriented, but others have that as a long-term target. The 3500 level is only 5 percent away. I will ride a position down to 3500 and might take very short-term trades, but overall I wouldn't be looking to short here if I thought 3500 would be the final low. There would be more to be made by buying at 3500 and riding the subsequent rally.

Above is Elliot Wave. It is fractal, such that wave 2 can develop like the ABC pattern at the top, because within Wave 1 there are five waves. I don't use Elliot Wave for trading, but it does describe market psychology well, tends to work better in bear markets for that reason and makes it easier to put the market in context.

The first scenario is Wave 1 ended in June. (Note that everything is inverted because this is a bear market.) That low will hold until next year or the dip to 3500 on the S&P 500 is a bear trap for anyone not covering there. A new low at 3500, followed by a big rally, means wave b of the a-b-c of wave 2, completed. Wave c will be the rally into late this year or early 2023. 

Not making a new low is the same as making a slightly lower low, as long as the next move is a big rally. The 4400 level discussed before could be where this goes, a 25 percent rally. Since the market (measured by the S&P 500) would be down close to 30 percent at 3500, if that were only wave 1 it would open up a final bear market low in the low or even sub-2000s level because there are two more bear waves coming. This could easily touch the bottom of the megaphone made by the 2018 and 2020 lows. (I'm using VOO because it is less marked up than other charts.)

The second scenario is Wave 3. The market tumbles as it did in 2008 after sliding down most of the year. Most likely down to 3000-3300 area. An middle ground in this scenario would be the Feb 2020 level of 3400. Closer to 3000 it is more of a crash and would strengthen the Wave 3 thesis. Jan-Jun is Wave 1, Jun-Aug Wave 2, Aug-Oct Wave 3, Oct-Jan? Wave 4, and then the final low next year either breaking the March 2020 low or close enough to be called a test. More than 40 percent down from the top, more than 50 percent on Nasdaq. The final low might come in March to May. 

A crash should be triggered by a huge event. Catalysts could be currencies (yuan deval would be high on my list) or bonds (I posted high yield yesterday, right at long-term support and the ex-dividend portfolio trading like they did in 2008 and 2020). Perhaps a key earnings miss or warning from a company such as Apple (AAPL). Geopolitical events such as Russia-Ukraine escalating into a regional war or with use of unconventional weapons. This might be a best case scenario for bulls (without the war escalation) and for bears if they have positioned for a big drop.

Leaving speculation aside, a move lower will absolutely require major breakdowns in key charts. One is high yields bonds. HYG broke and recovered a line from the 2008 and 2020 lows. JNK broke that line clean, but there's a second line formed by post-2008 corrections still ahead. HYG is the better signal here. A plunge through support will be a huge event.

CNYJPY probably doesn't need watching, but it sums up the yuan depreciation thesis. China is struggling as export competitor currencies crash. If the yen continues falling, the yuan will eventually break sharply lower as it catches down to the yen, won and euro.

Many charts, including HYG above, are where a bounce looks likely. Charts such as USDKRW also make it clear that this move has to be terminating because charts don't go vertical for very long.

Moreover, a chart such as USDKRW will reverse explosively. The only scenarios for this chart are accelerated continuation or reversal. The 1997 peak was in December after a 3-month panic, but global financial markets didn't bottom out until September 1998. The "2008" peak was in March 2009 with some choppy months. It is 13 percent back to the 2009 peak and 30 percent to the 1997 peak.

As I speculated on August 19 in Won Enters Crash Zone, the prior two breaks above the horizontal led to huge moves. We are in this move now. It ends when it ends, but this has major implications for all markets because this chart isn't moving in isolation.

I wish there were a way to be more confident, but these situations are always opaque on the inside. In hindsight, they are obvious. They're unknowable because crashes break everything. Candles, technical indicators, sentiment and so on can all scream buy buy buy and the very fact that the market doesn't bounce, or reverses after a short bounce, is what induces panic from the professional trader down to mom and pop retail investors. 

Nothing is screaming crash here, but continuation in high yield, currencies, stocks and bonds will push everything towards a crash moment. Don't forget crypto. BTC would likely implode in a crash, yet it too sits above long-term support. Gold broke its last line of support on Friday, so that is one key chart that has walked through the door opened by King Dollar. Whether the market bounces or falls or crashes, in my opinion there are days to weeks left for bearish trades in stocks and bonds.

