FX Charts Reaching Turmoil Zone

The Case for Deflation

The market is in a curious state with some sectors such as oil and oil serivces hinting at bullish breakouts and bonds hinting at bearish breakdowns. How about the contrary? The charts say the market isn't far from deflation either. If crude reverses, the outlook for inflation dims fairly quickly. I'm not going into monetary data in this post, only looking at some assets that should be doing well if inflation, specifically commodities prices, move higher.

Crude oil is about $10 away from a clear bullish breakout, but it is battling at a resistance area. It is $20+ away from a major bearish breakdown.

Rio Tinto has a potential measued move to $100 or its done and topping.

Freeport-McMoRan has what looks like a diamond pattern to me. Moves out of diamonds are often huge, powerful moves.

Emerging markets, of which China is the main component, are less than 10 percent from major support.

Copper is already well into a rollover and it leads oil.

Not enough to call it a serious break yet, but EURUSD went through support on Friday. The euro is keeping the U.S. Dollar Index in a bearish pattern.

East Asian currencies are rolling over. It won't take much of a push open a retest of the dollar's 2022 highs. An extension of the current dollar rally into Monday might be enough, as it would be enough to carry EURUSD below support...

Of Australia, Brazil and South Africa's stock markets and currencies, only Brazil's currency looks strong. You'd think it would be more than 1 out of 6 if a commodities bull run is coming.

Gold has a bullish look to it, but it often falls in the first part of deflationary waves. A pullback towards ther $1550 to $1600 area might be the buy of a generation if secular disinflation and the 40-year bond bull market have ended.

I've been focused on rising home prices and affordability, but I didn't pay close enough attention to the 2006 top. The Case-Schiller Index spent about 13 months topping (the low between the two tops broke in April 2007, after the initial March 2006 peak) with a double-top pattern. A precisely similar top in time would see home prices implode this month because Black Knight has said, and the trend in Case-Schiller, points to a new high in July. Case-Schiller will report August data in October. Analogs need not be precise though. As long as prices sink in the autumn, it'll be a very similar top. The prior top was followed by a 50 percent decline.

More Important Than the Dollar

Everyone is focused on the dollar most of the time and they're right to.

If the yen weakens much further though, it is going to become the story.

Something Brewing in South Korea?

The won looks weak, with a possible major bearish breakdown in play. It only looks good versus the yen.

Euro Testing Support Again

CNY Down

USDCNY 8 is the chart and fundamental target in the near-term. If CNYJPY 21 is a ceiling, and the target for USDJY is 175, that is 8.33.

This Bear Move Will End When...The Pound Falls to Dollar or Euro Parity

When charts break major levels, it can be tough to find a target. Fibonacci levels are one option. When looking for a psychological number, I think parity between the pound and dollar is as good as any. The pound fell more than 5 percent last week. Another 8 percent is not excessive by comparison.

It helps that it lines up a fib level.

If you want to get more bearish though, the cross with the euro looks like a potentially huge top, or potentially huge base for EURGBP. That makes sense though. If all fiat currencies will die, then I think the UK being independent increases the odds they devalue before the Bundesbank. I mean ECB.

Going Short as Rubber Hits Road

Everyone has a plan until they're punched in the face, but the shorting window is opening again this week barring a bullish breakout. The window closes after the Federal Open Market Committee meeting next week.

The bear market still hasn't started yet. It's all computers, traders and derivatives. The casino games. Last week and into this week, it will be the CPI. The bulls are hyperfocused on the minutiae of macroeconomic data and missing the forest for the trees: valuations and earnings peaked. Bear markets are blamed on events, but at heart they are an internal market event driven by social mood. Extreme optimism leads to extreme pessimism.

There is a bullish scenario though: CPI peaks before economic growth weakens. In this scenario, wild speculation ignites again. I don't think this scenario is likely, but it's out there. It also wouldn't last long because speculative activity would quickly flow into housing and commodities, and suddenly we're going to be talking about a double-digit Fed funds rate.