New Low for the Won

Who says history doesn't rhyme?

I'm calling this one a win, but guessing it's not done yet. From August 19: Won Enters Crash Zone

Yen is the Devaluation Juggernaut

Wouldn't you like to fly in my ADXY balloon? Oh we can fly.......

China's dirty USD peg is causing a market-enforced Plaza Accord. Back in 1985, the G5 agreed to weaken the U.S. dollar. The main effect was the appreciation in the yen that led to twin bubbles in stocks and real estate in Japan. China learned from this. Chinese economists and officials have repeatedly said they won't repeat Japan's mistake. See: Potential Dollar Target Rises as China Refuses New Plaza Accord.

What's happening today is a kind of stealh Plaza Accord. The Chinese yuan is appreciating versus the yen, won and euro.

China does not want yuan appreciation. It is an export economy with strict capital controls. It has locked down its capital account to keep reserves from depleting. As the yuan rises, reserves will come under ever more pressure because the trade balance will start turning unfavorable. Leaving aside the housing bubble, they don't want deflationary pressure ripping through an economy with a debt-to-GDP ratio of more than 300 percent.

At some point, China will cry uncle and let the yuan drop. Or it won't. There's a slim possibility that WW3 is underway and China makes a move. However, this move would be akin to what South Korea did in 1997. Whatever choice they make, a global disaster is coming. All of this is mute if the U.S. dollar peaks now and reverses lower. If the U.S. dollar keeps rising and if, importantly, export competitors of China are some of the worst performing currencies, then a crisis is inevitable.

As for the equity markets. You can't always get what you want, but I wouldn't mind a bounce. The 4120 level on ES would be the final gift for bears in 2022 because it will be the last shortable peak followed by a final low for this leg sometime in the autumn.

Crude oil is cratering. It is go time on oil shorts. If this puts a floor under ZB, then we have the setup for a temporary bounce in stocks.

Morning Reading: The Dawn of Quantitative Easing, and the Boom and Bust at Rue Quincampoix

Since the bank’s notes represented a legal claim on gold livres held securely in the bank, those who accepted the notes in public transactions no longer had to worry whether coins they accepted as payment were counterfeit — which was always a risk with coin transactions. As a result of this key advantage, which had been at the foundation of the Bank of Amsterdam’s success over the prior century, the notes quickly became a preferred method of payment.

Those who do not learn from history are doomed to repeat it. There are good arguments against fiat currencies and credit monies, but what's often overlooked it why it became popular. Although there is often a nefarious actor who gives it the nudge into wide circulation, the truth is fiat has almost always met a popular demand. In most cases, sound money is anti-democratic.

Won Gone

It ends when it ends.

EWY took out long-term support.

Who is Positioned for DXY 170?

China Slashes FX Deposit Requirement To Prop Up Yuan... But Only Delays The Inevitable

According to Goldman, this cut should help increase FX liquidity onshore, easing FX appreciation (i.e., CNY depreciation) pressures as a result. And while the actual liquidity impact from this cut looks modest by Goldman's estimates - onshore FX deposits stood at $674BN as of July 2022, so a 2% cut implies $13BN liquidity release - this cut serves as a strong policy signal that the PBOC is uncomfortable with the rapid depreciation of the currency especially ahead of the 20th Party Congress in October; sure enough the USDCNH appreciated slightly immediately after this announcement.

The arrows on the USDCNY chart are Fed tapers and QEs after 2013.

When China pegged the yuan at 8.28 per U.S. dollar, it was massively inflating the yuan. It has been "printing" at a faster pace, relative to growth. A move to USDCNY 10 or higher is a possible target if the 8.28 level falls.

Here's a fun one. If DXY can clear 120, the measured move from the base takes DXY to around 170 or the Plaza Accord high. it sounds crazy, but when you consider the dollar has already rallied about 40 percent since 2014, that tops such as 1985 and 2002 came with vertical moves and a break above 120 will take out the prior dollar cycle high...once should assume a stretch target if 120 falls.

I don't know if USDKRW will pull back first or not, but it is primed for its crash. Since I think we could get about 6 weeks of hell in the financials markets as the world comes to terms with Europe going dark, I see a clear path for collapsing currencies in export countries.

There are several levers China can pull to alleviate the growth impact from increased capital flight. One of these is allowing the yuan to weaken. But if the pain becomes too much, White believes that China may choose to abandon its fixed-rate regime altogether, which would have many profound (and dire for the status quo) implications, including for EM monetary policy and global supply chains.

America's Great Depression is available free online. Same setup, with countries in different roles. China is still the closest to USA 1929.

Highway to the Danger Zone: Will China Abandon Stealth Plaza?

I'm back.

August 17: Yuan Deval Incoming

August 19: Won Enters Crash Zone

Won Enters Crash Zone

The Korean won has traded lower twice, in 1997 and 2008. Both moves were explosive. The question for traders is termination or follow through? If it follows through, there's all manner of short targets because this is not an isolated chart. It has to be seen in concert with charts such as USDJPY, EURUSD, USDCNY and so on. It has to be seen in context with stock charts such as EEM that are at long-term support.

A currency crisis can have several catalysts. A big one would be yuan depreciation. It's an echo of the 1997 Asian Crisis more than the 2008 financial crisis.

Here is EEM sitting at long-term support. It's like an inverse of USDKRW. KRE has broken a long-term resistance line and EEM has broken a long-term support line.

I am putting on far OTM trades on lots of assets. My sense is the market knows all these risks, but is almost blissfully unaware given recent price action in U.S. stocks, along with the many investors focused on inflation and who think the U.S. dollar will crash as a result. 

Buckle Up

If the currency markets start driving events, a chart such as USDKRW or USDCNY is far more important than a chart of the S&P 500. Here is the VIX overlaid with USDKRW. I'm not interested in the VIX here so much as the gap between VIX and USDKRW. That gap is going to close if USDKRW keeps running.

Here's USDJPY trading at its highest level since the Asian Crisis. 

The euro is also weak.

I could write a lot on the macroeconomics of it, but look at the charts. It simplifies everything. View all the charts in concert. If they keep breaking down or breaking out in a way that is favorable for the U.S. dollar, eventually an uncontainable crisis starts unfolding. China stayed out of 1997, and even helped the situation by holding the yuan steady and acting as a bulwark, but they are much closer to the profile of a country that suffers in this type of crisis than one that can act as a white knight. Would the U.S. and China work as equal partners in a bailout, or would China and Russia instead take advantage of what would be seen as a major breakdown in the U.S.-led global economic order?

You can make up your own mind about how you see this all resolving. My view is as follows: when charts of major assets get this extreme and break long-term support or resistance levels, it doesn't matter what plays the role of domino. Either the market bearishness has topped out or chaos is coming this autumn. This is as close to a binary setup as one gets in the markets.

I can see both sides of the situation, but what interests me is that asymmetry. Going long might be the best trade, but it would require taking on more risk for more reward. Whereas going short here, if correct, has a very asymmetric payout such that a small capital outlay in OTM puts could deliver large gains. Plus it's a target rich environment with everything from emerging markets to commodities to high-yield bonds getting hammered in a bearish resolution.

Korean Won Chart

More charts below, but USDKRW is the most interesting. It has has sustained moves higher during the 1997 Asian Crisis and the 2008 financial panic. I laid down a green horizontal to highlight this. If the trendlines have any value, they say USDKRW will go much higher, if it is going higher. Not particularly insightful given everything going on, but given the base and lack of any upside target except prior highs, it looks like a 20 percent devaluation from here. Note that I expect a pullback in the DXY here. This could be a bigger move in a dollar pullback, then breakout scenario. CNY,JPY,EUR below the jump.

More Yen Charts

Ozbucks, won and yuan.

Somebody Noticed the Yen and Yuan

ZH: Yen At Risk Of "Explosive" Downward Spiral With Kuroda Trapped... And Why China May Soon Devalue

The yen's recent nosedive has heightened fears of a vicious cycle as Japan's worsening current-account balance threatens to spur more selling while the BOJ's dovish scramble to prevent rates from blowing out means that even modest countertrend buying will promptly reverse.