In other words, this is the Federal Reserve's moment. Inflation is on the ropes. They have to deliver the killshot and that will be evidences by major pain in the financial markets. There is widespread disbelief in a major recession, but Europe doesn't appear ready for surrender yet. They're going to shut the lights out this winter. The world saw the effects of lockdowns and Europe is repeating, while China implements rolling lockdowns as part of zero-covid, yet people think this is going to somehow result in economic growth. In April 2020 the market had bottomed and bears were screaming, "How can the market go up when there are lockdowns?" Yet it was all priced in. Now all the economic pain is ahead as far as data goes, but even the bears think the future is some kind of stagflationary growth scenario.

Cryptos are popping. That sure looks like it could develop into a substantial basing pattern if there's any Fed capitulation:

The ES died right at my resistance area in early trading. I could go short at any moment if I see signs that this move isn't going to produce a gap-up overthrow.

Crude oil is wrecking the disingflation party, but ZB is getting constructive for bulls or bears. For myself, my focus is on crude and long-bonds until I see stocks crack because of the dance between these three. If crude rises too much, bonds and stocks tank. If bonds rally too much, it probably means crude and stocks are tanking.

The U.S. dollar is a wildcard. I cannot predict the fallout from its move. In the short-term, dollar down should lift stocks, but a large reason why inflation has died is dollar strength. If a weaker dollar translates into commodities rallies, then the Federal Reserve will be hiking rates soon. For now, dollar strength is also mainly euro weakness. The yen did rally on Friday, but it hasn't continued rallying. I see 1.036 on EURUSD as a likely resistance area.

It will take time, but when the market realizes the dropping CPI is not good news, then we will see "Wave 3" get cooking: Amazon Closes, Abandons Plans for Dozens of US Warehouses

MWPVL International Inc., which tracks Amazon’s real-estate footprint, estimates the company has either shuttered or killed plans to open 42 facilities totaling almost 25 million square feet of usable space. The company has delayed opening an additional 21 locations, totaling nearly 28 million square feet, according to MWPVL.

Adding More TLT

I was shaken out of my long trade yesterday and went short. I did well on the trade, but didn't get back into my SPY long. I closed the day by buying calls on TLT, thinking it had to bounce if stocks keep rising. Sure enough.

Similar to the summer, TLT is a high confidence long for me because I can see a scenario where it rises no matter what the stock market does. I added more TLT on this morning's dip.

This flows into my next point: I am a bear and haven't been shaken from my longer-term view. However, I don't see inflation rising. I foresee inflation giving way to deflation as it did in 2008. If you are a bear because you think inflation will remain elevated, then I have bad news. The CPI is coming down. If crude slides into the $70 range, my hunch is the past three months will be close to zero inflation. With about a third of September gone, crude needs to slide to around $75 by midmonth to accelerate disinflation. very possible looking at the chart. A drop into the $60 by late month wouldn't surprise with this setup.

The Federal Reserve is going to keep rates high and wait for confirmation of falling inflation, which is partially why I am bearish. If you don't think the economy will weaken enough, then I think you should be bullish. Without a substantial drop in economic activity, a substantial drop in inflation will act as a tailwind for the economy. It may be that stocks are still overvalued and headed for a decline. It could be that inflation will reaccelerate in 2023 and pull the plug on this bull market for good. In the interim though, the stock market could rally. If I can forecast:

I expect next week's CPI will be negative.

Stocks will rally hard expecting a pivot (75 bps is expected now).

The Fed drops the hammer on September 21 by raising 75 bps. In presser, Powell says the negative CPI is a blip and doesn't change policy.

Stocks begin move to new lows.

Looking at possible targets, the first stop for the euro is the 1.03 area.

I have 4120 area as a target for the ES. Could go higher given how much it has already run up. It might depend on whether the market thinks 50 bps is more likely after the CPI and whether that delusion runs all the way to September 21 or not.