While a soft yen has long been seen as a boon to Japan's economy, not to mention the stock market, and was one of the key drivers behind the launch of Abenomics whose anchor pillar was printing ginormous amounts of yen (and monetizing just as massive amounts of JGBs to monetize Japan's prodigious deficit), now that benefits have tilted toward certain exporters and the wealthy while individuals and small businesses feel the pain of higher commodity prices, Japan may need to rethink a fundamental assumption of its economic approach.

As argued here, inflation is a yen killer. If yen tanks, then what do Korea, China and Europe do? All of them are also energy importers, plus food for Japan and Korea.

But while Japan may be a lost cause, a bigger question emerges: how will Japan's latest devaluation impact its fellow exporting powerhouse competitors, i.e., China, and as Edwards frames it, "this beggars the question how will China react? Maybe just like they did in August 2015 when the PBoC devalued? Back then persistent yen weakness had dragged down other competing regional currencies and left the renminbi overvalued."

Wait, yen weakness leading to China devaluation? According to Edwards, that indeed was the sequnece: as he shows in the chart below, the super weak yen of 2013-15, by driving down other competing Asian currencies, ultimately led us to the August 2015 renminbi devaluation.

Yen and yuan both strengthened as soon as the yen made it into headlines and financial media attention, but barring a major reversal in King Dollar, this will only be a consolidation. More over, both currencies are at major turning points. USDJPY's next up move will clear a 20-year base and USDCNY sits right below a decade-plus support line. Since China has said it won't follow Japan in the 1980s, then it isn't going to let its currency appreciate...even if that was in the cards.

I've argued for years that the yuan can experience a major devaluation. Nothing in the fundamental economic argument has changed. If anything, Europe's reaction to Russia's invasion of Ukraine has made the euro far weaker than it was. I had previously expected the yen and euro could absorb some currency flight from a yuan devaluation, but now it looks like the dollar may rise alone in a scenario where nearly all fiat currencies collapse.

KRWJPY Breakout

The Korean won has broken out too.

Bye Won

USD makes a 25-year breakout versus the Korean won.

Rorschach Currency Charts

Bullish or bearish? What's the common theme besides they're all U.S. dollar crosses? My answer: China's economy.

Evergrande is FX Risk

Evergrande is not a direct threat to the U.S. financial markets. This won't be a systemic financial crisis outside of China because the financial system is almost as walled-off as the Internet.

The handling of Evergande is a threat to global currency markets, and by extension, global financial markets and the global economy. The risk is small in percentage terms, but the "expected value" is high because if the Chinese credit bubble pops it's the end of a 40-yesr trend. Probably more than one of them...

In the past, China easily papered over these events. Sometimes they had to let the yuan depreciate enough to spread the pain globally.

The larger question for all markets is whether the post-2008 economy still exists or if something changed in March 2020. Charts such as USDCNY (and copper) argue they have not. USDCNY touches the violet line in 2014 (taper started), April 2018 (Fed reducding balance sheet) and June 2021 (global stimulus running out).

The Korean won is already sinking in expectation of what is coming.

>Evergrande could be a very complex bankruptcy or bailout, but for the markets its a simple calculation. Does the forex market care? If yes, does it cause contagion into the U.S. Dollar Index? If the U.S. Dollar Index raillies 0.7 percent, that'll be a minor breakout. More bearishness for stocks ahead, but maybe not a major crisis. If there's a major crisis, USDCNY is going to run past 7.00 on its way higher, perhaps much higher. At which point the odds of a "surprise" devaluation in the yuan start accelerating towards 100 percent. Until something happens in FX land, Evergrande is a spooky ghost haunting a U.S. stock market worried about the sustainability of the current rally. I cannot argue against those who say Evergrande will be a non-event, but if you do, be sure you won't get caught whistling past the graveyard in October.

Yen Trading Like Won

Correlations don't last forever, but I noticed that USDJPY was trading like USDKRW, when normally KRW is the more volatile currency. Also, if USDKRW completes its base, it should climb above the 1200 level. If USDJPY keeps trading like the won, it will approach 117, not far from the late 2016 high. Finally, if the euro starts catching up with KRW and JPY as those two move towards their initial targets, it points to the 96 area on DXY, where I expect a counter-trend rally in the dollar should end if this is a bear market.

Yuan is the other East Asian currency to watch. USDCNY turned near long-term support and at the 61.8 percent fibonacci of the move from 2014-2019.